Neoclassical Nonsense

Innovation Economics and Competitiveness commentary


Time to Stop Blaming Manufacturing Job Losses on the (Nonexistent) Shift to Services

The U.S. lost more than 5 million manufacturing jobs since 2000 (roughly a 30 percent drop), while nonmanufacturing jobs have grown by 8 percent. Understanding why is critical to developing the right policy response.

Unfortunately, too many apologists for U.S. manufacturing decline argue that manufacturing employment loss is a natural trend. They blindly follow the assumption that as economies get richer they naturally consume a smaller share of manufactured goods and a larger share of services.  Therefore, we should expect manufacturing job losses.

New data from the St. Louis Federal Reserve Economic Data should hopefully put an end to these false claims. Recent analysis demonstrates that after adjusting for inflation, the share of real consumption of services has actually decreased slightly after reaching a peak in 1992. At the same time, durable goods manufacturing consumption is growing as a share of total consumption.

Accounting for inflation, services reached a peak of 70 percent of total consumption in the mid-1990s and have since declined to around 66 percent. This is not so different from the late 1950s when services made up 62 percent of total consumption. Meanwhile, the consumption of durable

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Robots Don’t Eat Sugar: Productivity Growth and Sugar Consumption Now No Longer Growing Together

In recent years what was once seen as crackpot economics has now become close to conventional wisdom: the notion that productivity costs jobs. Economists call this the lump of labor fallacy. As ITIF has written here, here, and here, it’s clear that the jobs problem of today has nothing to do with productivity and that we should not worry about productivity reducing the number of jobs.

But that has not stopped many talking heads and experts from opining that yes indeed, productivity kills jobs. One graph that has gotten and continues to get widespread attention is from Andrew McAfee and Erik Brynjolfsson’s book, The Second Machine Age, that shows that “productivity and employment have become decoupled.” [i]

But as any first-year statistics course will teach you, correlation does not prove causation. In fact, it is easy to get spurious correlations. Here’s one: The divorce rate in Maine is almost perfectly correlated with the per capita consumption of margarine.

In Brynjolfsson’s case, the relationship being examined merely shows two variables that happen to be increasing from 1970 to 2000, but there is no feasible underlying argument about how

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What Would the Wright Brothers Think?

What a difference a century makes. No, not in technological innovation, but in technological pessimism. As David McCullough writes in his new history of the Wright brothers, their discovery was met with near universal excitement and optimism, even in the face of setbacks, some of them fatal. Today, a century later, innovation and innovators are more often met with skepticism, approbation, and opposition.

Case in point is from Joe Nocera’s op-ed in The New York Times about Google’s driverless car effort, as part of its Google X project. Nocera relates how John Simpson, head of the nonprofit Consumer Watchdog, bought a few shares of Google stock so he can go to their board meeting to berate Google executives for developing an autonomous vehicle. Simpson noted that Google’s cars have been involved in 11 accidents (although all have been minor and none of them caused by the AV car itself). He also warned that the Google car would steal our privacy. In other words, he berated Google for trying to innovate what could well be one of the most important technological breakthroughs of the 21st century. Indeed, as I wrote

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A Response to the Critics

I expected that there would be a lot of critical responses to my argument that Emmanuel Saez had “cooked the numbers,” in his study of income inequality,to show that virtually all of income growth during the “recovery” after the Great Recession went to the wealthiest 1 percent. I had a strong feeling that most people would miss my narrowly framed argument and think that I was belittling the negative effects of inequality on our population. Despite attempts to inoculate myself from this criticism by showing the relatively low share of income held by the top one percent in 1979, various commentators have criticized me on several grounds: not discussing wealth inequality; not seeing the long rise in inequality; picking selective years to make my points; helping the right wing; overemphasizing the effect of transfers because of the rise of Social Security and Medicare and failing to appreciate the difficulties of middle class people and exaggerating the effects on the rich.

I have an odd intellectual history in that I was one of the first researchers to report on rising inequality in the late 1970s  and 1980s, yet have for the

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Our Automatic Assumptions about Automation

Senator and likely presidential hopeful Marco Rubio (R-FL) appeared on last Tuesday’s The Daily Show with Jon Stewart, promoting his new book and weathering an endless stream of jokes about his home state of Florida. While the discussion covered a range of policy ground, we wanted to highlight one comment by Senator Rubio that showed an all too common misunderstanding of innovation and automation.

Rubio said, “The concern I have about the minimum wage increase is that we have been told by the CBO and independent analysts that it will cost certain jobs. And that happens when some businesses will decide that well, you’ve now made our employees more expensive than machines so we’re going to automate. So in 5-10 years it’s going to happen anyway but this will accelerate this process, when you go to a fast food restaurant it will not be a person taking your order, there will be a touchscreen there that you will order from and when you get your order it will be right. [uneasy laughter] But the point is, if you make that person now more expensive than that new technology, they’re going

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Think the Trade Deficit Couldn’t Get Any Worse? Think Again

For a country that has not run a trade surplus since Gerald Ford was in office 40 years ago, the United States is surprisingly optimistic in its widespread belief that the trade deficit is going to eventually correct itself. After all, as tidy macroeconomic models of international trade show, a nation’s trade deficit should lower the value of its currency, lowering the cost of exports and raising  the cost of imports, thereby gradually reversing the deficit. After all, the models show that in the long term, current accounts must balance.

As Martin Feldstein, former Chairman of the Reagan administration Council of Economic Advisors, predicts:

“The United States cannot continue to have annual trade deficits of more than $100 billion, financed by an ever-increasing inflow of foreign capital. The U.S. trade deficit will therefore soon have to shrink and, as it does, the other countries of the world will experience a corresponding reduction in their trade surpluses. Indeed, within the next decade the United States will undoubtedly exchange its trade deficit for a trade surplus.”

Unfortunately, Feldstein wrote this in 1987.

Far from his predictions coming true, the U.S. trade

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Photograph by Chetan Karkhanis

Developing Countries Need Robots Too

Ask any economist why some countries are poor and some countries are rich, and they will probably answer, “productivity”. Essentially, this means that people in rich countries are rich because they are able to create more wealth with less effort. But how do they do this? One of the primary ways is through better technology.

Unfortunately, instead of being recognized for its contribution to wealth, better technology is all too often demonized as a threat to employment, particularly in low-income countries without social safety nets. Intuitively, people care more about the jobs and income streams that already exist than the potential future savings from automating their jobs–a bird in hand, as they say. But a new paper by Mehmet Ugur and Arup Mitra of the University of Greenwich shows that even in very poor countries, technology is far less threatening than it may appear.

We have argued here before that robots are not taking our jobs: in the long run on a macro level productivity increases have no relationship with either the total number of people employed or with the level of unemployment. This is because when automation or

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Immigrant STEM Workers Increase Everyone’s Wages

We’ve posted recently about how our current immigration policy is hurting Silicon Valley. But when the United States lets in more immigrants, what happens? Often it’s not what you would expect.

A new NBER paper by economists at the University of California Davis and Colgate University studies the effect of skilled H1-B immigrants in STEM occupations on more than 200 cities across the country. In cities with more STEM immigrants, wages for college-educated workers went up 7-8 percentage points, wages for non-college-educated workers went up about half as much, and there was no significant effect on employment.

Why this counterintuitive result? Economics 101 says that when the supply of something grows, the price should decrease, not increase. As is too often true, however, Economics 101 in this case tells us very little about the real world. Figuring out cause and effect in many types of markets, particularly labor markets, is tough because economies are not as simple as the textbook models might have you believe.

What actually happens is that when immigrants enter an economy, they do more than just offer their labor at a (potentially) lower price. They increase

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Worry About Slow Productivity Growth, Not Fast Productivity Growth

U.S. productivity growth is stagnating, and if the trend continues it could have a drastic impact on the U.S. economy. Without increasing productivity, the only way for a country to get richer is by working more or borrowing more. Furthermore, productivity is a crucial part of international competitiveness, because it is only by increasing our productivity that we can compete with other countries on cost.

A recent BLS news release does a good job of showing the worrying trends. Productivity growth has been abnormally low since approximately 2006, plummeting through the Great Recession, recovering slightly immediately afterward, and slowing considerably since 2010.

The first graph below (Chart 1) provides historical context back to 2000. There is a clear decline in labor productivity (the dark blue line) and also multifactor productivity (light blue). These are the two most common ways of understanding output growth: labor productivity estimates how much each worker produces and multifactor productivity tells us how much each worker and unit of capital can together invest.

Looking back a bit further in time, the next graph (Chart 2) estimates the amount that different factors contributed to total productivity growth.

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Unsubstantiated attacks on the Ex-Im Bank fail to take flight

A recent review by the Wall Street Journal of a Standard & Poor’s (S&P) credit analysis of Boeing in relation to the U.S. Export-Import (Ex-Im) Bank appears to have missed the point. The article sums up the report with the quote, “We don’t believe that the expiration of Ex-Im’s authorization in September would hurt Boeing’s credit quality or ability to make planned deliveries in 2014 and 2015.” However, this ignores the fact that this statement relates only to planes already in production being prepared for delivery. S&P goes on to conclude that alternative financing sources would not be able to match the demand for Boeing airplanes, and that Boeing would lose out on new orders of aircraft. In addition, it states that the effect of an Ex-Im Bank dissolution on Boeing’s credit quality would be significant, especially in sales to emerging markets or to start-up and financially weak airlines. Judging by 2014 data, Boeing’s new financing needs would total between $7 billion and $9 billion if it lost the support of the Ex-Im Bank.

This ‘misunderstanding’ seems to stem from a desire to portray the Ex-Im Bank—which has been quietly

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