Setting the Standard

The Australian National Maritime Museum, in Sydney, has mounted an unusual exhibition about the history and consequences of the shipping container, a subject near and dear to my heart. Appropriately enough, the exhibition is housed in containers spread around the museum’s grounds.

When the organizers asked me to write a post for the museum’s blog, I took the opportunity to explain why standardization has been so important to the growth of container shipping — and asked readers to imagine how tangled world trade might be if the same basic 40-foot container was not in use everywhere. The first containers used aboard a ship in Australia were 16 feet 8 inches long. No ship in any other country has ever carried boxes of that size, and you can imagine how difficult it would be for Australia to engage in international trade if its containers couldn’t easily be used abroad. The post is here. Many thanks to the museum’s staff for coming up with some great pictures and drawings to illustrate it.

Some Wisdom from Henry Kaufman

Sometimes, when you write history, you can end up feeling old. I had that feeling a couple of weekends ago, when Henry Kaufman ventured to Baltimore to talk to the Business History Conference, an organization of historians.

I’ve known Kaufman for many years, and when my neighbor in the audience said, “I don’t know who this person is,” it was hard to explain how important he was on Wall Street in the second half of the twentieth century — how he, then head of research at Salomon Brothers, and Albert Wojnilower, the chief economist at First Boston, presciently warned in 1981 that Ronald Reagan’s economic policies would drive interest rates and the dollar sky-high, or how Kaufman’s pronouncement in August 1982 that interest rates had entered a long-term downward trend awoke the stock market from years of slumber. Since then, Kaufman has come in for a good bit of criticism: he was insufficiently bullish on the stock market in the 1990s, it is said, and as a board member bears responsibility for the collapse of Lehman Brothers, a venerable investment bank, in September 2008. He remains bitter about his experience with Lehman, and he blames the Treasury and the Securities and Exchange Commission for telling the directors Lehman should declare bankruptcy. “I think it was partly a political decision to allow Lehman to fail,” he says, recalling the pressure on the Fed and the Bush Administration to force someone on Wall Street to lose big.

Kaufman is 90 now, and he continues to cast a skeptical eye on the markets. He has always been a bond guy, and bond guys, by nature, worry about risks more than opportunities. His greatest worry is the financial system itself. He thinks that regulators missed the boat in the 1990s when they phased out the rules that separated commercial banking from investment banking; they expected deregulation would lead to greater competition among banks, he recalls, but instead it brought large-scale consolidation. The Dodd-Frank law and the other reforms that followed the 2008-2009 crisis, he thinks, have reinforced that trend. “It preserved the enormous financial concentration that had taken place and even accelerated concentration. That was a mistake,” Kaufman says. The result, in his view, is a system that is even riskier, with rules that are too complicated for bank supervisors to enforce.

His recommendation is to force financial institutions to specialize. The advantage in having companies that deal only in insurance, or consumer banking, or money management, he says, is that managers and regulators could better understand their finances. “I dare anyone to tell me they can go into a large financial institution [today] and tell me the details,” Kaufman insists. “You can’t,” he says, because the companies are too complicated to comprehend. The idea that “living wills” will enable them to disentangle their affairs in the event of crisis, as Dodd-Frank commands, is fatuous, Kaufman adds. Even with a living will, the markets will devalue a troubled institution’s assets, spreading pain widely.

Kaufman knows the world has moved on, and he is not optimistic about bringing the old times back. But he distinctly remembers how, back when Wall Street firms were partnerships for which partners bore personal responsibility, they behaved differently than they do today. When he was hired at Salomon in 1962, he recalls, he was told, “Go home and tell your wife you’re going to be liable for $2 billion.” Answering to shareholders isn’t the same thing at all.

Dirty Laundry and High Productivity

Not too long ago, on a visit to Copenhagen, I took several shirts to a laundry. The proprietor greeted me brusquely with the words, “I can’t do express.” He wanted four days to wash and press my shirts, longer than my remaining time in the city.

That evening, on my way to dinner, I walked down the same street and saw the owner still at work, surrounded by piles of clothes. Suddenly, his disinterest in my patronage made sense. Denmark’s economy is strong, unemployment is negligible, and there aren’t many workers willing to accept low-paying, low-productivity jobs in laundries.

I’ve replayed this incident lately as the I’ve heard complaint after complaint about the purported shortage of labor in the U.S. economy. Trucking companies, manufacturers, fast-food restaurants, and retailers all say they can’t hire enough help. The truth, though, is that the supply side of the labor market–prospective employees–responds pretty quickly to economic signals. The reason firms can’t hire enough help is that the compensation they offer is too low. The reason for that, simply enough, is that the way the firms plan to use those workers won’t result in sufficient productivity to justify higher wages.

As an economic matter, it’s good if those low-productivity jobs disappear. On another trip to Denmark, many years ago, a labor union leader told me, “We want to be a wealthy economy, and we can’t be a wealthy economy if we have low-productivity jobs.” It was that union leader’s view that Danish businesses should move low-paying jobs abroad and focus on providing high-wage, high-productivity jobs in Denmark.

You won’t find many union leaders suggesting that in the United States–nor business leaders or politicians. We pay far more attention to the number of jobs in our economy than to the quality of those jobs, and we’re reluctant to let low-productivity jobs vanish. Thus, debate over raising the minimum wage revolves around whether this would cause unemployment among hamburger flippers rather than whether higher labor costs would lead fast-food chains to develop new equipment that would raise productivity. Debate over immigration is colored by the assertion that we need immigrants to come and do low-wage jobs U.S. citizens don’t want, an assertion that allows us to avoid discussing why employers aren’t investing in capital equipment that might render those jobs more attractive and better-paid.

Some companies, of course, see profit in employing low-wage workers and don’t want to change that business model. But if we look deeper, tens of millions of us have selfish reasons for cherishing low-productivity work. While we give lip service to higher productivity, we also want an economy in which it’s cheap and easy to find someone to clean the house, babysit the kids, and mow the lawn. We like going out for an inexpensive dinner and paying a few bucks for an Uber ride across town, treats that would be far less affordable if there were fewer workers who have no better alternatives than taking low-productivity jobs with low pay.

If we want to raise living standards for all Americans, we can’t do it with sluggish productivity growth. That means that we may have to make some sacrifices. That’s how I solved my laundry problem in Copenhagen. I tossed my shirts in the washing machine, let them drip dry, and ironed them myself. Admittedly, my ironing skills were a bit rusty. But if having a high-productivity economy means I’ll need to keep them honed, I suppose I can manage.

Who Owns the Curb?

How we define a problem often affects how we think about it. Consider the question of how we deal with the demand for curb space in our urban areas. If one were to approach this question as an engineer, one might look for ways to redesign our streetscape and reallocate the curb to certain users. If one were to approach this question as an economist, however, one might ask whether there’s a pricing problem.

As discussed earlier this month at the annual meeting of the Transportation Research Board (TRB), a government-sponsored research organization, this is an engineering problem. The assertion is that new ways of doing business have left us with too many vehicles at the curb. The growth of online shopping means more trucks making deliveries, and the growth of ride-sharing services has brought Uber and Lyft drivers waiting to pick up customers. Therefore, the logic goes, we need to provide more unloading zones for trucks and more pick-up locations for ridesharing vehicles. The presentations at TRB suggested that other uses, such as bus lanes, bike lanes, and parking of passenger vehicles, may have to give way.

The underlying assumption, you may have noticed, is that because consumers want online shopping and ridesharing, our streets should accommodate these uses. But there’s another way to look at the problem. Curb space is obviously of great value in some urban areas. That value belongs to local taxpayers. Every time a UPS truck parks at the curb to provide “free delivery” from Amazon, those local taxpayers are subsidizing Amazon customers unless UPS is paying the full market value of that parking space. Every time an Uber driver idles at the curb in Midtown Manhattan, she is occupying valuable real estate without paying for the privilege, and that subsidy is reflected in the artificially low cost of the ride.

Can the demand for curb space be met with economic measures rather than engineering? There is enormous pressure not to find out; in 2014, when Washington, DC, imposed a $323 annual fee for a decal that permits a truck to park in a loading zone, the trucking industry howled–even though that fee, about 88 cents per day, is far less than automobile drivers would gladly pay for a space one-third that size in many parts of the city. But perhaps if trucks and ridesharing vehicles paid the full value of the public assets they use, consumers would make less use of their services and businesses would save money by accepting deliveries at times when the value of curb space is low. Such changes could help relieve traffic congestion without remaking urban streets. There’s something to be said for paying full freight.

Information and Competition

It seems that competition regulators at the European Union are looking into whether “Big Data” is a potential threat to competition. The concern, apparently, is that a company may be able to use a trove of proprietary data about consumers in ways that foreclose competition — and that the assets changing hands in a merger could include enough data to give the merged firm an insurmountable advantage over would-be competitors.

There’s no doubt that control over data can affect competition. But it’s not so obvious how to ensure that consumers benefit.

Consider the logistics business. Every containership line publishes a schedule with the rate for moving one container from, say, Shanghai to Los Angeles. In practice, though, almost all ocean freight moves under confidential contracts between shippers and carriers. These contracts may be filled with contingencies providing for bonuses and penalties if the parties exceed or fail to meet their respective commitments. A large retailer, manufacturer, or freight forwarder has many such contracts in force at any one time, and it is always negotiating new ones. This means that big shippers have lots of up-to-date information about current shipping rates.

Now, imagine a small shipper, a modest retail chain rather than a Walmart or a Carrefour. Because of its size, this firm has only a handful of contracts with ship lines, and it may go months without negotiating a new one. It therefore lacks the current rate information its bigger competitors possess, so it will have a tougher time bargaining for the best rates. It may use a freight forwarder to get better rates, but then must pay the forwarder for its trouble. Either way, the smaller company’s information deficit will force it to pay more to move its goods than its larger competitors do.

This information disadvantage is one reason smaller retailers and manufacturers have been having such a difficult time. Their supply chains are comparatively costly to operate, on a per-container basis, and their higher costs make it hard for them to match their competitors’ prices. I suspect this is one reason we’ve been seeing increased concentration in so many industries. The big benefit from their control of big data about shipping costs; the small are harmed by their lack of information.

Is there a solution to this problem? Of course there is: it could be made mandatory to publicly disclose information about shipping costs. We actually tried such a policy in the United States in the early days of railroad deregulation. What happened? Railroads were reluctant to offer discounts to individual shippers when they knew that publicity would lead other shippers to demand similar discounts. Little freight moved under contract and rates remained relatively high. Only after confidential agreements were permitted did railroads’ freight rates fall and their service improve.

I think there’s a lesson here. Control of information can be anti-competitive, no question. But public disclosure of information can be anti-competitive as well, potentially raising costs for consumers. The EU will face a challenge getting the balance right.


A Museum Worth 100 Marcs

Economists are forever complaining about the public’s ignorance of economics. You can’t really blame the public: most of what academic economists produce these days is incomprehensible to anyone who hasn’t earned an A in advanced econometrics, and far too much of what economists say in less technical settings is driven more by political biases or commercial interests than by conclusive research. There’s a lot economists don’t know, and too often you won’t find them admitting it.

That said, there are some important economic concepts that people need to grasp to reach their own judgments about economic issues. Many U.S. high schools now seek to teach such things, with mixed success. On a recent trip to Mexico City I saw what might be a more promising approach than classroom lectures, the Interactive Museum of the Economy, known by its Spanish acronym as MIDE.

MIDE, housed in an eighteenth-century convent in the center of Mexico City, claims to be the world’s first museum dedicated to economics. Its target audience is high school students, large numbers of whom come to visit each week. Costs are covered by a modest admission fee and substantial contributions from the Banco de Mexico, the central bank, and private financial institutions.

The museum is short on artifacts, long on hands-on activities that introduce such concepts as scarcity, division of labor, comparative advantage, and the trade-off between consumption and investment. Exhibits don’t just talk about the role of banks in society and the effects of inflation, but offer screens students can use to explore how bank deposits are invested and see how prices for different commodities change at different rates. Docents barely older than the visitors roam the exhibit halls, answering questions and drawing together small groups to play table games that also teach economic ideas, while more experienced educators offer brief programs in screen-filled rooms just off the exhibition floor. After you’ve learned about the role of money in society, you can order up a hundred-peso note issued by the Bank of the Bethlehemites–the religious order that formerly owned the building–and featuring your own image.

Mexico, of course, is a vast country, and most high school students will never have the opportunity to visit the museum. MIDE is now developing an app to make itself accessible to students all over the country.

I’ve never come across a museum quite like this before. Sure, many central banks operate their own museums, but most of them are, to be polite about it, places a teenager would never think of setting foot in. There’s much to be said for making learning about economics a fun social activity rather than an unpleasant obligation. Washington, where I live, has museums about everything from the bible to the U.S. Navy. A hands-on museum about how the economy works would be a fine addition.

Waiting for the Tooth Fairy

Four prominent economists at the Hoover Institution have published a new paper claiming that President Trump’s policies could make the U.S. economy grow 3 percent a year. Perhaps it’s just a coincidence, but three of the four authors have been mentioned as people Trump might nominate to head the Federal Reserve Board after Janet Yellen’s term expires next February.

Let’s be clear: 3 percent annual economic growth would be quite an accomplishment. The U.S. economy hasn’t grown that quickly over a full year since 2005. There’s no doubt that Americans would feel much better off if the economy were to soar as the Hoover Institution economists suggest. Personally, though, I think we’re about as likely to get a visit from the tooth fairy.

The authors attribute slow U.S. economic growth to slow productivity growth and a drop in the percentage of adults who are in the workforce. I agree entirely. But they then go on to lay the blame on President Obama, without mentioning him. “Focused primarily on ‘stimulus’ in the short-term, the conduct of economic policy in the post-crisis years did little to reset expectations higher for long-term growth. That policy failure restrained those expectations, adversely affecting consumption and, especially, investment spending,” they say. The authors assert that lower taxes on businesses and on capital investment, less regulation, and slower growth of federal spending “would help turn the recent upswing in animal spirits into a significant improvement in economic activity.”

You may have caught this movie before. Back in the 1980s, President Reagan’s economic experts promised much the same. Tax rates were lowered, regulations scaled back, federal spending curtailed. Yet on average, output per hour worked in non-farm businesses — the most basic measure of productivity — grew more slowly during the Reagan years than it had during the miserable 1970s, when tax rates had been far higher. These policies were supposed to bring miraculous productivity growth, but as Reagan’s former budget director, David Stockman, said in 1986 “The fundamentals that I look at are not a miracle.” 

What’s the issue here? Our four authors claim that “economic policies are the primary cause of both the productivity slowdown and the poorly performing labor market.” But as I show in An Extraordinary Time, the connection between government policy and productivity growth is tenuous. Productivity gains stem mainly from innovations in the private sector, which work their way into the economy in unforeseen ways. Government can help by supporting education, scientific research, and infrastructure, but the productivity payoff from such investments is unpredictable. The evidence that tax rates or government deficits affect productivity growth is quite weak. This is true not only in the United States, but in other advanced economies as well. 

Some productivity experts, notably Robert Gordon, think slow productivity growth is with us permanently, which would mean Americans’ incomes will grow only modestly in the coming years. I’m not so pessimistic. Historically, we’ve seen unanticipated spurts of productivity growth as firms suddenly figure out how to take advantage of new technologies and new ways of doing business. That has happened before, as with the Internet boomlet of the late 1990s, and I think it’s entirely possible that it could occur again. But I’m afraid the claim that the government can give us faster productivity growth just by passing a couple of laws falls into the realm of wishful thinking.

Amazon, Whole Foods, and The Great A&P

A lot of people are concerned that if’s purchase of Whole Foods Market goes through, Amazon will be able to use its might and technological savvy to monopolize the grocery business. I’m not concerned about that myself, because I think the grocery business is pretty difficult to monopolize. Even the Great A&P, the subject of one of my books, never managed to amass enough power to force up the price of food; indeed, when a federal court found it guilty of violating antitrust law in 1946, the charge was that it was using its size to sell food too cheaply, not to raise prices unfairly.

So when the New York Times asked me to write about Amazon and Whole Foods in mid-June, I used my space to wonder why Amazon, which reports precious little profit from all the goods it sells, wants to go into the low-profit grocery business.  Perhaps, I suggested, Amazon should take a portion of the space in Whole Foods’ stores, most of which are in affluent neighborhoods, and turn it into an exciting retail concept that sells exclusive merchandise at a high mark-up. I was thinking of something similar to the Apple Store, which is a far more profitable retail venture than hasn’t yet offered me a consulting contract, so it apparently didn’t think much of my idea. Jeff Bezos seems to be a pretty smart guy, so if he thinks his company can make billions shaking up the stodgy grocery industry, perhaps he’s right.  But the list of others who have thought the same thing is very long indeed.

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.




Pushing Productivity

As I’ve talked to people about An Extraordinary Time, I’ve received a lot of questions about what government can do to improve productivity. Some readers have gone so far as to accuse me of advocating “no-growth economics” — and, not surprisingly, these critics tend to have their own favorite policy prescriptions which, they promise, will reinvigorate productivity growth and raise living standards.

So let me lay out my argument once more. I don’t assert that government is powerless to improve productivity. I do assert that productivity growth comes largely from innovative ideas put to use in the private sector. Government plays an important role in this. It’s very clear that government spending on education is important in developing a more highly skilled workforce. Government support for scientific research can have a payoff in terms of innovation, as Mariana Mazzucato has shown. Government spending on transportation infrastructure, when managed wisely, makes it easier and cheaper for producers and retailers to move goods and expand labor markets, giving workers a greater choice of jobs and allowing employers to draw on a larger pool of potential employees.

The challenge for policymakers, though, is that the timing and magnitude of these effects are highly unpredictable. It’s a good bet that if more students complete university degrees today, we’ll see some payoff in terms of higher productivity in the future. But when? And how much? We can’t answer those questions. With respect to research and development, it’s very clear that scientific discoveries themselves have no direct economic benefits. What matters is turning these discoveries into new products, services, and ways of doing business, and there is no way to predict whether that will happen or how important those innovations will prove to be. In this respect, the U.S. productivity boomlet of the late 1990s and early 2000s is instructive: the unexpected rise in the rate of productivity growth was attributable, in part, to research in computing and communications that had received public funding decades earlier. As president at the time, Bill Clinton was able to claim the credit for stronger economic growth, but he didn’t really have much to do with the public-sector investments that made it possible or with the private-sector innovations that drew on those publicly funded discoveries to bring our economy into the Internet era.

Through history, there have been a handful of developments that have led to extremely large increases in productivity: think of the steam engine, the electric light, the construction of the Interstate Highways. Bob Gordon, in his wonderful book The Rise and Fall of American Growth, highlights the importance of the the public water systems built in the early twentieth century in rapidly improving public health. For the most part, though, productivity improvement arrives slowly due to marginal improvements in technologies and business processes. When it comes to economic growth, lightning does not strike often.

So when a politician promises to make the economy grow faster, beware. Yes, everyone agrees that it’s easy to juice the economy in the short term: a big tax cut, some added deficit spending, or a cut in interest rates all are likely to do the trick, at the risk of unfortunate consequences a year or two hence. But over the long run, higher living standards depend overwhelmingly on the growth of workers’ productivity. Regardless of what governments do, in most times and in most places productivity grows slowly, which means that living standards improve only gradually. Like it or not, this is, as I assert in my book, the trajectory of an ordinary economy.