Tag Archives: economics

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.

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.

Economic Illusions

In my book An Extraordinary Time, I document the hubris of economists who thought they had discovered the key to economic stability during the postwar Golden Age. Esteemed experts such as Walter Heller, chairman of the President’s Council of Economic Advisers under presidents Kennedy and Johnson, and Karl Schiller, West German economy minister and then finance minister as well, believed economists knew enough to tell presidents and prime ministers how to assure strong economic growth and low unemployment. It was a seductive vision. It also proved to be an illusion: when economic crisis arrived at the end of 1973, the experts were unable to deliver the prosperity they had promised, leaving citizens frustrated and angry.

A reader recently asked whether talk of a “Great Moderation” in the late 1990s and early 2000s was a similar display of hubris. As was the case during the boom of the 1960s, those involved in economic policy in the late 1990s seemed to think they had conquered the business cycle. They had many admirers. Journalist Bob Woodward feted Alan Greenspan, then the chairman of the Federal Reserve Board, as “The Maestro” for orchestrating the economy’s smooth performance. Of course, the Great Moderation ended in the deepest economic crisis since World War II — a crisis that is long since over in the United States, but has yet to come to an end in parts of Europe.

While macroeconomists displayed no lack of hubris in boasting of the Great Moderation, I would submit that there was an important difference between the economic policies of the 1960s and early ’70s and those of the Greenspan era. Walter Heller and his contemporaries didn’t pay much attention to monetary policy. Their version of fine tuning involved manipulating instruments under direct government control, mainly taxes and government spending, to achieve a desired economic outcome. The Fed was an afterthought. This approach to fiscal policy was badly discredited by the economic failures of the 1970s and has never come back into fashion.

During Greenspan’s time at the Fed, in contrast, fiscal policy was in disarray. Deep divisions between Democrats and Republicans and between Congress and President Clinton rendered the U.S. government incapable of changing tax rates and federal spending to achieve any particular economic goal; although the federal budget went into surplus at the end of Clinton’s presidency, this was more the result of unexpectedly high tax receipts during the Internet boom than any deliberate purpose. Greenspan himself was no fan of fine tuning. Rather, he was among the very large number of economists who believed the central bank should use its control over short-term interest rates to achieve price stability, and that other important factors affecting employment, the rate of economic growth, and the prices of financial assets were beyond Fed control.

Yet this point of view involved hubris as well. Macroeconomists in the 1990s overwhelmingly believed that the prices that mattered to the economy’s performance were those paid by consumers. The Fed, they said, didn’t need to worry about certain other prices, such as those of stocks and real estate, because these would not have much effect on employment, incomes, and voters’ other economic concerns. As we learned at considerable cost, that conventional wisdom wasn’t right. The sharp drop in asset prices that began in 2008 left millions of households with depleted retirement accounts and upside-down mortgages, forcing them to pull back spending, leading in turn to a sharp rise in unemployment. By and large, economists missed this connection between the financial economy and the real economy.

Of course, saying that the Fed should worry about asset prices as well as consumer prices still leaves the central bankers to determine when stock prices are reasonable and when they are soaring unjustifiably. Either way, economists must pretend to know something that cannot possibly be known until after the fact. In his masterful biography of Greenspan, Sebastian Mallaby wrote that “The delusion that statesmen can perform the impossible—that they really can qualify for the title of ‘maestro’—breeds complacency among citizens and hubris among leaders.” Unfortunately, he’s right. One of the great challenges facing modern democracies is that their citizens expect more than their governments can possibly deliver.

 

The Truth About “Pro-Growth” Economics

Like every president, Donald Trump has promised to make the economy grow faster. Good luck with that. In an article in Vox, I trace the history of the idea that we know how to make the economy grow faster. As I explain, while politicians love to talk about “pro-growth” policies, a productivity boom is not something Trump’s economic advisers, or anyone else’s, have the tools to bring about. Productivity depends mainly on private-sector decisions, and while government actions clearly influence it, the timing and extent of that influence are impossible to predict.

As I argue more fully in my new book, An Extraordinary Time, until and unless an unexpected productivity boom takes hold we’re likely to be stuck with an ordinary economy. That’s not terrible; at the moment, the United States is pretty close to full employment, and wages are on the rise. But it’s a far cry from the growth of 4 percent, 5 percent, or even 6 percent that Trump and some of his more zealous supporters have promised us. An effort to push the economy faster than underlying productivity improvements will allow is not likely to end well.

If It Can’t Go On Forever, It Will Stop

The American economist Herb Stein, whom I had the privilege of meeting a few times before his death in 1999, is famed for the aphorism, “If something can’t go on forever, it will stop.” I found myself thinking of him often a few weeks ago during my first trip to Dubai.

Dubai has the feel of a boomtown. The airport, of course, is one of the world’s largest — and yet not large enough, for a second airport, to be even larger, is under development a few miles away. The container port, also among the world’s largest, has just opened its third terminal, and plans for terminals four, five, six, and seven are on the drawing board. Forests of skyscrapers would leave Manhattan in the shade. Dubai Mall, reachable by riding no fewer than seven automated sidewalks from a station on Dubai’s automated metro, boasts Bloomingdale’s, Galleries Lafayette, Marks & Spencer, a two-story walk-through aquarium, an ice rink, a dozen stores selling high-end wristwatches and two dozen selling diamonds, and even a bagel shop.

And the boom is isn’t over. Construction cranes are visible in every direction. An entirely new freight railroad linking the United Arab Emirates and Saudi Arabia is under construction. When one of my interviews fell through and I decided to go to the beach, I found that much of the beach was closed for refurbishment. I mean that literally: the municipal government fenced off not just a few hundred yards, but five or six miles, effectively rebuilding the emirate’s entire beachfront in one go.

It’s all extraordinarily impressive. And it’s successful because Dubai has positioned itself as a place that works in the midst of a lot of countries — South Asia on one side, Africa on the other — that don’t work so well. If India were ever to have smoothly functioning infrastructure and Tanzania to develop an honest and efficient customs service, Dubai might be a much less busy place.

Dubai is also a relentlessly optimistic place, at least at the official level. Doubts and doubters are not encouraged. Yet one can’t help but wonder whether a shakeout is coming in the oasis business. A few miles to the northeast, Dubai’s sister emirate, Sharjah, has its own international airport, its own container port, its own dreams of expansion. A few miles to the southwest, Abu Dhabi has much the same. All of this is happening at a time when the growth of international container trade is slowing and the price of oil spiraling down. Since many of the big investments are being undertaken by entities that don’t publish reliable financial statements, it’s hard to know which parts of Dubai’s investment boom are paying off. But Herb Stein’s words offer a useful caution: the boom can’t go on forever, and at some point it will stop.

Maybe We Have Too Much Infrastructure

Not far from where I used to live, in New Jersey, a light rail line rumbles between Newark Penn Station and the much smaller Broad Street Station, on the other side of downtown. This line, about a mile long, opened in 2006, and it cost more than $200 million to build. It was projected to serve 13,300 riders a day by 2015. Actual ridership, though, is just a few hundred. You won’t have trouble finding a seat.

The Broad Street extension is an example of a problem people don’t much like to talk about: misguided infrastructure spending. We constantly hear complaints about inadequate infrastructure, from the archaic main terminal at LaGuardia to the all-day traffic jams at Chicago Circle, and armies of consultants roam the world helping justify yet more projects. The truth, though, is that a great deal of our existing infrastructure is poorly used, and taxpayers often are on the hook for new projects that don’t produce the expected returns.

This isn’t just an American problem. Last week, I was in Europe, where there has been massive investment in container ports to handle the extremely large vessels now coming on line. These ships carry the equivalent of 9,000 truck-size containers, and to accommodate them ports are deepening their channels, lengthening their wharves, expanding their storage areas, and installing bigger cranes. Every port wants the mega-ships to call. The ship lines that own these vessels, though, don’t want to stop in every port; they want their ships to spend as little time in port as possible. Moreover, as these giant ships replace smaller vessels, most ports will see fewer containerships, not more. The bottom line: Europe’s ports now have far more container-handling capacity than required. That overcapacity increases the ship lines’ ability to play one port off against another to force port charges down, making it even harder for port operators to recover the cost of their investments and increasing the likelihood that taxpayers will be forced to pay up.

Container ports are not the only place where there’s excess infrastructure. In the United States, several relatively new toll roads are attracting far less traffic than projected. Pittsburgh airport demolished one of its concourses after passenger numbers plummeted, and the near-empty terminals at Kansas City airport can be spooky. Japan’s high-speed trains are wonderful–but while some carry extremely heavy traffic, others appear to be rather underutilized. There seems to be a surplus of convention centers almost everywhere, and the world is full of stadiums that receive only occasional use.

So while there may be many places where today’s infrastructure is inadequate, claims of an infrastructure crisis deserve careful scrutiny. Often enough, users of infrastructure, such as transportation companies or sports teams, want governments to bear the risk of building facilities that the private sector may, or may not, choose to use. Governments have a hard time saying no to such demands: what politician wants to face accusations that his or her inaction caused a business to leave town? But building too much infrastructure may well leave tomorrow’s taxpayers facing the bill for today’s mistakes.

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).

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.