Neoclassical Nonsense

Innovation Economics and Competitiveness commentary


If Manufacturing Employment is Dead Then Take a Look at China’s Zombie Apocalypse

Policy-making relies on narratives, and narratives often come from data. Or claim that they do. One story often told by economists—by everyone from Dani Rodrik to Erik Brynjolfsson and Andrew McAfee to James Kynge to Laurence Summers—is that China’s manufacturing sector has been shedding workers since the mid-1990s. This story leads us to believe that something like this is happening:


This argument ends up as a morality tale with serious policy implications: if even China, manufacturing powerhouse with wages developed countries cannot hope to compete with, is losing manufacturing jobs, then surely manufacturing jobs are obsolete and the U.S. is foolish to try to maintain them—let alone get them back.

Unfortunately, this story is based on a gross misreading of inaccurate evidence. There are three major problems. First, even based on a simplistic look at the data, it’s flat out wrong. Take a look at this chart that shows the actual manufacturing employment in China. (You may note that this chart only goes back to 1998, and that the peak of employment  underlying most claims was in 1996—more on that in a bit.)


Strangely enough this graph looks nothing … Read the rest


Robert Gordon’s Cassandra World

The Federal Trade Commission has rules about unfair and deceptive advertising.   Too bad they don’t apply to academic papers, because if they did Robert Gordon would be facing an FTC inquiry.   His new Cassandra-like paper, “The Demise of U.S. Economic Growth”, has little to do with U.S. economic growth.   Rather it is focused on other factors like transfer payments, taxes, and income inequality.  He should have titled his missive “The Demise of Robust After-Tax Income Growth for Low and Moderate Income U.S. Workers.”   But that’s nowhere near as catchy as his chosen title.

Gordon’s new NBER paper restates his slow-growth forecasts from two years ago, which come in turn from his long tradition of dismissing the potential of technology to drive productivity. This time he is careful to label his more controversial “growth headwinds” (slower innovation and continued globalization) as “speculative”.  Still, he fails to make a more convincing argument for an overall growth slowdown. This is partly due to his reliance on assumptions about education, inequality, and globalization, coupled with a fundamental lack of understanding of the nature of 21st century innovation. But it also … Read the rest

Chevy Volt Factory

Two Cheers for Martin Baily’s “U.S. Manufacturing”

It was with great interest and mostly pleasure that I read Martin Baily and Barry Bosworth’s new article in the Journal of Economic Perspectives, “U.S. Manufacturing: Understanding Its Past and Its Potential Future.”

The article attempts to analyze recent trends in U.S, manufacturing performance, including output and employment. This is an area ITIF has been working on for a number of years. And in the past, Baily has been skeptical of our analysis, which claimed that U.S. manufacturing was in fact worse off than official statistics, in part because of the overstatement of computers and electronics manufacturing output. So it was with great delight, and some surprise, to see that Baily and Bosworth have now embraced this analysis.  As they note, the fact that measured manufacturing output’s share of GDP has remained stable “is largely due to the spectacular performance of one subsector of manufacturing: computers and  electronics.” In fact, as ITIF showed, they also show that by taking out computers, overall real manufacturing output fell from 2000 to 2011, something that is unprecedented in our almost 250-year history.  They also rightly point out that the massive … Read the rest

King Luddite has a straw in his hand

Grasping at Luddite Straws

The current issue of the New York Review of Books features an article by Harvard economist Benjamin Friedman, “Brave New Capitalists’ Paradise’: The Jobs?” which is yet another reminder why we should not let economists make economic policy.

Freidman starts off by rightly pointing to the period from after WWII to the early 1970s as a golden era of low unemployment and high median income growth. He then rightly points to slower income growth over the last 20 years. His solution: less technology and lower productivity.

For Freidman has joined the ever growing neo-Luddite movement in America that mistakenly attributes our economic problems to too much technology and automation. He writes, “New technology that enhances the productivity of labor… means less labor input is needed to produce what was made before.” So far so good. But he goes on to write that “increasingly over the last quarter century, the balance [of less labor for existing goods plus more labor for new goods] indeed appears to have shifted [toward less labor].”

Why? Because “the pace of labor saving technological change has accelerated.”  Okay, let’s stop here. First, of all productivity growth … Read the rest

This is a picture of Ray Kroc's first McDonald's restaurant in Des Plaines IL USA - now a museum.

Let them Eat the Dollar Menu

Making the rounds on the internet this week is a budget tool for McDonald’s employees, put together by McDonald’s and Visa. It’s depressing.

The budget is unrealistic–it neglects costs like gas and food and relies on a person working 74 hours a week at the minimum wage.

Other sites have done a decent job of explaining why it is hard to live off a minimum wage. Let’s take a minute to think about how we got here, though. Why do we have people working for such terrible wages?

Let’s go over a few common explanations. (The first two are not particularly convincing.)

1. McDonald’s is greedy. McDonald’s should pay their workers more.

Well, yes: McDonald’s is greedy. But it’s greedy because it is a legal entity explicitly designed to be greedy—that is, maximize shareholder value. While I’m all for companies paying high wages and getting high value from their workers, and also increasing the bargaining power of workers, currently the trend is clear: corporations will pay wages ” the market will bear”.

2. Consumers are cheap. People need to consume more responsibly.

Are we complicit … Read the rest

It's 2010. Where's my jetpack?

Innovation is Still the Answer

In gloomy economic times such as these, we naturally look around for sources of blame. Former saviors make easy targets.

The tech boom of the late 1990s was great for the U.S. economy: GDP rose, unemployment dropped, and median incomes even made their most significant gains since the 1970s. Most people understood this success was due to new technology–and to information technology in particular–and they expected IT to be a main driver of the economy for years to come. Our bold New Economy had arrived, with all the convenience and style of America Online.

But the 2001 recession shook our faith in technology, and in the aftermath of the 2008 financial crisis many have turned on our would-be robotic saviors. Their disillusionment takes on the forms of disappointment, fear, or both.

The disappointed see our IT revolution, chock full of smartphones and big data, and ask, what good has it made in the real world? Recent technologies have changed our lives, certainly, but not with the productive power of previous advances. Instead: we order takeout via the internet instead of the phone; we watch YouTube at work in … Read the rest


Unintentional Privatization

Conservatives opposed to government spending often argue that the market will do a better job and that public provision of goods crowds out market solutions. In some cases they are right, but there is no guarantee the market will solve the problem. Take the recent example of a government statistical program that was a casualty of this spring’s sequester.

We were disappointed when we learned that the Bureau of Labor Statistics would be shutting down its International Labor Comparisons program, which provides some of the highest-quality comparative international data on labor markets and productivity. Anyone who has worked closely with international data knows that cross-country comparison is no easy task: the multitude of different labor regulations, market types and definitions, combined with the sheer scale of aggregation make the construction of reliable data anything but easy. Important indicators in one country may simply be meaningless in another country.

It appeared for several months that the economics and policy community would just be out of luck. Fortunately, The Conference Board, a non-profit research and advising organization, has just announced that it will continue updating the series and provide the data … Read the rest

Amateur Political Philosophy

Noted conservative economist and former Romney advisor Greg Mankiw has just written an article with the unabashedly conservative title “In Defense of the One Percent”. The pile-on has already begun, with an excellent takedown at the Economist American Politics blog, and good pieces as well at the left-leaning CEPR and Unlearning Economics.

Mankiw defends the rich because he believes they have brought us value commensurate with their wealth. This is the essence of conservative neoclassical economics: markets allocate value the way that value should be allocated. There are theoretical exceptions to this rule, of course, like rent seeking or other market failures, but real conservatives remain “unconvinced” that such exceptions are to be found in the real world.

Mankiw prefers the idea that markets can still work as intended (optimally allocating resources) without being entirely “fair”: insufficient high-skill workers and “superstar” gains can drive inequality even in perfect labor markets. Mankiw is sympathetic to these arguments because they allow him to claim that everything is working as intended: there’s nothing to see here, the markets are working, please move along.

But wait a minute.

What Mankiw would have … Read the rest

Is Technological Change Speeding Up? How Can You Tell?


Evidence of technological change is all around us—smartphones, self-driving cars, amazing drug discoveries, and even drone warfare.  With all of this novelty many futurists and other pundits breathlessly proclaim that technological change is speeding up. In  fact, some go so far as to claim that the pace of innovation is not only accelerating, it is accelerating exponentially (which, anyone with a rudimentary understanding of exponents can see, is utter nonsense). Peter Diamandis, author of Abundance: The Future Is Better Than You Think, argues thatWithin a generation, we will be able to provide goods and services, once reserved for the wealthy few, to any and all who need them. Or desire them.”

But is the rate of technological change really getting faster? Other commentators, including some notable academic economists, actually think the opposite—that we have run out of the “easy” technological advances and new breakthroughs will take much more work.

Questions about the rate of technological change may seem trivial—will I get one hoverboard or two?—but getting a handle on an answer is critical because in economic terms, technological change equals economic growth. And growth has powerful implications for … Read the rest

Robot with Computer Chip

Robots Are Good for Us: Really, They Are!

The Smart Manufacturing Coalition recently conducted a survey of Americans to get their views of whether modernizing factories with advanced technology and automation was a good or bad thing for the economy.

Amazingly, nearly two-thirds of respondents said it either made no difference or actually hurt the economy. Half of those making $35K to $50K actually said it has hurt the economy.

Wow, have these people not taken economics? Do they want to go back to farms with mules and factories with hand files? Have they not read the newspapers about how our manufacturing sector has been decimated by overseas competition?

Well wait, they probably have not read those newspaper articles, not because most people no longer see that they have a civic responsibility to read the news, but because by and large, the media doesn’t write these stories. Rather, they almost always write that when it comes to explaining the decimation of U.S. manufacturing jobs, the cause is automation. In fact, as ITIF and others have shown, the loss of U.S. global competitiveness has accounted for over half of manufacturing job loss over the last decade.

I suppose … Read the rest