Category Archives: Musings

Mismeasuring Mismeasurement

Nobody wants ordinary. That’s why my assertion in An Extraordinary Time that our slow economic growth is merely ordinary growth doesn’t go down easily.  One typical response is that the economy’s performance is much better than official statistics indicate. In other words, we don’t have a slow-growth problem, just a measurement problem. If we were able to measure correctly, the contention is, we’d find that the economy is growing much faster than captured by official statistics and that living standards are rising, not stagnating.

There are a three reasons why I strongly disagree with this claim, which was most recently put forward by Martin Feldstein.

First, the assertion that economic growth is much faster than the data show is generally based on anecdotes claiming that the effects of particular products, such as smartphones and Google search, are undervalued by government statisticians. If we properly accounted for such advances, the argument goes, we’d find the economy to be doing much better than we think. These anecdotes, I find, are almost always accurate–there are indeed a lot of measurement problems–but they tend to be quite one-sided. Consider a counter-example. I think most Americans would agree that the quality of airline flights has deteriorated in recent years, as passengers are required to arrive at the airport well ahead of flight time, stand in long security lines, occupy seats offering less legroom than in the past, and wait at the arrival airport for luggage that is no longer permitted in the passenger cabin. U.S.  statistical agencies probably should adjust estimates of economic growth downward to account for the diminished quality of this product. They don’t. If all such mismeasurement problems were resolved, it’s not obvious that the net result would be a faster-growing GDP.

Second, the slowdown in economic growth in recent decades is visible not just in the United States, but around the world, in wealthy and less wealthy economies, and in many countries where semiconductor manufacturing, on-line advertising, and other hard-to-measure industries are relatively unimportant in economic terms. Identifying a purported shortcoming of U.S. national income statistics fails to explain why slower economic growth, and the slower productivity growth to which it can be attributed, are apparent in so many places.

Third, to claim that we’re now seriously underestimating economic growth, it’s not enough to show that some parts of the economy are mismeasured. Proving the claim requires showing that the mismeasurement problem is substantially worse today than in the past. I’ve seen no evidence to this effect. Consider that life expectancy at birth in the United States rose from less than 50 years in 1900 to 70 years in 1960, but has grown very slowly since. That rapid improvement over the first six decades of the twentieth century undoubtedly raised people’s living standards in a way not captured by the growth rate of GDP. The mismeasurement related to smartphones and social networking services seems trivial by comparison.

So the mismeasurement story doesn’t explain why economic growth in every wealthy economy is much slower today than during the postwar Golden Age–and has been so since the mid-1970s. And it doesn’t refute my assertion that what seems to be painfully slow growth is really just ordinary economic performance.

 

 

 

True Believers

One of the challenges of writing about economics is that many people treat it as a religion. They know what they think, and they don’t want to be bothered by facts that may not support their beliefs.

The response to my new book, An Extraordinary Time, has reminded me of the intensity of that religious fervor. The book asserts that an economy growing at one-and-a-half or two percent a year is not doing badly. While we all enjoy boom conditions like those that prevailed from the late 1940s until 1973, the extraordinary growth during those years was due to factors that are unlikely to be repeated; the slower growth we see today is not “secular stagnation,” as some would have it, but rather an ordinary economy behaving normally.

This assertion has brought outrage from all over the political spectrum. Gold bugs are convinced that if only the United States would go back on the gold standard, the economy would soar. Supply-siders blame government regulation for all ills; if only government would get out of the way, the economy would grow far faster. Ronald Reagan still has many acolytes who are convinced his policies made the U.S. economy perform far better than it actually did. Many of the mainstream macroeconomists who dispense policy advice so freely naturally disagree with the idea that their wisdom is unlikely to bring back the boom times. Self-styled socialists attack my claim that slow growth is normal because slow growth leaves many workers unable to improve their conditions; they take government’s ability to produce faster growth for granted.

I admit the idea that slow growth is ordinary growth is not enthralling. Who wouldn’t like full employment, big wage increases year after year, and a steadily improving standard of living?  But while it’s natural for politicians to promise such things, they have far less ability than they believe to improve productivity, which is the key to long-run economic growth. The fact that we might like the economy to soar doesn’t mean we have the tools to make that happen, at least for an extended period of time. Sometimes faith can overwhelm common sense.

 

No Time for Nonsense

The first time I met John Makin, back around 1985, we had lunch in the dining room at the American Enterprise Institute in Washington. There was a large round table in the middle, at which a bunch of pompous know-it-alls — if you’re old enough to remember those days, you’d recognize their names — held forth with the answers to all of the world’s problems. At a smaller table off to the side, John tutored me on the shortcomings of the Reagan Administration’s economic policies. He was a Republican, and AEI was home base for the Ronald Reagan Fan Club. That made no difference to him. John didn’t have much time for economic nonsense, and he felt no need to justify it just because it happened to be the current Republican Party line.

If pressed, John would describe his ideology as conservative Keynesian, a term that is now long out of fashion. Ideology, though, wasn’t really his interest. He had equally little respect for politicians who pontificated about balancing the federal budget, politicians who claimed lower tax rates would bring in more revenue, and politicians who fancied that more government spending could provide everyone a job. What intrigued him was not what politicians said, but how interest rates and hence exchange rates responded to what politicians and central bankers did, and how that response affected economies around the world. His ear was well tuned to the nuances of Japanese and European monetary policy. He knew what he was talking about, and for many years he spent much of his time helping a hedge fund make money from his ideas.

John spent three decades at AEI, turning out thoughtful work rather than predictable talking points. In a city in which many people devote their lives to twisting the facts in order to support some political view, he was an independent thinker and a straight shooter. His death last week leaves a void.

A New Survey Finds….

When it’s a slow day out in medialand, you can always count on a survey to provide “news” to fill empty space. It’s well known that much so-called public opinion research is bogus, using non-random samples and asking questions that are designed to elicit particular responses. But even honest attempts to measure public opinion in a neutral way can founder on unanticipated problems. One of these recently caught my eye.

The subject, in the case, was financial literacy. Surveyors working for the central bank of the Netherlands wanted to know how much average households understand about basic financial matters. As part of a longer survey, half the participants were asked the following question:

*Buying a company stock usually provides a safer return than stock mutual fund. True or false?

The other half were given the question this way:

*Buying a stock mutual fund usually provides a safer return than a company stock. True or false?

It may seem to you that the second question was nothing more than the contrary of the first. yet the share of people answering correctly was twice as great when the question was asked the first way as when it was asked the second way. How could this have been? The answer, the researchers speculate, is that a large number of respondents may have been unfamiliar with words in the question. When the subject of the question was “company stock,” enough people apparently were sufficiently familiar with the concept not to find it “safer” than the alternative. When the subject was “stock mutual fund,” however, they did not know enough to make a judgment about its safety–even though they were comparing stock mutual funds to individual company stocks in both questions.

This finding is a good warning for those of us who consume media–-and for those who produce it. Surveys, even when well designed and carefully conducted, may not tell us what they claim to tell us. Skepticism is always in order, because we never know how the people surveyed understood the questions they were asked.

The survey I mention above is cited in Annemaria Lusardi and Olivia Mitchell, “The Economic Importance of Financial Literacy,” Journal of Economic Literature 52 (March 2014).

Making Archives Customer-Friendly

If you want to get historians upset, just mention NARA. NARA is short for the National Archives and Records Administration, and its main job is running the National Archives. The Archives is a treasure trove of papers, films, photographs, and digital materials documenting the work of the U.S. government. It is also a difficult place to do research. Although NARA has made strides putting certain types of records online, particularly military records–a very large proportion of Archives users want information related to their own or a relative’s military service–the vast bulk of NARA’s holdings is stored in acid-free boxes on the shelves of the main Archives at College Park, Maryland, or at other facilities around the country. Locating a needle in the vast haystack that is College Park requires access to hundreds of looseleaf binders, known as finding aids, which for some reason NARA has never been willing to post online.

Using the Archives as a researcher, it is fair to say, is not a customer-friendly experience. Say a researcher thinks the records of the U.S. Maritime Administration might be helpful. NARA’s website reveals only that College Park houses 357.2 Headquarters Records of the Maritime Administration 1947-69. The researcher must now buy a plane ticket, reserve a hotel room, and come to College Park. There, the finding aids in the textual records room might include a binder or two for the Maritime Administration, with listings such as “Office files of Joe Smith, deputy assistant administrator for shipbuilding, 1951-53.” By the time the researcher has received a few boxes of Joe Smith’s records, he or she has lost several hours of precious research time in College Park. The boxes may not even have records that relate to the topic, meaning that the researcher will have to order more boxes and wait again. And it’s highly possible that someone has determined that the material is security-sensitive, meaning that the researcher must file a Freedom of Information Act request and wait for months to see whether the records will be opened. (The obsession with “security” can go to ridiculous extremes; when I was researching my book The Great A&P, I found that boxes of records relating to a 1940s court case were under seal in College Park, even though everything in the boxes had originally been introduced in open court–and even though many of the same records were available, unsealed, at the National Archives branch in Chicago.)

I recently encountered a very different approach to customer service at the Bundesarchiv, the German Federal Archives in Koblenz. A few weeks ahead, I’d sent an email outlining the research I was doing and the types of records I wanted to see. An archivist wrote me back, attaching a list of records he thought might be relevant. I selected a few, which were waiting for me when I arrived. Fifteen minutes after I walked in the door, I was taking notes.

Instead of finding aids in looseleaf notebooks, the Bundesarchiv has a computerized catalog for use on-site. On the left side of the screen is a schematic of the archive’s holdings that opens into greater and greater detail, so the researcher can specify a search across the entire government’s records or those of a particular subagency. The right side is a search engine that enables the researcher to look by author or keyword, within a desired time period, within whatever records group has been specified on the left. A few seconds later, the system, known as Invenio, spits out a list of relevant records. The researcher can then immediately order the records through Invenio. There are none of the paper call slips required by NARA, which occasionally have errors that lead to the wrong materials being delivered.

I don’t know whether a system such as Invenio is practical at the National Archives. I do know that the system makes it easy to do historical research. Perhaps NARA has something to learn.

Is the Age of Innovation Over?

For all their bushels of data and their powerful econometric tools, economists still know precious little about what makes economies grow. Yes, in general it seems that having a central bank that keeps inflation under control is helpful, and it’s probably good when entrepreneurs and investors aren’t living in constant fear their assets will be confiscated. But for every theory about the sources of growth one can find counterexamples. There have been fast-growing countries with high taxes and with low taxes, with relatively equal income distributions and with income controlled by a powerful few. Some people insist on the importance of the rule of law, yet China continues to boom despite a legal system that inspires little confidence. Others emphasize democracy, but Korea grew at a rip-roaring pace for a quarter-century before its military rulers surrendered power in 1987. Still others emphasize capital formation–but if that were the key, Jordan would be growing much faster than Israel, and Vanuatu would be outpacing both.

The famed economist Edmund Phelps recently waded into this debate with a book called Mass Flourishing, which I review in the current issue of the business journal Strategy+Business. Phelps believes the key to economic growth lies in innovation. Openness to innovation explains the 19th-century growth surge in Western Europe and the United States, Phelps claims, and the United States’ openness to innovation made it wealthy. Now, a decline in the pace of innovation threatens prosperity, in the United States and other countries as well. The culprit, he asserts, is corporatism—the inclination of interest groups to use the government to block economic change. This problem has been worse in Europe, but even in the United States,  he contends, “the waning of innovation was largely behind the increased joblessness and downward pressure on wages that have been endemic to the post-1972 period.”

The claim that innovation is on the wane is an interesting one. But how does one prove it? Phelps attempts to do so, in part, by measuring the market capitalization of a country’s enterprises compared to the value of the companies’ physical capital; the gap between the two, he contends, reflects investors’ view of the value of unexploited ideas for making better use of that physical capital. It’s a clever idea, but very America-centric; Phelps’s measure will make companies in other countries, notably Germany, appear less innovative than American companies simply because they make less use of stock markets to raise capital.

Another way to measure innovation is to count patents. Many patents, however, are granted for “discoveries” that are hardly innovative, and many highly innovative ideas are not patented. Some scholars have looked at R&D spending as a share of output, but what of the many innovations that never saw the inside of a laboratory? My own work on A&P, for example, has shown the economic importance of innovative methods of retailing, but the company’s rapid shift from neighborhood stores to supermarkets relied on a merchant’s well-honed senses, not on scientists or engineers.

Others who have looked at this issue, like the Northwestern University economist Robert Gordon, end up arguing that some innovations are just more important than others. The period of what he calls the Second Industrial Revolution, roughly from 1870 to 1900, brought such innovations as the telephone, the motor car, and electric generation. These technologies, Gordon says, took decades to refine, leading to an extended period of rapid economic growth. By contrast, the computer-related technologies of the Third Industrial Revolution, he says, have had a comparatively small effect in improving productivity. Gordon thinks this and other factors will lead to slower economic growth in the future.

This is an important debate. Phelps insists that the formula for growth is for government to spend more on public goods, such as infrastructure and education, while attacking regulatory barriers, business conspiracies, and labor rules that slow the pace of innovation. Gordon, by contrast, seems less optimistic about the ability of government to foster growth and drive the economy faster. His message is not a hopeful one. But the sheer number of innovations I see around us makes it hard for me to believe that the age of innovation lies in the past.

History and the economists

This weekend I attended the annual meeting of the American Historical Association. Most of the historians at the meeting were academics, and people like myself, unaffiliated with a university, got the opportunity to hear interesting papers and catch up on the latest trends sweeping academia. This year, the most noteworthy fashion was lesbian, gay, bisexual, and transgender history, which filled no fewer than eleven sessions during the three-day meeting. There also seemed to be a lot of attention given to Latin American, Asian, and African history, as many of the openings in history departments involve teaching those subjects.

Much as I enjoy the diversity of approaches to studying history, it saddens me to see how business and economic history have been marginalized within the history profession. The AHA doesn’t have much use for them, and historians who work in those fields have long since gone off to form separate organizations. As a result, many academic historians — even those who consider themselves scholars of political economy — have little or no economic training, and their presentations at forums such as the AHA meeting are entirely devoid of economic perspectives. For example, at the meeting I heard papers on the Nixon Administration’s support of black capitalism that made no mention of the economic forces buffeting the new black capitalists in the early 1970s, and I heard papers on flood control that assumed that water was the main thing on the minds of members of Congress, rather than, say, employment in their districts. I’m not arguing that every paper should contain econometric analysis, but I think the history profession as a whole has lost out by pushing business and economics aside.