Marc Levinson

Month: December 2020

  • Productivity and the Pandemic

    Across from my apartment, there’s a new restaurant with a new way of doing business. No one hands you a menu or takes your order; instead, you use the QR code taped to the table to see what’s available and choose what you want to eat. There’s a carafe of tap water on the table, along with four glasses; if you want to fill a glass, you do it yourself. To settle your bill, you can put your credit card details into the restaurant’s app — or, better yet from the restaurant’s point of view, you can use the app to establish an account, so on your next visit the bill will be handled automatically.

    A year ago, before the COVID-19 pandemic, none of these practices was common in the United States. In most restaurants, collecting a customer’s payment required the server to make four separate visits to the table: once to present the bill; another to pick up cash or card and take it to the cash register; a third to bring the patron change or a credit card voucher; and then once more to collect the cash tip or the signed voucher. With fewer steps in the payment process, each server can handle more tables, allowing a restaurant to operate with less staff than before.

    Something similar is happening in many different industries, raising the prospect of faster productivity growth economy-wide. This matters: in the long run, higher productivity — that is, using fewer workers and resources to create a given amount of output — is what makes economies grow. Some of the best-known scholars of productivity, such as Robert Gordon, have argued that there are no great innovations on the horizon that are likely to boost productivity growth like railroads, electricity, and expressways all did at various times in the past. This, obviously, would not bode well for raising living standards. My own view has been less pessimistic. As I pointed out in An Extraordinary Time, economists have a terrible track record when it comes to forecasting productivity improvements, which often arise unexpectedly: just because artificial intelligence and virtual reality haven’t moved the productivity numbers so far doesn’t mean they won’t revolutionize entire industries very soon.

    Changes like those evident in my neighborhood restaurant are leading to speculation that the pandemic will bring a productivity revival. The Economist recently hypothesized that “The pandemic could give way to an era of rapid productivity growth,” and Greg Ip of the Wall Street Journal asserts that “much of what started out as a temporary expedient is likely to become permanent.” If they are right, we could be in for an odd sort of boom coming out of the pandemic, in which the economy grows smartly but unemployment remains high until workers find not just new jobs but new occupations that are in demand because of new ways of doing business.

    Yet it’s also possible that the productivity gains from the pandemic turn out to be modest. While the server at my neighborhood restaurant saves time by skipping repeated visits to my table, she also misses out on the opportunity to describe the wonderful tiramisu or ask if I’d like an espresso to top off my meal. The QR code taped to the table may be efficient when it comes to taking my order, but it’s not an efficient way of maximizing my bill. That’s probably not good for the economy, although it may be good for me as a diner. I didn’t really need that dessert anyhow.

  • The Risks of China

    “We have no choice but to follow the party,” a Chinese seafood entrepreneur told the Wall Street Journal recently. The Chinese government, the Journal asserts, is increasingly forcing private firms to follow Communist Party guidance and using its control over financial markets to punish those that don’t comply. In the process, state-owned enterprises are playing a larger role in the economy, reversing years of effort to downsize the state sector and expand the economic role of private investment. It’s a pretty good bet that China’s economy will become less innovative in the process.

    This development is one more nail in the coffin of what I have called the Third Globalization, the period when international trade grew by leaps and bounds due to long, complicated value chains. As I point out in Outside the Box, this model gained favor in the late twentieth century in part because the corporate bean counters who demanded that manufacturing be located where production and transportation costs were lowest failed to account for risk. Yet risks can’t simply be wished away. If goods don’t get delivered on time, investments are confiscated, or proprietary information ends up in the hands of potential competitors, the costs of long value chains can far exceed the advantages of low production costs and cheap shipping.

    As foreign businesses see it, China now has risks in spades. Dozens of foreign companies, from Abercrombie & Fitch to Zara, face the threat of of trade sanctions and customer displeasure due to allegations that their value chains include producers who use forced labor in the western province of Xinjiang. Foreign banks lost an estimated $400 of fees in an instant when the Chinese government blocked a $40 billion stock offering by the financial company Ant Group in November. The threat that Communist Party functionaries will play a greater role in guiding the activities of foreign-owned enterprises and joint ventures in China is just one more risk that has to be pencilled in.

    In response to the perception of greater risk, firms are carefully shifting their supply chains out of China and are trying to avoid tying up their money there. According to OECD data, the stock of foreign direct investment in China, which was around 25% of the country’s GDP between 2008 and 2016, fell five percentage points between 2016 and 2019. (For comparison, the share in the United States is over 40% and rising.) In 2019, the net inflow of foreign direct investment into China came to 1% of the economy, the lowest level since 1991.

    Skip the eulogies: globalization is by no means dead. But as firms and governments assess its true costs, the global economy is looming less important in our lives. We can expect international trade in goods to grow more slowly than the world economy over the next few years, and perhaps to start declining. One consequence, as Paul Krugman wrote recently, is that “America’s future will be defined by what we do at home, not on some global playing field.” The came could be said of many other countries as well.

  • Inflation Again

    It used to be that inflation was just part of life: the 11% increase in consumer prices in 1974 and the 9% rise the following year seemed inevitable at the time, and even after Paul Volcker painfully put the kibosh on inflation in the early 1980s, annual price rises hung around 4% for a decade. These kids today (he says disdainfully) don’t know anything about that. Over the past decade, the average annual inflation rate in the United States has run well below 2%. Many people who didn’t live through the inflation-ridden ’70s or ’80s have come to take that as normal. A recent study by the Cleveland Fed estimates that the financial markets are pricing in a U.S. inflation rate averaging 1.37% per year through 2030.

    I hope they’re right, but I’m not so sure. In my new book, Outside the Box, I argue that international trade, and in particular trade in manufactured goods, will decline in importance in the coming years, growing more slowly than the world economy. This is likely to have important effects on the inflation rate in the United States and around the world.

    Since the early years of this century, the vast influx of goods from East Asia has played a major role in holding down U.S. consumer prices. The abrupt shift of manufacturing supply chains to East Asia, while extremely painful for U.S. factory workers, caused a flood of cheap imports. Bedroom furniture costs about 8% less than it did twenty years ago, according to the Bureau of Labor Statistics, while prices of clocks and lamps have fallen by two-thirds. Such drastic price drops have allowed the Federal Reserve to control inflation without raising interest rates so high that they choked off economic growth.

    But that’s history. As manufactured imports account for a smaller share of Americans’ spending, they will become steadily less important in restraining prices. The Fed will have to rely more heavily on its power to influence interest rates to do the job of keeping inflation down. And that doesn’t allow for the likelihood that the federal government will rely on inflation reduce the burden of repaying the trillions of dollars of debt it has issues to keep the economy alive during the COVID-19 pandemic. That’s why I expect 2.5% mortgages and 10-year Treasury bills yielding a fraction of one percent interest won’t be with us for long — and why there’s a good chance that inflation rate over the coming decade will be a percent or two higher than the benign rates we’ve become used to.