Book Review: Arnold Kling's Macroeconomics Book

Psst! The Wizard is powerless!

So claims Arnold Kling in his deeply subversive little book formally entitled Memoirs of a Would-be Macroeconomist, but known in Mr. Kling's blog simply as "my macroeconomics book."

He should know, of course. He worked for the Fed from 1980 to 1986 during the reign of Paul Volcker. He was a worker bee in a very busy office, collecting data, analyzing reports, coding FORTRAN, and doing other things staff economists do. He was close enough to the Wizard to know what was going on, and yet apparently had no position of any power. It's what I'd call the perfect fly-on-the-wall appointment.

So with all that effort, the Wizard stood behind his curtain, tweaking the carefully calibrated dials, turning knobs, pulling on levers and pushing buttons. The monetary machinery creaked and groaned, serviced by the army of economists including Mr. Kling, who oiled it for greater transparency and efficiency. Yet still, despite their best efforts, great clouds of irrational obfuscation issued forth.

Mr. Volcker is widely credited for ending the inflation of the 1970s, but Mr. Kling doesn't give him much credit. He writes

I might argue that it was not Volcker who made the difference [in inflation]. ...What I am suggesting is that the high inflation of the late 1970s may have been self-correcting. It resulted in weakness in the stock market and in housing, which then created severe recessions--remember, the unemployment rate climbed over 10 percent in the second half of 1982. Yes, most economists say that was due to monetary tightening, but I am suggesting that it was due to financial dynamics that were playing out regardless of what the Fed was doing.

Contrary to mainstream thinking, Mr. Kling argues that (short of the full Zimbabwe), inflation is not very susceptible to either monetary or fiscal policy. Expectations control inflation more than most economists acknowledge--as the money supply is increased, the market automatically corrects by reducing the velocity, and vice versa.  Mr. Kling's opinion is that QE, tapering, and Fed-speak are mostly if not entirely irrelevant.

That differentiates him from the folks (charlatans?) over at ZeroHedge or Occupy, who believe that the Fed is actively malign. But powerlessness implies an inability to do evil as much as good. Besides, Mr. Kling has a great deal of respect for his former bosses--he credits them with good intentions, and even for a few good deeds. In his list of economists who have led "interesting lives," (that he himself might like to have lived) Mr. Bernanke comes in for special praise, but mostly for his research rather than his chairmanship.

Mr. Kling's alternative to standard macroeconomics is something called patterns of sustainable specialization and trade (PSST). He describes it nicely in his book. For a more scholarly account you can download a pdf here. I will summarize it in two sentences:

Entrepreneurs, mostly by trial and error, will look for ways to maximize value from existing resources. In response to change, new economic patterns will evolve over time that optimize the consumer surplus.

As Mr. Kling generally rejects mathematical models as unrealistically simple, mainstream economists obviously dislike his view. He's basically telling them that they've wasted their professional lives for the past thirty years.

There is a view that is more charitable to the mainstreamers. One can accuse PSST of being untestable and unhelpful. In discarding econometric models, Mr. Kling essentially throws up his hands in despair and asks us to abandon all hope of messing constructively with the economy. This is a rather depressing conclusion that people of good will prefer to reject.

But I think PSST allows for some predictions. In particular, I think it renders the two recent books by Tyler Cowen (the world's most overrated economist?) wrong. In The Great Stagnation Mr. Cowen argues that technological change has come to a (temporary) halt, and we've already consumed the benefits from electrification, the IC engine, etc. Thus economic growth is in decline, and this accounts for the declining wages, unemployment, etc.

But this doesn't square with PSST. Absent technological change, the economy should be stagnant. That means that the optimal patterns of specialization and trade would already be in place, with consumer surplus maximized. Thus, rather than there being unused resources, all resources would be used to maximum extent. Of course the "boom" wouldn't really exist--consumer surplus would never grow. Indeed, it might gradually shrink, and despite the full employment we would all be getting steadily poorer. (Think of it as an economy with no additional labor-saving devices.)

That doesn't describe our current economy. Instead of stagnation we have crisis. That means there is rapid change occurring that renders existing patterns non-optimal. I think that change is fairly obviously technological, so the great stagnation theory is wrong.

Mr. Cowen's second book, Average is Over, contradicts the stagnation thesis, arguing that rapid technological change in the form of computer automation will put huge numbers of people out of work. He suggests that, despite marvelous new technology, up to 80% of us will be in absolute terms poorer than we are today. (You can't win with this guy--technology or no, we're all gonna get poorer no matter what.) But PSST says this can't be true, at least not in the long term. Entrepreneurs are not going to leave 80% of human capital sitting on the table collecting no return--that is clearly not an optimal pattern. So while almost everybody agrees that in the short term new technology will be highly disruptive, in the longer term new patterns will evolve that utilize the existing human resources. New technology will eventually show up as added consumer surplus.

My claim is that Mr. Kling's book is subversive. Of course it undermines mainstream economics. It also diminishes the Austrians, Austerians, NGDP, DSGE, neo-Keynsians, and the doomsters over at ZeroHedge. I like PSST because I think it correctly predicts that new technology will make us richer. I've argued along similar lines in my post here.

The second way Mr. Kling is subversive is his status in the profession--he has none. He occupies no faculty chair, nor has he ever served as a policy maker in government. Following his fly-on-the-wall stint at the Fed, he held a similar position at Freddie Mac. He then went on to start an Internet company, which made him financially independent. I understand that his day job now is teaching high school, undoubtedly done as a labor of love. (Lucky students!) The title of his memoir gives it away: Memoirs of a Would-be Macroeconomist.

Third, Mr. Kling writes a professional memoir rather than a scholarly article. That makes it much more interesting to read, and it also lets him draw on his extensive and relevant experience. But this is not the typical way that academic research proceeds. Rather than just the in-crowd, Mr. Kling is addressing readers like me--interested laymen curious about economics. (I'm a rank amateur, with no formal economics education whatsoever.) Of course I prefer that approach, but apparently the cognoscenti do not. The book has not been widely reviewed. I don't believe the book is mentioned on Tyler Cowen's blog at all. This is discouraging.

Finally, and related to the third point, Mr. Kling obeys Trotsky's First Law, which states that the value of a scholarly article is inversely proportional to the height of the paywall, that judged not just by the subscription fee, but also the time and effort required to read it. Mr. Kling accordingly values his work very highly--it is an enjoyable (if not always easy) read, only 120 pages long, and is available for FREE.

Psst! I think Mr. Kling has written a very important book. Pass it along.

Further Reading:

• Thomas Piketty & The Marxist Meme
• Book Review: Average is Over
• Book Review: The Three Languages of Politics
• Why The Academy Sucks

Affirmative Action, IQ & Liberals

This post is a riff on a Slate piece by Tanner Colby entitled The Massive Liberal Failure On Race (Part I and Part II). In Mr. Colby's view, the Republicans are unequivocally the Evil Party--racist, greedy, selfish. The Stupid Party is the Democrats, and not just in the trivial sense of needlessly throwing elections. He accuses his own party of almost criminal negligence in the cause of affirmative action. They confused integration with desegregation, and suppressed the Black community's desire for agency over their own kids' education by busing Black students to white schools merely to meet statistical quotas. The whole busing thing wasted billions of dollars with no positive effect whatsoever on either educational outcomes or racial harmony.

After the 1967 race riots in Detroit and elsewhere, some bargain had to be made with Black America for the sake of public order. While Mr. Colby tendentiously attributes the terms to President Nixon's racism, his description of the bargain is generally accurate.

• The government instituted affirmative action programs for Blacks in public employment. This led to the dramatic increase in African-Americans working in the military, the post office, police and fire departments, and to lesser extent, in public schools and universities. Millions of Blacks were pulled into the middle class by these programs.
• On the other hand, the high crime rate had to be lowered. Crimes (then and now) were disproportionately committed by Black teenagers. Between draconian drug laws and much more aggressive policing (or some other reason), crime was brought under control. The cost was the high incarceration rate, especially for Black men.

The result has been generally successful. Black people are richer and more integrated into the American economic mainstream. Everybody (whites and, especially, Blacks) are safer--the crime rate continues its descent from the 1970s high. These days people (mostly Republicans) are beginning to discuss lowering the incarceration rate.

The problem is that this grand bargain is breaking down. Even liberals such as Mr. Colby understand that affirmative action can't work anymore, and Republicans realize you can't just lock everybody up.

Back in 1994 Charles Murray and Richard Herrnstein published the controversial book The Bell Curve. I read it many years ago, but recall it as an excellent book, probably still well worth reading. But as with many other readers, some things bothered me. Notably, they never gave a very good definition of IQ.

Whatever IQ is, Murray and Herrnstein show that it correlates very strongly with income. Indeed, some claim (not necessarily convincingly) that if you correct for IQ then education makes essentially no difference in economic outcomes. You can read that whole debate on your own--I'll just point you to a game-changing article by Ron Unz. He quotes another to emphasize his main contention: 

Allow me to repeat the concluding sentence of the Abstract of this peer-reviewed academic article: 'These observations suggest a causal direction from GDP and education to IQ.'

So that leads me to this definition of IQ: IQ measures those mental traits that were most useful in the late 20th Century economy. Then by definition there is a correlation between income and IQ, but who knows which way the causal arrow goes?

So African-Americans are relatively poor, and thus do poorly on IQ tests. Affirmative Action managed to fudge that outcome by increasing their income by fiat. But this doesn't mean Blacks are stupid--it just means their skills aren't easily monetized. Or more precisely, their cultural talent is mostly in winner-take-all professions. I'm listening to Art Tatum as I write this--I think he died a poor man. But the richer sorts--Oscar Peterson, Count Basie, Duke Ellington--all worked in winner-take-all markets where wealth was not widely distributed. Similarly for sports. Likewise, African-Americans have played a hugely disproportionate role in our political life, on all sides of the spectrum from W.E.B. DuBois to Martin Luther King to Herman Cain to Ray Nagin.

My definition suggests that IQ may become less important in the 21st Century, and I do indeed think that will happen. White people have not been proportionately as successful as musicians, preachers, entertainers, or even politicians. Instead they've concentrated on more mathematical, analytical pursuits--endeavors that have been much more lucrative for more people. Their median income has been correspondingly higher.

But here's the rub. Computers will steal white jobs long before they get to Black jobs. Computers can do math better than you can. Math skills will always be important, but they will increasingly lead to winner-take-all jobs. The very best computer programmers will be millionaires, the average will be shlubs, and the below average unemployed. And similarly for most other, white-dominated STEM professions.

The jobs of the future will be jobs that computers can't do, e.g., entertainment, preaching, politics, and music. Computers will raise the relative value of Black culture in the labor market. And none too soon, as the traditional sources of Black employment are drying up. The post office is increasingly automated, and shrinking in any case. The military no longer needs grunt manpower. And the government sector is (thankfully) getting ever so slightly smaller.

Here is an example of the jobs of the future: the street entertainers in New York City. Those guys (almost all Black) are very, very good, and are a major tourist attraction. Once, on a small side street in Lower Manhattan (undoubtedly chosen for its acoustic properties), I spent almost an hour listening to an a capella quartet singing old rock songs. They had a huge crowd around them and were making money like nobody's business. No microphone, no overhead, no instruments--just absolute, raw, undiluted talent. No computer can ever reproduce the human-to-human immediacy of serendipitous, live music. And likewise for preaching, politics, and athletic skill (street-side gymnasts are another NYC draw).

I think Blacks will do relatively better in the 21st Century. And new, updated IQ scores will eventually reflect that.

Blacks do need to get their propensity for crime under control. They're not deprived, nor are they depraved. But there clearly is something wrong, and unless they get it fixed the mass incarceration strategy looks set to continue.

Further Reading:

• Post Office Blues
• The Dream 50 Years On
• Affirmative Action: Out With A Whimper

Turkish Politics From Socialist Action

I really enjoyed Yasin Kaya's article on Turkey's crisis in the current issue of Socialist Action. I've been following the Turkey situation from the business pages--interesting, but it lacks political insight. I surmise that Mr. Kaya speaks Turkish, which means he actually knows something about the country (more than, say, Larry Kudlow). He also writes well in English.

Mr. Kaya sees the crisis as a falling out among Islamists. The ruling Islamist party (AKP), headed by prime minister Erdogan, has relied on support from the Gulen Movement. The latter is a devoutly religious group (sect? cult? party?) led by Fethullah Gulen (correct spelling here), a 72-year-old cleric living in self-imposed exile in Saylorsburg, PA.

I've been trying to come up with an American analogue to the Gulenist Movement (Wikipedia articles here and here). Wikipedia compares it to the Catholic Opus Dei movement, but that won't ring a bell for many Americans. Its semi-secretive, conservative nature suggests something like the Mormons. But the Mormons are heretical, whereas the Gulenists are stolid traditionalists. Some accuse the Movement of being a cult, rather like Scientology--but I don't think that's accurate.

The closest I can come up with are the Southern Baptists. They're probably not as secretive as the Gulenists, but their insistence on solid doctrine, religious education, and moral rectitude is a good match. With that analogy, the American politician most like Fethullah Gulen is Mike Huckabee--a dyed-in-the-wool, charismatic, Christian pastor and political leader.

So Mike Huckabee isn't president of the United States, and neither is Mr. Gulen prime minister of Turkey, which I suggest is for similar reasons. Mr. Huckabee, an honorable, honest and charming man, holds opinions that are simply too far out of the mainstream. Accordingly, he lost the Republican nomination to the more protean John McCain. Likewise, Mr. Erdogan, a politician first and foremost, views the Gulenist principled insistence on religious dogma increasingly as a handicap. Hence the divorce.

But what a breath of fresh air to learn about a fundamentalist Islamist who isn't a Jihadi. Mr. Gulen is no more a bomb-thrower than Mr. Huckabee. The Gulenists run schools and business, not terrorist cells. Mr. Gulen's exile refuge is Pennsylvania, not Waziristan. He believes in inter-faith dialogue with "People of the Book," i.e., Christians and Jews. (His tolerance does not extend to atheists, though he certainly does not advocate their murder.) Accordingly, he's met with Christian prelates and Jewish rabbis. Mr. Kaya accuses him of being "pro-Zionist." I'm not sure about that, but at least he's not a raving anti-Semite. I don't know his opinion on the Israel-Palestinian question.

The Gulenist Movement borrows heavily from Sufism--if anything, they're pacifists. Jihad, for them, is a spiritual struggle.

As an aside, it is very important that Americans do not vilify all Muslims. However much we may differ from the Gulenists in politics, religion or culture, they are our allies in the war against Islamofascism. I think that people such as Robert Spencer, Michelle Malkin, and the late Oriana Fallaci (a superb writer) carry their passion too far.

The split between the government and the Gulenists has led to a purge of police officers, civil servants, and cabinet ministers, presumably because they're somehow associated with Gulenism. Prior to that, Mr. Kaya accuses them both of human rights violations, including the violent suppression of demonstrators at Taksim Gezo square. He writes,

Such undemocratic underpinnings sustained the corrupt neoliberal economy. This meant unprecedented profits for domestic and foreign financial capitalists and their conglomerates on the one hand, dispossession and pauperization for workers and peasants on the other.

What he doesn't mention is that Turkey has run up large current account deficits. That's what forces them into the hands of the "foreign financial capitalists." The country has to borrow money just to pay its bills. It has been able to do that (according to some commentators) because of the Fed's Quantitive Easing, which sent investors abroad in search of higher returns. But in the current risk-off environment, that capital is now fleeing Turkey in favor of US government securities. The days of cheap, easy money from the credit card are over.

The underlying cause of Turkey's economic difficulties is the country is bankrupt--just like Detroit, Puerto Rico, Greece, California, Illinois, Spain, etc., etc. It is bankrupt because it has been misgoverned for many, many years, by governments that have promised a higher standard of living than they can deliver. Turkey's problem is worse than many other jurisdictions because its debt is owed to foreigners rather than its own banks. (The contrast is China, also hopelessly in debt, but its debt is owed to its own citizens in its own currency. China has had a current account surplus for many decades, and can easily pay off foreigners.)

Mr. Kaya describes three other political currents in Turkey. First are the Kemalists, the founders of the modern, Turkish state, who are now using social democratic language to appeal to voters. Of course this is a recipe for disaster--social democracy simply promises more goodies without offering any way to pay for them. It won't work when the credit card is tapped out.

Second, he discounts the secular Left, which "is still fragmented and lacks the ability to organize public dissent, although its ideas are enjoying a revival." It's fragmented because today's Left is incoherent. I doubt it's undergoing much of a revival. The Left, after all, is the Party of Baathism.

Finally, Mr. Kaya mentions the Kurds. He thinks they've sold out. Frankly, if there is one faint glimmer of hope in Turkish politics, it is the rapprochement with the Kurds.

Mr. Kaya doesn't mention the war in Syria, which alone renders Turkish politics unstable. Twenty percent of the population is Alevi, a Shi'ite sect closely related to the ruling Alawi group in Syria. Kurds also live on both sides of the border. The Gulenist's relationship with the Syrian rebels has to be complicated, at very least. Turkey shares borders with Iran, Armenia, and (across the Black Sea) Russia, along with the European Union. Cyprus is a thorn in everybody's side. The country is a member of NATO. Turkish politics is an unforgiving mess.

Mr. Kaya's suggestion for Americans is just silly: "Our slogan should be 'Imperialist Hands off the Middle East!'” Who knows what that means?

That notwithstanding, Mr. Kaya's article is helpful. But I still have absolutely no clue what is going to happen next. It probably won't be good.

Further Reading:

• Peace, Peace, War, War
• Imperialism
• BRICS

College: Signal vs. Substance

I really would like to agree with Bryan Caplan.

A debate rages about the importance of signaling in higher education. On this theory (in the extreme formulation) employers either can't or don't want to determine how good an employee you will be, and hence they judge entirely by a quasi-relevant signal: education. Thus somebody with a high school diploma will be hired over a dropout. A baccalaureate degree holder will win over a high school graduate, and a masters degree will trump both of them. Never mind that nobody learned anything relevant to their job--only the signal counts.

Evidence cited by signalers includes the growth in the number of jobs that now require a bachelors degree. Increasingly, baristas have college educations these days. A high school diploma, formerly the entree into the workforce, now counts for very little. The whole education system is nothing but an arms race, where each contestant tries to be better educated than his neighbor. It's like the two campers running away from a bear: "I don't need to run faster than the bear," says one. "I just need to run faster than you."

On the signaling theory, college attendance, while good for individuals, from society's standpoint is a complete waste. Most employees would perform just as well if they'd never gone to college at all. Thus the signaler's goal is to defund higher education and dissuade as many people as possible from going to college. Champion signalers are Peter Thiel and Bryan Caplan.

The opposing view is held by people who argue that college is an investment in human capital. In extreme form, these folks hold that every moment spent in any college classroom is time irreplaceably well-spent. Your career and life will be worth infinitely more if you go to college--something that everybody should do. The entire college-industrial complex has bought this line to the hilt, and they invent increasingly silly terminology to justify their case.

Critical thinking skills is a term that gets my goat--if you think at all critically about it, it dissolves into complete meaninglessness. And yet mult-year long, general education programs are devoted to this mirage. Any otherwise useless class is justified because it enhances "critical thinking skills." Conversely, nothing remotely practical does any good. In reality, critical thinking skills are just a synonym for the classes that the faculty want to teach.

At least two issues complicate any analysis. First is ability bias, i.e., smart students go to good colleges and get good jobs. The latter two are correlated because both derive from the student's innate ability. But it seems to me ability bias is just signaling in disguise--smart students signal their ability by going to a good college. They don't necessarily learn anything there.

The second issue is rent-collecting using a credential. For example, one can't be a lawyer without a law degree--so the money lawyers earn has less to do with ability or signal, but rather because they own a credential. Rent collecting is a serious problem caused by government licensure and regulation, but is beyond the scope of this post.

In the post linked above Mr. Caplan claims the value of education is 50% ability bias, 40% signaling, and only 10% human capital investment. As said, I think ability bias and signaling are almost the same thing, so what he's really saying is that only 10% of the "value" of education comes from actually learning something. I think that estimate is too low. I'll provide three examples.

First, in my old age I aspire to be an amateur economist. I have no formal education in the discipline. Unlike my professional colleagues, I read what I want and don't read what I don't want. That means I see only those bits of the discipline that interest me, and indeed, may grossly misunderstand parts of it. Not getting systematic feedback is a major handicap. So formal education in economics is worth something--certainly more than 10%. (That said, we amateurs are unpolluted by the fads and fancies of the in-crowd, which I suppose gives us an advantage.)

Second, my daughter has an English degree. She has a job where she uses her degree. I have pressed her repeatedly on this issue: Do you really use anything you learned in school? Her answer is always "yes." If she hadn't read good literature and written term papers, it would have been impossible for her to do her job. Yes, in principle she could have learned on the job, but her employer wouldn't have had the patience for that. (That said, she got the job because her boss is an alum of the same school. That fact made her resume stand out. So perhaps signaling got her the job, but it didn't make her successful at it. There was a real capital investment.)

Third, I have former students who say that the most important stuff they learned in college was general chemistry. Again, there is some capital investment going on--it's not all signaling. (That said, this feedback dates mostly from the 1990s. I think general chemistry is much less useful today than it was back then--those old jobs are being automated. Today it's more about signaling or credentialing.)

So I don't agree with Mr. Caplan. There is more to education than signaling--certainly more than 10%. In his emphasis on signaling Mr. Caplan misses two big problems with higher ed.

First, there's some debate these days about what is capital and what isn't. The concept of human capital is particularly fuzzy, especially since the return is paid as wages. So think about it this way. Suppose the value of labor is $10/hour--that's what a cleaner or a fast-food worker makes. Any reasonably competent worker can get a job at that wage (give or take).

People with bachelors degrees often make considerably more than that, my daughter included. The extra derives from some human capital investment--in this case education. Signaling may be useful in getting a job (cf. my daughter), but it won't make you successful at it. As wages these days approach market rates, the signaling effect washes out, but the capital return remains.

Second, the problem with college isn't signaling, but rather irrelevance, making it an increasingly poor investment. This is partly caused by technological change. There is little in the general chemisty class, for example, that a computer can't do better than you can. Many fewer students need to study general chemistry these days. This effect is accentuated by the tenure system which enshrines old ways of doing things. My colleagues and I are still preparing students for the class of 1995.

So I don't agree with Mr. Caplan's signaling thing. But I do agree with his prescriptions. College needs to be cheaper, and taxes have to be lower. Government should disinvest from higher ed.

Further Reading:

• The Death Of The Humanities Is Greatly Exaggerated
• What's Wrong With College
• Why the Academy Sucks

Book Review: The Second Machine Age

The Second Machine Age, by Erik Brynjolfsson and Andrew McAfee (Erik & Andy, as they call themselves) is a sequel to the equally entertaining, self-published e-book, Race Against the Machine. The more recent book is a longer, more detailed account of the same thesis.

The argument begins with Moore's Law, which posits a doubling of computing power every 18 months. If one chooses the date that the US Government defined the economic category information technology as Year 1, then the year 2006 brings us to 32 doublings. That means computers (along with software, data communication, etc.) were 4.3 billion times more powerful than they were in 1958.

Pocket change, claim Erik & Andy. Despite the dramatic increase in computation over 48 years, computers were still something of a sideshow. Well into the aughts one could claim that the only source of economic growth was in information technology--the rest of the world still plugged along as it always had.

But now things are different. Now we have arrived at the second half of the chess board (from the story where a king promises his faithful servant grains of wheat, the amount to double on every square). For most of the first half of the chessboard, computational gains are modest if not nugatory. But as one goes from the 32nd doubling to the 64th doubling, computer power begins to take over the entire economy. Erik & Andy predict massive changes in how we will live.

So I agree with Erik & Andy. Indeed, I wrote a post last Summer (Getting Richer While Feeling Poorer) which actually serves as a pretty good description of the first half of their book. The claim (in both my post and their book) is that computation will lead to rapid automation, which will dramatically change the nature of the labor force. We both argue that traditional economic statistics, such as GDP, are no longer very useful for describing the new normal. Erik & Andy, however, include a lot more data and information in their much longer text.

Erik & Andy's thesis can be distinguished from Tyler Cowen's The Great Stagnation. Mr. Cowen argues that the world has run out of innovation--that we've consumed all the benefits of electrification, mass education, modern manufacturing, etc. Thus growth rates will inevitably decline, at least until the next big thing comes along. Erik & Andy (& me) argue that the next big thing is already here in the form of mass automation. For us, boom times are just ahead, if not here already.

Mr. Cowen recently published another book, Average is Over, in which he implicitly repudiates the stagnation thesis. He argues that indeed, computers will automate lots of jobs, but only the cognitive elite will benefit. The rest of us shlubs (80%) will be under- or unemployed and have a net lower standard of living. (His claim reduces to the argument that massive economic growth will lead to widespread poverty--a ridiculous conclusion.)

Eric & Andy specifically address the Average is Over thesis comparing Bounty and Spread. Bounty refers to the huge amount of wealth created by computer power. Spread refers to the distance between rich and poor--the greater the spread, the more the inequality. Will the bounty be distributed broadly enough to minimize the spread? They offer no definite answer, but my reading leads me to be optimistic.

It is not just the so-called cognitive elite that will benefit from computers. Indeed, a lot of doctors and college professors are going to be put out of a job, while home health care aides will have thriving careers. Erik & Andy borrow a 2 x 2 matrix to describe the result, with routine and non-routine jobs in the columns, and manual and cognitive jobs along the rows. They conclude that routine jobs, whether manual or cognitive, will tend to disappear. Assembly line work in factories (very routine) is already mostly eliminated. Increasingly, routine cognitive work (including entry-level lawyer jobs) is going the same way.

I agree with that, but I'd add some other ideas. For example, any job that requires a prodigious memory is likely to be (partially) computerized. Thus medical jobs (especially diagnosis) will rely heavily on computers and will displace a lot of humans. What is happening to lawyers today will be happening with doctors in the near future, and for much the same reason. I've posted a longer piece about the impact of automation on STEM careers here. The STEM careers that show the most promise are the skilled trades, i.e., the equipment and instrument repairmen. To use an example from Erik & Andy, the guy who can fix Baxter will make a good living.

I disagree most with Erik & Andy on their policy prescriptions. A college education, while excellent preparation for work in the 20th Century, is less well suited for the 21st Century. In particular, I think graduate work is a waste of time for all but the very top students--graduate enrollments in all disciplines should shrink by 90%. I think the baccalaureate program is too long in most cases--a two or three year college career is long enough. I think general education--such as a Great Books program--no longer makes much sense. That is something that can be pursued by the adult learner on-line as part of life-long learning.

Finally, I think math is useless for almost everybody. I took a poll in my gen ed science class (mostly art and business majors) asking how many knew how to do long division. Every hand went up. Now this is the most useless skill imaginable, yet we're still teaching it in school. Likewise, factoring quadratic equations, graphing non-linear inequalities, studying trigonometry--none of this is useful for more than 1% of the working population. Computers can do math better than you can--why are we still putting everybody through this?

Conversely, art, music, writing, performance, public speaking, cooking, dance, counseling--computers can't do any of that. Those are the subjects that should be taught in school. Save the math and science for those students who are interested in it for its own sake. There will be very few jobs in those fields.

Otherwise I really like Erik & Andy's book. Highly recommended.

Further Reading:

• Those Nattering Nabobs Of Negativism
• Book Review: Average is Over
• Are Rich People Rich?

Thomas Piketty & The Marxist Meme

The Marxist meme, for those of you new to this blog, claims that we're poor because the rich people stole all the money. It is an idea that slides easily into the mind, quickly learned but very hard to unlearn, despite making no economic sense. Economically uneducated people (such as my Trotskyist friends) are enchanted by it.

But even brilliant geniuses can fall victim to the meme, a case in point being the young, French economist, Thomas Piketty. His new book, Capitalism in the 21st Century, (h/t Tyler Cowen) will be released in English in March. Needless to say, I haven't read it yet. I may never read it--it's 900 pages long, albeit apparently very well written. I have read Milanovic's excellent review, here (pdf).

Piketty's model starts out with accounting identities. These are facts that are true by definition, such as in a balance sheet liabilities must always equal assets. It doesn't matter if the firm is a stock market star or nearing bankruptcy, if the balance sheet isn't balanced it's time to fire the accountant. There are macroeconomic identities as well. For example (oversimplifying), global expenditures must equal global incomes, since whatever I spend is necessarily somebody else's income.

So accounting identities can be manipulated mathematically while still remaining necessarily true, and this is what Mr. Piketty does. His first law is simply rewriting some known identities.

First among these is that income is allocated between capital and labor. Income from capital is known as return on capital, while income from labor is called wages. The total income is the sum of the return on capital and wages. So it could be, for example, that 30% of total income is awarded to capital, while 70% is awarded to wages. The fraction of total income that's awarded to capital is called alpha.

The second identity is a relationship between the average global return on capital (let's designate that by r), and the rate of growth of the global economy (let's call that g). Piketty shows that if r > g, then alpha must get bigger over time. That is, a larger and larger fraction of the global wealth will accrue to capital, with an ever smaller fraction going to wages.

Conversely, if r < g, then the reverse is true--wages will grow relative to capital.

In the former case, r > g, reasonably assuming that rich people own most of the capital, then more and more wealth will accrue to the 1%. The rich will get richer, and the poor, while perhaps not getting poorer, will certainly be getting richer a lot slower. In the latter case, r < g, the premium goes to wages, and so wealth is more evenly distributed across society.

So which is it? The relative values of r and g depend on empirical fact rather than accounting identities. And here Mr. Piketty apparently excels--he has collected extensive data from most of the capitalist world from before the French Revolution to the present. He has found that for most of the last 200-300 years that r > g. The exception has been the period from 1913 to 1970--during that time r < g. His conclusion is that r > g is the normal state of capitalism, while r < g was an aberration that will likely never be repeated.

Today global growth is in the 2-3% range, while the average return on capital is roughly 4-5%. Thus r > g, and accordingly an ever increasing fraction of wealth is accruing to the top 1%. This is certainly true in the US, evidenced by high unemployment, declining labor force participation, and stagnant wages. Piketty argues that global growth can't get much higher. It depends predominantly on two things: population growth (stagnant), and improvements in technology (yielding approximately 1.5%). Growth is as high as it is because of China, but as it becomes fully integrated into the capitalist system its growth rate will slow, taking global growth down with it.

The return on capital has averaged 4-5% over the past two centuries, and barring exceptional circumstances is unlikely to change significantly. So Mr. Piketty forecasts r > g for as far as the eye can see.

The exceptional period from 1913 to 1970 was due to the World Wars (echoing my Trotskyist friends). By destroying so much capital, the return on capital was greatly reduced (perhaps even negative in some years). Further, rebuilding Europe and Asia enabled very strong growth. So, with r < g, this was the heyday of labor, when workers could claim an ever larger share of the pie. Unfortunately, economists coming of age during that time thought that was normal, and that capitalism would inevitably lead to a richer and more equitable society. Mr. Piketty says that's wrong.

Piketty's view is very pessimistic, essentially condemning a large fraction of the population to relative poverty. He suggests that 50% of the population will generally benefit from the trend toward capital, but that the bottom 50% will be losers. This, at least, is better than the robber baron age when it really was only the top 1% who were able to capture the largest share of income.

Among Piketty's solutions is to reduce the rate of return on capital through higher taxes. He supports (in some cases) a return to the 90% tax bracket--not to raise revenue (it won't) but rather to lower r. Instead of a war, let's just destroy capital through taxes. This is where the Marxist meme comes through most obviously.

So I am reminded of three things. First, many years ago I saw a TV interview with some futurologist. In a thought experiment he imagined a world where robots did all the work, and people simply lived off interest on the capital. Everybody would be a member of the leisure class, and labor would collect no wage whatsoever. We'd all own our bit of a robot.

Second, I frequently buy my morning coffee at a convenience store that is part of a state-wide chain. They pay minimum wage and are always trying to recruit employees. One of the perks they offer is stock in the company. In light of Mr. Piketty's argument, the company's stock may, in fact, turn out to be much more valuable than the wage. It's always been important to save for retirement, but if Mr. Piketty is correct, then accumulating capital at an early age becomes even more crucial.

Finally, Mr. Piketty criticizes Gary Becker's theory of human capital, i.e., that the investment made in education, etc., is a form of capital. In Piketty's opinion this just muddies waters that don't need to be muddied, namely the distinction between labor and capital. (Or as my Trotskyist friends would put it, don't cross the class line.) Mr. Piketty likely disagrees with the thesis I've put forward elsewhere that we're all petty bourgeois now. But whether or not human capital is really capital, there is no doubt that people who conserve human capital will also be able to accumulate real capital.

Human nature being what it is, some government redistribution of wealth will always be necessary. But perhaps we should redistribute capital rather than income.

Note (April 25th, 2014): I have written a follow-up post on Piketty's book here.

Further Reading:

• Book Review: Average is Over
• Why Trotskyists Don't Like Las Vegas
• Book Review: Human Capitalism

Grenada & The Art Of Being A Comrade

Jeff Mackler authors a heartfelt and informative article in last month's Socialist Action. October 25th marked the 30th anniversary of the US invasion of Grenada, and also the 30th anniversary of Mr. Mackler's resignation from the Socialist Workers Party (SWP). The two events are loosely connected.

Grenada, a small Caribbean island with a population of about 100,000, became an independent country in 1974. The first prime minister was Eric Mathew Gairy, whom I suppose one could describe as a psychopathic lunatic. At his disposal there served a murderous gang of thugs known as the Mongoose Gang. According to Mackler, Mr. Gairy was passionately interested in the occult--ESP, mind reading, flying saucers, etc. The prime minister's "demons extended to literally banning the construction of left turn lanes on the few roads that surrounded this volcanic mountain nation."

Indeed, he chose a superstitious date, March 13, 1979, to leave the island for New York to attend a conference on the occult. He left instructions for the Mongoose Gang to murder the rabble-rouser, Maurice Bishop. Bishop got word of the plot in advance, and staged a preemptive, nearly bloodless coup overthrowing Gairy. Good riddance.

The problem was that Mr. Bishop fancied his coup to be a socialist revolution, and allied himself with Cuba. He gussied up the rhetoric using words like liberation, Black Power, and participatory democracy. Much of this was a fraud, as Mr. Mackler's article demonstrates in his discussion of participatory democracy.

But Mr. Mackler buys Bishop's revolutionary gobbledygook hook, line and sinker. 

Bishop’s followers, perhaps 200 activists at most, but accompanied by massive community support across the island, successfully seized control of all local police stations. ... 

Bishop’s statement made clear the revolution’s objectives: “People of Grenada, this revolution is for work, for food, for decent housing and health services, and for a bright future for our children and great grand-children. The benefits of the revolution will be given to everyone regardless of political opinion or which political party they support.

Then follows a litany of how Bishop's New Jewel Movement improved the living standard of average Grenadians, most of which were funded by Cuba. New fishing boats were purchased, refrigeration facilities were added, the Cubans sent their legendary medical teams to serve the poor, and new roads were built (presumably with left-turn lanes). Indeed, "[i]n four short years, unemployment was reduced from 49 percent to 14.2 percent."

A socialist paradise was aborning, and my Trotskyist friends' hearts all warmed to the challenge. The SWP published a book entitled Maurice Bishop Speaks. No doubt Mr. Bishop was a charismatic guy. It may even be that he was as well-intentioned as Mr. Mackler claims. Mr. Mackler, after all, met the man, and describes how Bishop had more than a passing acquaintance with the SWP.

But even Mr. Mackler admits that all was not well in socialist La-La land. It's one thing to import Cuban charity, but another to build a sustainable economy.

All of these critical gains notwithstanding, almost everyone understood that Grenada, essentially a huge mountain with poor soil conditions and surrounded by a single road, was currently incapable of putting into effect more dramatic and long lasting improvements. The PRG [Provisional Revolutionary Government] leadership moved to resolve this dilemma by embarking on the construction of a major international airport, able to provide access to the world’s modern airplanes. With significant loans from Canada and the allocation of vast human resources, again from revolutionary Cuba, Grenadian and Cuban workers began construction on this project aimed at promoting tourism as the major source of income in the years to come. Grenada’s antiquated Pearl Airport was capable of landing only small turboprop planes with a capacity of some 30-50 people.

Mr. Mackler's larger point is correct--tourism had to be the leading source of foreign exchange (even though Grenada is among the world's leading nutmeg producers). It's ironic, then, that Mr. Mackler reports that the PRG significantly raised taxes on the big hotels--certainly counterproductive. That alone would have led to its downfall had not other events intervened.

The airport became the bone of contention. The Reagan administration argued it was for military use, built at the behest of the Cubans and their Soviet masters. The Grenadians said it was to bring in tourists more efficiently. Of course both were true--the Grenadians were undoubtedly sincere in their desire for an improved airport. Even today it is named the Maurice Bishop International Airport--probably the single, lasting legacy of the so-called revolution.

Socialists can't do tourism very well. Tourism is (usually) a luxury good, i.e., the tourists have more money and leisure than local residents. Thus it depends on inequality. In the 1990s the Cubans tried to isolate tourism into enclaves so that the locals wouldn't have to interact with them, but that rather destroys the experience. The charm of tourism is local food, shopping, entertainment, and (in the case of Cuba) access to sex. Even now, Cuba does a poor job for tourists, ranking behind the Dominican Republic and Puerto Rico. In 2011 the island hosted 2.7 million visitors. By comparison, in the same year New York City (worse weather; far more expensive) had 10.6 million international arrivals.

So of course it was all going to fall apart. A tourism-dependent, socialist island, putting itself outside the world economy had no place to go except poverty. Mr. Gairy may have been bad, but Mr. Bishop, for all his good intentions and fine rhetoric, was surely a whole lot worse. The end came in two steps. First, there was the falling out amongst thieves--Bernard Coard, another member of the Central Committee, launched his own coup and assassinated Mr. Bishop. And shortly thereafter, on October 25th, 1983, nominally in response to the airport, the US invaded Grenada and put paid to the whole experiment.

Mr. Mackler describes it this way.

The Grenadian Revolution ended that day [of Coard's coup]. The U.S. invasion that followed a few days later was met with virtually no resistance except for the several hundred Cuban airport workers. Breaking a formal agreement that had been hurriedly negotiated between the Cuban government and the Reagan administration, affirming that the Cubans would not resist the invasion and would act only in self defense, the Rangers nevertheless opened fire on the Cubans, who alone courageously resisted as well as they could the massive power of the imperialist forces. ... 

...The island was “conquered” by the invaders in a matter of hours as Grenada’s humiliated and demoralized masses were rendered helpless and disarmed.

Just as Mr. Mackler assumed that Grenadians originally supported the "revolution," he now assumes they assented to its demise only because of "demoralization." Both of these are inferences unjustified by facts. Almost certainly, Grenadians wanted to lead normal lives as part of the global economy. The Gairy regime was awful, the Bishop government was worse, and the Coard coup was intolerable. So no wonder they watched/welcomed the Americans.

And it looks like their good judgement has paid off. I am not an expert on Grenadian politics, but from the Wikipedia page it seems they've had a succession of prime ministers, all the result of peaceful elections. People are voted in, and then the bums are voted out. That's the way it should be. Further, Grenada is economically fairly well off. By most measures it's doing better than Cuba. For a tiny country at the mercy of the global economy, this is not a bad result.

Mr. Mackler's personal story of leaving the SWP is also interesting, but I'm out of space. So read the whole thing. It's worth your time.

Further Reading:

• Imperialism
• The Doctrine of Secret Socialism
• Book Review: Filthy Rich In Rising Asia