TGS vs RATM

Android app + machine that mixes drinks. As Paul Krugman notes in his “futurism article“, most things that symbolic analysts do can and will be automated. Add to that category (unsurprisingly) repetitive remedial tasks. This, of course, reduces the marginal product of bartenders to zero for people who eschew witty banter and simply want a drink. On the plus side, you would never have to ask a bartender if he knows how to make a particular drink (I’m not creative with drinks…).

However here is a developing point; In any society, people should be able to dream up jobs for other people to do (for example, at one point in history, ironing newspapers was someone’s job). In reality, that may require some changing mores about what is considered paid work. The second part of this point is that I think as specific human interactions become more rare, they become more premium, that is, the marginal product of simply being human and having a particular skill rises (and if economics is any guide, extremely rapidly). That doesn’t bode well for the quantity of jobs, but it does for the quality of reproduction.

Keep in mind, however, that up to this point society has seen it fit to heavily subsidize areas of the economy which have already suffered from this phenomenon (arts, music, farming).

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P.S. I think that the future will see the rise of complementary currencies — money with different mechanics than legal tender — which will facilitate this type of human interaction. I think a lot of economists overlook this possibility in their futurist extrapolations. Many try and shoehorn the current rules into their interpretations…but I think that kind of brushes aside fundamental concept in economics: incentives.

Starving the Moral Beast

Since I can remember I’ve loved reminding my audiences that economics is not morality play. It wasn’t until Paul Krugman started blogging that I realized that I must have picked it up from one of his early writings.

That virtue can sometimes be vice is one of the most fun lessons of economics. There is a perverse delight in explaining how foreign aid may impoverish the Third World but sweatshops would make it grow rich.

I can understand why many of my fellow economists were so eager to transport this insight to the political realm. Politics they argued was a fight between interest groups – a battle over the fiscal commons. There weren’t good guys and bad guys. There were just naturally self-interested people.

Tyler Cowen pays homage to this legacy in a recent NYT piece

James M. Buchanan, a Nobel laureate in economics — and my former colleague and now professor emeritus at George Mason University — argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains. We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society. As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic.

Curiously Tyler refers to a rational actor model as a moral critique but then again he certainly knew Buchanan better than I.

Still, to borrow a phrase from another of my favorite economists, the only problem with this analysis is that it is at odds with the facts.

If we want to build a model of what the government spends money on we would be best to start this way: ask people what social obligations do they believe “society” has. Look around for the cheapest – though not necessarily most efficient – programs that could credibly – though not necessarily effectively– address those obligations. Sum the cost of those programs. That will be government spending.

Contrary to Jonah Goldberg and others who see Canada and the United States as examples of two clashing ideologies, they are actually examples of two different ethnic distributions.  The United States is not Canada because there is ethnic strife between Southern Blacks and Southern Whites. That strife reduces the sense of moral obligation on the part of the white majority and so reduces government spending.

I want to be very clear that I don’t say this to paint those against social spending as racists. From where I sit I am betting that most of the intellectuals lined up against expanding the welfare state are naively unaware that their support rests upon racial strife. Otherwise they would realize that as America integrates they are doomed. They are fighting as if they believe they have a chance of winning. Given the strong secular trend in racial harmony, they do not.

I point this out also to show why the major Republican strategy for limiting government was doomed from the start and why I am also not particularly worried about Americas fiscal future per se.

In the 1980s some conservatives believed that they might not be able to cut government but they could cut taxes and thereby starve the beast. Rising deficits would force the hand of future governments. Spending would have to be cut in order to bring the budget into balance.

Much of the current handwringing about fiscal irresponsibility is a sense of alarm not only on the right, but throughout much of the political center, that these spending cuts are not actually materializing.

But, by what theory of government did you ever believe they would? Governments don’t look at how much money they have and then decide what they want to buy. They decide what they want to buy and then they look for ways to fund those purchases.

Divorcing the two – through sustained deficits – was only going to lead to ever increasing levels of debt. This is what we got. At no point was the beast ever starved. The peace dividend lowered government spending growth somewhat, but that was undone by the war on terror. Otherwise spending hummed along, as it always will, with the government buying things the public thinks it ought to buy.

Yet, if this is causing upset stomachs among many of my fellow bloggers it calms mine. Its quite clear how this will end. Racial strife will continue to abate. The public will coalesce around the welfare state and taxes will be raised to meet the cost.

The fundamentals do not predict rising debt forevermore. The fundamentals predict a VAT.

This is not to say I am unconcerned about our economic future. Health care costs will continue to eat up more and more of our economy unless something is done. However, trying to convince people that health care is not a social obligation a fool’s errand. The best you could do is convince them we have no obligation to the other. As the other integrates this will likewise prove impossible.

No, people will ultimately believe that health care for all is a social obligation and therefore government will pay for it. There is no more analysis to be done on that part of the question.

The only part left is looking around for the cheapest program. This is where our attention should be focused. Can we lower the cost of those obligations? Can we make medicine more efficient?

If we can there will be economic room for other things. If we can’t, well just hang in there until the artificial intelligence revolution.

The Great Stagnation – Deflation or the Informatic Cross of Gold

Scott Sumner makes this point using NGDP. I’ll say it in more mainstream terms.

If you think one of the problems with the New Economy, is that it produced a lot of happiness at low cost, then you are basically saying that the problem is that the US economy experienced massive disinflation and potentially deflation. How far you get depends of course on your estimate of the benefits of the internet.

To the extent that’s the case it makes perfect sense that debtors would be major losers in this game. They were expecting a world with steady growing inflation, they got a world where the cash price of happiness collapsed, but whoops they still owed they bank actual cash.

Add to that the point that this deflation is only benefiting infovores and you have the problem that there is widespread deflation and exploding inequality that puts enormous pressure on the working class.

This is a fairly common story. It’s a modern Cross of Gold, with infovores playing the role of the urbanites and the rest of America the farmers.

I am not saying much here, but there is much in this part of the story that interests me.

The Great Stagnation – Medicine or Who Ate My Prosperity

One of the obvious areas where Tyler’s thesis will run into controversy is in Medicine. Medicine is the most obvious place to look for innovation outside of the information sector.

Its also where a big chunk of the middle America’s paycheck has gone. Its not much of a stretch to say that if you think medicine has done a lot of good then you think the last 30 years have been good for the average American. If not then not.

Here I tend to side with Tyler. I don’t think most medicine has done that much good and I am not optimistic about the usefulness of most future medical spending.

This is not to say I don’t think there will be important breakthroughs. I think there will and the next fifty years will be exciting on that front. Its just that along the way we will dump a bunch of GDP down the drain, paying for medicine that is not so good.

The question is why are we doing this?

I have struggled with this. Is it because medical breakthroughs are reaching diminishing marginal returns. That doesn’t seem right because quite frankly there weren’t that many breakthroughs in the past.

We have vaccines, antibiotics, sterilization and anesthesia. That’s about it for really big time breakthroughs.

The view I subscribe to currently is that most people don’t care that much about increasing their life expectancy, they care about being cared for and being cared about. They care about reassurance and they care about feeling like they are not alone.

We can see that people don’t care that much about maximizing their life expectancy because they place an enormous premium on their doctor’s bedside manner and a much smaller premium on his error rate. We can see that when objectively bad doctors who are nice rarely get sued for malpractice, while much better doctors ,who are assholes get sued all the time.

We can see that when we offer potential surgical patients stats on the number of fatalities at prospective hospitals and they refuse them.  We can see that when message boards about doctors are filled with comments like “He really understood me.” “She took the time to stop and listen. “ “I knew they cared about whether I got better” “I was more than just a number.”

These are not comments about the skill of the medical provider but about the caring of the medical provider.

Now, when I present this stuff to my students they often say: but a doctor who cares will do a better job and so you are more likely to live longer.

Lets ignore the fact that if this were true it should be captured in the doctors’ stats. Suppose that it is true. Then why in the world are we investing all of this time an energy selecting really smart students and then putting them through years and years of training if the main thing that matters is how much the doc cares?

Dealing with this is a real puzzle. Though I am a free market person, I see the price system’s big advantage is that it conveys information. In medicine virtually no information is conveyed through price. People at all levels are confused about what they really want or what we should do.

For example, when I speak with doctors the issue of non-compliance often comes up. This is typically to explain why treatments that look good in clinical trials don’t work out as well in real life.

Non-compliance is the issue of getting patents to go along with some aspect of the treatment they don’t want to go along with. I argue that if the treatment only works if the patient does something that he or she isn’t going to do, then the treatment doesn’t work. Doesn’t matter what JAMA says. To the docs I say, you go to war with the patients you have, not the patients you wish you had.

To society at large, however, I say, we have to rethink what we are doing here. Ultimately, we want to make sure that we are spending money to make someone better off. If the doctor is complaining, the patient is complaining, and either the insurer or the government is getting a huge bill, then exactly who are we serving here?

The Great Stagnation – A First Cut

Rather than struggling to write one consistent definitive post, I‘ve decided to bite the bullet and offer a series of small takes.

Of course, I loved the shorter ebook format, encourage others to download, and to switch from the overly hyped e-ink format to something that can actually display charts and graphs. Wanting to read mostly PDFs with lots of charts is why I didn’t buy a Kindle.

The Great Stagnation’s core thesis is that all of the woes of our time come down to diminishing returns. We ate the low hanging fruit as Tyler says.

It’s true that we have ridden the industrialization pony about as far as she is going to go, that new meaningful innovations are going to come from somewhere else and that this new innovation will define a different kind of growth and ultimately a different kind of economy.

However, is this the source of what ails us? I tend to think that it isn’t. For one, the Great Recession has causes that are largely, though not completely, orthogonal to this issue. I also think the actual stagnation in living standards has somewhat different roots.

A key step in evaluating Tyler’s argument is getting a good measure of how the US economy is growing and seeing whether or not it shows evidence of diminishing returns.

Tyler is attracted to median family income as measured by the Census Bureau. Its not hard to see why. Median family income is more or less a measure of how much stuff the typical family can afford to buy. That has indeed been stagnating.

Now if you believe the standard story, then median income has been stagnating both because society is investing in things the family doesn’t buy directly and because more national income is captured by the wealthy (which is another word for Wall Street.)

Tyler’s case ads the following twist: we only think that our overall economy is growing because we are throwing more and more money at medicine, education, and Wall Street. However, these things don’t represent actual economic growth. Our GDP stats are thus inflated, our productivity stats are wrong, and the stagnation of family income reflects the true nature of our economy.

I have some sympathies with this line of reasoning. I have lots of data quibbles and ultimately I think it can’t be quite right, but those can come later.

My primary question, however, is this: to the extent we are throwing money at unproductive uses, is this a supply problem as Tyler posits or a demand problem, as I tend to think?

In other words is it that innovation has just become so darn hard or is it that higher salaries are luring all of our bright kids into becoming doctors and hedge fund managers, while relatively fewer are becoming engineers and teachers. [1]

The net effect of my story is that there less human intellect devoted to productive innovation and that the typical American – by dearth of K12 education – is further from the technological frontier.

Tyler hints at a demand side solution when he says we need to raise the status of scientists, but my question is whether we have actually run out low hanging fruit or have simply stopped picking it?

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1) Its important to note that Peter Thiel one of Tyler’s inspirations is a brilliant guy, very interested in science, and founded an innovative company. Nonetheless, he has made most of his money in a hedge funds and much of that in shorting commodities and in currency trades. Not innovative stuff, but lucrative.