Nick Timiraos and Andrew Tangel: In the Long Term, an Economy Can’t Expand Faster than the Combined Growth Rates of Its Working Population and Their Output Per Hour

Link to Nick Timiraos's and Andrew Tangel's May 17 Wall Street Journal article "Can Trump Deliver 3% Growth? Stubborn Realities Stand in the Way" shown above

Nick Timiraos and Andrew Tangel's Wall Street Journal article on productivity and number of workers in the US explores many of the same themes as my talk "Restoring American Growth." One of the most basic truisms in the article is the one I made into the title of this post: 

In the long term, an economy can’t expand faster than the combined growth rates of its working population and their output per hour.

Let me talk about each of these in turn, as they do. 

The Drift of Policy is Against Growth in Number of Workers Because It Focuses on Prohibiting People from Working for the US Economy

Nick and Andrew write:

The president is pushing some policies that work against economic growth. Relatively low birthrates and an aging population mean immigration is the source of nearly all of the work force’s net increase, so its growth rate would be even lower if legal immigration were curbed. 

For the most part, economic growth is judged in terms of income per person. But there is one exception: potential military power depends in important measure on total GDP, not just GDP per person. In "Benjamin Franklin's Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?" and "Why Thinking about China is the Key to a Free World," I wrote of how allowing more immigration could add greatly to the military and therefore geopolitical strength of the US. Thus, allowing more immigration is the obvious way to "Make America Great Again" in the geopolitical sense. Conversely, treating being American as a closely guarded privilege that only those born to that privilege are allowed is a path to greatly reduced American power and influence. Of course, allowing more immigration is also extremely valuable to the immigrants themselves, as I talk about in "Us and Them" and "'The Hunger Games' Is Hardly Our Future--It's Already Here." But many people have a "Keep the Riffraff Out!" attitude that trumps concern with the America's power and the well-being of people who want to join us in our fair land. 

Aggregate Demand Is No Longer Scarce

Other than immigration, is there room for expanding the number of workers in the US economy? NIck and Andrew argue this is difficult:

With the unemployment rate now at 4.4% and operating at a level economists consider to be “full employment,” meaning the economy produces as many jobs as it can without spurring inflation, the labor market provides little room for the kind of economic surge that marked the 1980s.

But there is a contrary argument:

White House Budget Director Mick Mulvaney ... pointed to millions of prime-age workers who aren’t in the labor force. “If you created economic opportunity and jobs that they want, they would come back,” Mr. Mulvaney said. “So I’m not worried about the tightness of the labor supply.”

This argument should not be dismissed too quickly. It is quite similar to arguments made by Narayana Kocherlakota in our storified Twitter debate "Narayana Kocherlakota and Miles Kimball Debate the Size of the US Output Gap in January, 2016."

When Monetary Policy Keeps the Economy at the Natural Level, the Supply Side Determines What Happens

Some people think that monetary policy alone can create growth miracles. It can't; not for long. Good monetary policy can readily cut short potential disasters such as the Great Depression or Great Recession, which is in itself quite valuable, but when monetary policy has done its job, then it takes other policies to raise the growth rate of the economy in a sustainable way. 

And indeed, if monetary policy is done well, the remaining story will about the supply side. In my view, one of the best ways to get people to focus on the supply side—or what is sometimes called "structural reform"—is to do monetary policy so well that the economy stays at the natural level, or very close. What would this look like? Something like this description from Nick and Andrew, only more so:

If growth advances and productivity does too, policy makers may be able to keep interest rates lower for longer because productivity growth holds down inflation. Companies can boost profit margins and hold down costs, and thus inflation, when they can produce more goods and services with fewer workers.

If, on the other hand, the administration’s policies boost demand without drawing in new workers or raising their productivity, the growth that results could be harder to sustain because it would produce inflation. The Fed would feel additional pressure to raise interest rates to prevent the economy from overheating.

The Overall Trends in Productivity Growth Are Disappointing

Nick and Andrew include a graph showing how the growth rate of output per work hour has declined in recent years: 

I made a similar graph in the slides for my talk "Restoring American Growth." But where Nick and Andrew's graph gives credit for growth in the next 5 years and the last 5 years, my graph gives credit only for growth in the next 5 years after a given date, and so shows the decline in productivity growth after 2003 much more clearly:

A capsule history of productivity growth since World War II goes like this: 

  1. Fast from the end of World War II in 1945 to 1973
  2. Slow from 1973 to 1995
  3. Fast from 1995 to 2003
  4. Slow from 2003 to the present and maybe beyond (2017+) 

But to provide some perspective, however wrenching they have been politically, the "slow" growth rates from 1973 to 1995 and from 2003 to the present still represent the productivity growth rate that existed during the Industrial Revolution. The fast periods from the end of World War II in 1945 to 1973 and 1995-2003 made many people expect those productivity growth miracles to continue. 

Productivity Growth Is Miserable in Construction

One of the big puzzles for productivity—one that deserves to have many more economists studying it—is why productivity growth in construction has been so miserable. Productivity growth has been quite high in manufacturing. Construction is also a seemingly straightforward physical activity involving the assembly of tangible materials. Why is its productivity growth trend so different from that of manufacturing? 

Look at the difference in the productivity trends between construction ("Structures") and manufacturing (the other two):

Nick and Andrew also note the low productivity growth in construction. Here is their discussion:

Camden uses efficiencies such as prefabricated concrete building panels and roof trusses, “but there hasn’t been a huge breakthrough yet where we can lower costs dramatically,” said Mr. Campo. “You have a nail gun instead of a hammer, OK? But you still have to line it up and pull the trigger.”

Productivity in construction has contracted at a 1% annual rate since 1995, according to a study by McKinsey Global Institute, the research arm of McKinsey & Co., due in part to reliance on unskilled workers and in part to government red tape.

Joel Shine, chief executive of builder Woodside Homes Inc., visited Kyoto, Japan, to see how firms there use automation in home construction. He thinks it would take at least a decade for the innovations to become mainstream in the U.S., in part because they would require building-code changes.

State and local rules often play as big a role for his business as the federal government. Higher permitting fees, for instance, have raised construction costs in California towns. “There are a lot of places if you gave me a raw lot for free—for free!—I could not even come close to building an entry-level house,” Mr. Shine said.

I think this passage is part of the story. But I think there is more to the story of why construction productivity has gotten worse instead of better. I hope someone does more digging to find out. 

Prospects for Productivity Growth Elsewhere are Unclear

There is hope that productivity growth—that is, growth in output per work hour—will pick up. But the prospects are unclear. Nick and Andrew counterpose these two views:

Some productivity optimists say gains from new technology will build in the years ahead. They see businesses incorporating a backlog of innovations in artificial intelligence, from self-driving vehicles to the processing of routine clerical work.

A paper from four growth specialists published by the Brookings Institution in March takes a dimmer view. It maintains that almost the entire shortfall in output during the recent expansion reflects long-term forces unrelated to the financial crisis and recession, including a drop in a measure of economic dynamism called “total factor productivity.” That measure reflects how efficiently labor and capital are used.

Of course, the future of technology is unavoidably difficult to know; to know enough to predict it well, we would have to know the future technology itself. I talk about that difficulty in "The Unavoidability of Faith." 

What Can Be Done?

The question of what can be done is a difficult one. I know I don't have all of the answers, but I tried in my talk "Restoring American Growth" to make progress on this issue. I would be honored to have anyone reading this post listen to the video of that talk. 

Why Is Productivity Growth So Low? 23 Economic Experts Weigh In|FocusEconomics

FocusEconomics included me among the 23 experts asked the question "Why is productivity growth so low?" You can see my answer above and all of our answers at this link. Here is the list of economists offering their takes, in the order they appear in the article:

  1. Mike Norman
  2. Karl Denninger
  3. James Picerno
  4. Daniel Lacalle
  5. Alden Abbott
  6. Constantinos Charalambous
  7. Timothy Taylor
  8. Dean Baker
  9. Carola Binder
  10. John Cochrane
  11. Livio Di Matteo
  12. Colin Lloyd
  13. Elliott Morse
  14. Mike "Mish" Shedlock
  15. George Selgin
  16. David Andolfatto
  17. Jeff Miller
  18. Antonio Fatas
  19. Miles Kimball
  20. Neven Valev
  21. John Quiggin
  22. David T. Flynn
  23. Steve Keen

FocusEconomics sets up the question well at the beginning. 

 

How the Free Market Works Its Magic

Link to the Wikipedia article on “Harry Potter (character)”

Some people misunderstand free market principles. The free market depends on the establishment of property rights. That is the free market, not a departure from it. In particular, the free market yields good results only because after the obvious ways of getting ahead–lying, stealing and threatening violence–are outlawed, people have to exchange things that are valuable to other people in order to get ahead. 

Monetary policy is another interesting area to talk about. The logic saying that the free market yields good results comes from a model in which monetary policy doesn’t matter for anything important–have a central bank or not, it is all the same in that model. As soon as monetary policy matters, there is a genuine asterisk on the idea that the free market alone can do the job. As Milton Friedman recognized, some sensible monetary policy has to be appended to the establishment of property rights. 

Note: The timing of this post was inspired by yesterday’s post “Narayana Kocherlakota: Want a Free Market? Abolish Cash.”

Against Anticompetitive Regulation

If several businesses got together and agreed to raise their prices, that would be an antitrust violation. But when people with something to sell get together and run to the government and successfully ask for a regulation that will raise their prices, people often see that as OK. That makes no sense. If a restraint of trade would be a bad thing done by private agreement, surely that restraint of trade is also a bad thing done by government at the point of a gun.  

Of course, for most people, the big difference between a good and a bad restraint of trade is this:

Competition for thee; collusion for me. 

That is, I hate competition that I have to face, but like competition for you that keeps prices down for me. 

The standard argument against competition–when it is competition for me–is that (a) competition will lower quality because low-price, low-quality alternatives will be offered, and (b) these low quality offerings will have a bad spillover effect on people’s guesses about the quality of what I am selling. Notice that this is an all-purpose argument that can be used to justify almost any type of collusion.  

In his post “Dear John Cochrane, you are hurting the economists who care about you,” Matthew Martin distinguishes between reasonable and unreasonable arguments in favor of deregulation. Focusing narrowly on the “ease of doing business” rating for a cross-section of nations, Matthew contrasts John Cochrane’s rash extrapolation

with the fact that those nations with a greater ease of business than the US do not do any better than the US in GDP per capita: 

Evan Soltas, in “Is Pro-Business Reform Pro-Growth?” drives home the point by considering cases in which a country made a big leap up in ease of doing business, finding that there is very little growth dividend. My reaction to Evan’s post is to think that the “ease of doing business measure,” while correlated with things that make a difference, particularly among countries with lower scores than the US, but does not itself capture the key things. When countries raise their “ease of doing business scores” it might be like colleges gaming their rankings once they have figured out the US News and World Report formula for the college rankings. It is hard to genuinely make things better. It is much easier to raise a score by gaming it. And the “ease of doing business” rating is prestigious enough for many countries to see it as worth gaming it to raise it. 

What if some of the key types of deregulation that are especially important for economic growth don’t show up in the “ease of doing business” rating? To the extent doing them well is correlated with the “ease of doing business rating,” the “ease of doing business” rating could be a good indicator, but it would be a less good indicator when a country is only doing the things tallied in the “ease of doing business” rating without also doing the things often correlated with a greater “ease of doing business.”  

As an example of thinking about the benefits of deregulation more carefully than John Cochrane, Matthew Martin links to Salim Furth’s Heritage Foundation report “Costly Mistakes: How Bad Policies Raise the Cost of Living.” Let me list 11 areas Salim points to as areas of harmful regulation (I didn’t understand his least important example, “cement production regulation”) in the order of how big Salim thinks the annual cost to the average family is, without regard to what level of government is involved; many of the biggest are perpetrated by state and local governments. Indeed, I have often thought that instead the overly broad use of the “interstate commerce” clause of the US Constitution to meddle in things that are far removed from interstate commerce, the Federal government should use the interstate commerce clause to prevents states and localities from strangling their economies and thereby the US economy with harmful regulation. It is good to defer to states and localities when they lean in the direction of freedom, not always so good to defer to states and localities when they strangle freedom. 

All estimates of annual cost to the average family are from Salim Furth

  1. Land use regulations–cost to average family: $1700. Property owners already within a locality colluding against everyone who might want to move to that locality. 
  2. Occupational licensure–cost to average family: $1033. Those who already have a particular type of job colluding against everyone else who might want to do that job. 
  3. Corporate Average Fuel Economy Standards–cost to average family: $448. Pretending to do something to help the environment and to reduce US dependence on oil from enemy nations instead of really helping the environment and reducing US dependence on oil from enemy nations by raising gasoline and other energy taxes. 
  4. Auto Dealership Monopolies–cost to average family: $288. 
  5. Ethanol Mandate–cost to average family: $255. A tax on drivers to fund a handout to corn farmers and agribusiness, enforced by the key role the Iowa caucuses have in winnowing out presidential candidates. 
  6. Corporate Tax Complexity and Compliance Costs–cost to the average family: $230. Pretending that it is possible to avoid taxing people by taxing corporations, when at the end of the day, the only ultimate source for tax revenue is people. Or perhaps, pretending that taxing corporations only taxes rich people, when if one wishes to tax rich people, it is much better targeted to tax rich people by finding rich people directly. 
  7. Crude Oil Export Restriction–thankfully now gone, but used to cost the average family $227. 
  8. Renewable Energy Mandates–cost to the average family: $108. Those producing greenhouse gases using symbolism to distract everyone from the carbon taxes that would direct research and implementation of CO2 reduction in the most efficient directions. 
  9. The Current Medical Tort System–cost to the average family: $82. Lawyers taking a big cut of the money flowing through the incentive system/insurance system surrounding medical mistakes. 
  10. Sugar program–cost to the average family: $29. Sugar farmers colluding against sugar users. (Note that with a Pigou tax on sugar, the money would go to government uses instead of sugar growers.)
  11. Milk Marketing Orders–cost to the average family: $29. Dairy farmers and agribusiness colluding against milk users. 

When faced with the politics of such schemes, it is easy to get discouraged. But a journey of a thousand miles must begin with a single step. One of the first steps toward getting rid of bad regulations is to call them out for the reflections of self-interest that they are, and refuse to let them hide behind prettified excuses. What is achievable in the medium-term is that whenever journalists write about any of these regulations, someone close to hand is ready and willing to be quoted about how selfish these regulations are. 

Note: You might be interested in the related Storify story “Jonathan Portes, Brad DeLong and Noah Smith Set Me Straight When I Praise John Cochrane’s Shoddy OpEd.”

Patrick Goodney: Peak Car is Near, But Not Yet

Despite some contemporary discussion, the U.S. car industry hasn’t reached its peak yet, but it’s not too far out from doing so either.

I am pleased to host another student guest post, this time by Patrick Goodney. This is the 12th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link. This is the second student guest post by Patrick. His first was “The Fed Should Raise Its Target Rate Before the End of 2015.” I was impressed with how judicious both that post and this one are. 

Has the traditional car industry already reached its peak? In July, futurist Thomas Frey argued the U.S. had indeed already reached “peak car”—writing that vehicle ownership, driving and sales are all growing at slower and slower rates.

Frey says the turning point for the car industry was a major shift in American lifestyles spurred by “the perfect storm” of “economic collapse, digital revolution, and major shifts in urban lifestyles.” Ride-sharing startups like Uber and Lyft, as well as the emergence of electric cars and the promise of driverless cars are all leading a shift in consumer’s preferences—and Frey says this is represented in data by the deceleration of auto sales and of driving. Frey says America is already at “peak car,” at that the rest of the world is only a few years away. But are these projections reasonable?

Mark Mills argued in The Wall Street Journal in early October that Frey’s prediction is miscalculated (in a piece aptly titled “We’re a Long Way From ‘Peak Car’”). Mills says of Frey’s theory: “The idea may seem plausible given recent history: tepid new-car sales, fewer miles driven per capita and shrinking gasoline use. In reality, it’s poppycock: The car habits of young adults ages 18–33 simply reflected a lack of jobs and money.”

Mills says millennials are moving to the suburbs, and indeed, are “the fastest growing class of car buyers.” As well, Mills points to the fact that sales of electric cars are down one fifth to help illustrate the uncertain promise of future vehicles. Whereas Frey sees car ownership in the future as “relegated to the hobbyist, luxury market, much like owning airplanes or horses today,” Mills does not see the individual need for car ownership ever fading. Driverless cars will see as much demand as human-driven cars, he says, writing “whether a human or an algorithm is driving, it’s still a car.” He sees the expanded appeal of driverless cars among traditionally excluded groups like the elderly and young as evidence that the industry will continue to grow with technology, not retract.

I, somewhat boringly, view the future of the car industry as a blend of both projections: we are not quite yet at peak car, but we are very much on our way.

I think it very premature for Frey to declare the car industry as peaked; although it is facing competition in the future from the proliferation of ride-sharing and autonomous cars, the technology and its adoption is still too far out for us to already be trending down.

Frey is arguing that we are at peak car because the rate at which car ownership is growing is decreasing; this is not to say that car ownership is decreasing yet. Until we’ve reached that point, I’ll remain skeptical to the claim that the car is fading. Lower rates of ownership growth can be due to many things besides shifts to alternative transportation, anyways (lower birth rates among them).

As far as ride-sharing businesses like Uber and Lyft go, they still have a ways to go before disrupting the car industry. The businesses are young so far. It’s naïve to think many people are swapping car ownership or planned car ownership for ride-sharing at this point in time. If you live in a market where Uber is available and popular, you may think that Uber is more successful than it is. But, you can only use Uber in just over 300 cities worldwide so far (in 64 countries). So, ride-sharing is nowhere near a ubiquitous part of American life yet. There’s no coverage for most of the US. Ride-sharing’s market is very niche, but should continue to grow with time, if legal hurdles do not prove too overwhelming. (Lawmakers are consistently looking to put snags in ride-sharing’s rise.)

Perhaps the most credible threat for disrupting the auto industry is electric self-driving cars. According to a piece in The Economist, “An OECD study modelling the use of self-driving cars in Lisbon found that shared “taxibots” could reduce the number of cars needed by 80-90%… one extra car in a car-sharing service typically takes 9–13 cars off the road.” The huge reduction in the number of cars on the road promised by autonomous vehicles will surely be the undoing of the modern car industry. But still, the technology (and the road to legality) is quite a bit away from 2015.

I feel Frey’s views that driverless technology and ride-sharing will reduce the need for car ownership in the future is spot-on; however, his timeframe seems a little off. he new technologies are too far out yet to say cars have peaked today. Ride-sharing and the distant promise of driverless technology is not affecting today’s demand for cars in any meaningful way—Mills is wise in blaming the temporary decline to millennials’ lack of access to jobs and money. When future technology actually catches up with consumer demand, we will finally have reached “peak car.” I would say that we’re still at least five years out yet.

Ride-sharing’s impact will only snowball over the next five years. I imagine ride-sharing programs will be available in many, many more cities by 2020 and perhaps there will be ideas we haven’t seen yet born from the tech industry for transportation. Self-driving cars have a lot of promise for slowing down the consumption of cars and are increasingly attracting investment, so I see no reason not to think people will start believing in them as a viable alternative to traditional driving in around five years. Companies such as Apple are shooting for 2019 for releasing self-driving electric cars, according to The Wall Street Journal, so seeing car-buying trends change in around 2020 seems like a reasonable prediction. Between ride-sharing and autonomous cars, the traditional auto industry is bound to slow down in the next five to ten years.

Matt Ridley: Patent Reform is More Important for Technological Progress than Government Funding of Basic Science

Because we economists, too, feed at the trough of government-funded scientific research, it is important for us to make a special effort to seriously consider arguments that government funding of basic science is not socially optimal. Matt Ridley gives such an argument in his Wall Street Journal op-ed “The Myth of Basic Science,” based on his new book, The Evolution of Everything: How New Ideas Emerge. Let me quote four key passages from the his essay, then give my reaction. I can’t encompass all the ways in which Matt backs up his argument within a set of quotations of reasonable length here, so if you want to argue against Matt, you should read his whole article.

Matt Ridley:

1. Simultaneous discovery and invention mean that both patents and Nobel Prizes are fundamentally unfair things. And indeed, it is rare for a Nobel Prize not to leave in its wake a train of bitterly disappointed individuals with very good cause to be bitterly disappointed.

Patents and copyright laws grant too much credit and reward to individuals and imply that technology evolves by jerks. Recall that the original rationale for granting patents was not to reward inventors with monopoly profits but to encourage them to share their inventions. A certain amount of intellectual property law is plainly necessary to achieve this. But it has gone too far. Most patents are now as much about defending monopoly and deterring rivals as about sharing ideas. And that discourages innovation.

2. When you examine the history of innovation, you find, again and again, that scientific breakthroughs are the effect, not the cause, of technological change. It is no accident that astronomy blossomed in the wake of the age of exploration. The steam engine owed almost nothing to the science of thermodynamics, but the science of thermodynamics owed almost everything to the steam engine. The discovery of the structure of DNA depended heavily on X-ray crystallography of biological molecules, a technique developed in the wool industry to try to improve textiles.

Technological advances are driven by practical men who tinkered until they had better machines; abstract scientific rumination is the last thing they do.

3. In 2003, the Organization for Economic Cooperation and Development published a paper on the “sources of economic growth in OECD countries” between 1971 and 1998 and found, to its surprise, that whereas privately funded research and development stimulated economic growth, publicly funded research had no economic impact whatsoever. None. This earthshaking result has never been challenged or debunked. It is so inconvenient to the argument that science needs public funding that it is ignored.

4. … if the government spends money on the wrong kind of science, it tends to stop researchers from working on the right kind of science. …

… we can never know what discoveries were not made because government funding crowded out philanthropic and commercial funding, which might have had different priorities. In such an alternative world, it is highly unlikely that the great questions about life, the universe and the mind would have been neglected in favor of, say, how to clone rich people’s pets.

Miles: On patent reform, I am in agreement with Matt: current patent law and copyright law errs too far in the direction of giving monopolies that are longer-term than necessary to give adequate incentives for innovation and get in the way of progress in other ways. I address this on the copyright side in several posts:

On government support for basic scientific research, I think there is value to understanding the universe even aside from aiding technological progress, and our understanding of the universe is a public good. If indeed it is true that privately funded research is more productive than publicly funded research, the government can still help by requiring high levels of charitable contributions from people–as I proposed in 

and discussed further in 

Finally, with a clear warning that self-interest could be distorting my views here, I think a good argument can be made that social science research directed at policy-relevant questions will often be underprovided by the private market because it isn’t valuable for making money by those who discover it (that is, it is relatively hard to monetize) but only useful from improving the quality of public policy and literally or figuratively enriching many people a little bit. Of course, there is a real danger of having only the government fund policy-relevant research, because then research on what the government is doing badly wrong is likely to be underprovided. So it is important for private individuals and foundations of a wide variety of ideological stripes to fund social science research.    

Update: Many letters came in to the Wall Street Journal from very smart people disputing Matt Ridley’s contention, collected under the heading “Fundamental Science and Useful Applications.” Among other things, these arguments point out why many empirical approaches would fail to detect all the contributions of basic science. Of course, the issue is whether the subsidization of basic science is important. Other arguments are relevant to that. Here are some of the key points:

  • Len Fisher and Ibo van de Poel: Without the very abstract general theory of relativity, your GPS navigation system wouldn’t work. Without the abstract ideas of quantum mechanics, we wouldn’t have lasers and CD players. And without a basic understanding of the structure of the DNA molecule, we would have no chance of tackling many genetically based diseases.
  • Leon Cooper: It would have been difficult to predict that the investigations of Maxwell, Lorentz and Einstein in electromagnetic theory would lead to improvements in communications. Few would have expected that Schrödinger and Heisenberg’s quantum mechanics would lead to the transistor and computers, that Townes’s work on millimeter radiation would give us laser surgery. Premature targeted programs to obtain these technologies would have failed.
  • Standish M. Fleming: I have worked in venture capital for the past 29 years, primarily in the life sciences. Venture capital, biopharmaceutical and other high-tech industries cluster about major research centers because basic science drives innovation. Venture capitalists literally “walk the halls” of major research institutes in search of breakthroughs, embodied in patents and published papers, around which to build companies. Government financing supports those centers.
  • Bob Ward: Matt Ridley neglects to mention that in many advanced economies it is government funding for postgraduate students that ensures successive generations of highly skilled scientists for both the public and private sectors.
  • Val Dusek: One major exception to the lack of corporate funding of truly pure scientific research whose payoff, if any, lay many decades in the future is Bell Labs. [I think Val Dusek’s point is that Bell Labs was government-like support of basic research.]

Ben Thompson: Networked Robot Cars vs. Networked Carpooling →

The Stratechery post linked above is a very interesting additional twist to the discussion I bulletpointed on robot cars in my post “The Economist on the End of Cars as We Know Them” three days ago.

One other idea that is missing from “The Economist on the End of Cars as We Know Them” is the idea that to the extent people don’t own cars, but use a different car for each trip, it becomes much easier to electric cars. For certain trips, the short range of electric cars is a big problem, but for many trips, it is fine. And a robot-driven car can look for moments in its many peregrinations when it is close to a fast-charging station. (If a robot-driven electric car is in use a really high fraction of the time, then it will be hard to find a time to charge it that doesn’t have a serious opportunity cost. So there will be a premium on fast charging. But the fast-charging stations can be fairly widely spaced apart since the robot-driven car covers a lot of ground. This means that high-fixed-cost fast-charging stations will make sense.

The Economist on the End of Cars as We Know Them

Google’s autonomous car. Image source.

Google’s autonomous car. Image source.

On August 1, 2015, the Economist’s “The World If” column was titled “If Autonomous Vehicles Rule the World: From Horseless to Driverless.” Because I have had at the back of my mind the intention of writing a column on the coming transformation of automobiles, I could appreciate just what a wonderful article this is. I highly recommend it. Its thesis statement is:

… self-driving vehicles that can be summoned and dismissed at will could do more than make driving easier: they promise to overturn many industries and redefine urban life.

In bullet points, the support for this thesis statement is as follows (with a few comments of my own added in italics):

  • Cars are expensive, but people use them only about 4% of the time. Google estimates that driverless cars that can be called at will might be in use as much as 75% of the time. Therefore, Stanford University computer scientist Sebastian Thrun predicts: “There will be fewer cars on the road—perhaps just 30% of the cars we have today.” Other estimates predict as few as 10% of the number of vehicles per person as now.
  • Car makers will be selling mostly to commercially owned fleets, not individuals, and will be selling fewer cars than now. 
  • Car insurers will make less money as fewer cars, better driven, have fewer accidents. This possibility has been officially recognized by insurers in SEC filings.  
  • Fewer accidents also means fewer car parts will be sold. 
  • Robot taxis are a lot cheaper to use than human taxis–humans are expensive. Uber’s head Travis Kalanick said “When there is no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle.” Note also that without a driver, a robot taxi can be smaller. And it is easy to let people order the size they really need–a one-seater for simple trips; something bigger when they have luggage.
  • Self-driving trucks will make trucking cheaper; they also will reduce demand for motels and restaurants along the road. 
  • An estimated 4.2 million car accidents and 21,100 deaths from car accidents will be avoided every year.
  • “A study by the University of Texas estimates that 90% penetration of self-driving cars in America would be equivalent to a doubling of road capacity and would cut delays by 60% on motorways and 15% on suburban roads.”
  • People will be able to get more done when they are in a car. (Some designs have people seated around a table.)
  • Kids, senior citizens and the blind will gain independence. Parents will no longer spend such large chunks of time shuttling their kids to various classes, practices and other events.   
  • Much of the 24% of urban space devoted to parking will be available for repurposing. And most of the 30% of urban miles devoted to looking for a parking space can be saved.
  • While the city centers can get denser without the need for so many parking spaces, the ability to sleep during one’s commute will also spur the growth of exurbs.
  • Fear of driverless cars as dangerous has been much less than some have predicted. Indeed, some stuck behind them are already complaining that driverless cars drive too carefully and timidly. In the future, we may be (appropriately) afraid of having human drivers on public roads.   
  • Overall, the addition to growth and human welfare will be enormous if the technical challenges can be met.
  • Boosting economic growth in the long-run typically requires making expensive things cheaper. And things are typically expensive because someone is earning money doing them. So making things cheaper inevitably means that some people will need to shift to other jobs from the jobs they are used to. But these adjustment costs are worth it for the benefits. It would be a big mistake to obstruct the transformation of cars.

Quartz #65—>Why Thinking about China is the Key to a Free World

Here is the full text of my 65th Quartz column, “An economist explains why a key to the free world lies with China,” now brought home to supplysideliberal.com. It was first published on July 3, 2015. Links to all my other columns can be found here.

Ori Heffetz pointed out the error of my counting 239 years (“almost a quarter of a millenium”) of freedom in the United States since 1776, since the key date for freedom in the United States can’t be counted any earlier than the adoption of the 13th Amendment to the Constitution on December 18, 1865 abolishing legal slavery in the US. We are coming up on the 150th anniversary of that event later on this year. This actually reinforces my statement in the first sentence of the column that freedom is a rarity in human history. I am leaving this error in the column itself, because it is an instructive error, once pointed out. 

In addition to comments here, don’t miss the comments and debate in reaction to my first link to the Quartz column.    

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© July 3, 2015: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2020. All rights reserved.

Freedom is a rarity in human history, and still too much of a rarity in the world today. This should be no surprise. Would-be tyrants abound, and it is not easy to establish a system that keeps them all in check. The wonder is that we can celebrate the better part of a quarter of a millennium of freedom in the United States, and comparable freedom in some other lucky countries.

When Dan Benjamin, Ori Heffetz, Nichole Szembrot and I surveyed more than four and a half thousand Americans about what they viewed as the most important objectives for public policy, the top two (of 131 choices) were “freedom from injustice, corruption, and abuse of power in your nation,” and “people having many options and possibilities in their lives and the freedom to choose among them.”

This pairing of responses shows an awareness of the danger to freedom from those who would organize the institutions of a nation to serve the interests of an in-group at the expense of an out-group. At the beginning of the struggle toward freedom, the in-group is very small and the out-group large. At later stages of the struggle toward universal freedom, the in-group will be large and the out-group small. But adding up across the world, it is not at all clear that a majority of the people in the world today can be called truly free.

In international struggles for freedom, the advantage free nations have had in per capita income has helped to keep them from being overwhelmed by a coalition of dictatorships and oligarchies. As Daron Acemoglu and James Robinson argue in Why Nations Fail, the level of economic freedom necessary to enjoy the full benefits of innovation presents a constant danger of undermining the power of those currently in charge. As long as a country is getting up to speed on existing technologies and settled best practices, such dangers can be kept within bounds. But, a small in-group with a toehold on power is loathe to allow a creative adventure into the unknown that could transform the political arena as well as the economy.

The key to the future of freedom in our world is China. Its one-and-a-quarter billion people and high rate of economic growth are the reasons its course is so important to the future:

  • In the best case, China may evolve toward full freedom, and the full measure of prosperity possible when no one group manages to obstruct progress in order to cling to power.
  • China may descend into a civil war, with advanced weapons on more than one side of that war.
  • China may become like Russia under Putin, only more powerful: nominally democratic, but authoritarian and aggressively nationalistic.
  • China may continue under the rule of a nominally Communist oligarchy as now, but with economic growth gradually slowing (because of the limits to economic liberalization without political liberalization) so that it stalls out at a GDP per person perhaps 30-40% of that in the US—which would still make the total size of its economy significantly larger than that of the US, simply because China has so many more people.

Thus, over a horizon of two or three decades, China is dangerously unpredictable. The last three possibilities—Chinese civil war, a Chinese Putin, or continued dominance by an oligarchy that attacks freedom as a faulty Western conceit—all represent serious dangers to the progress of freedom in the world, as well as to peace. The imperative of raising the likelihood of full freedom in China means that trying to stand in the way of Chinese economic growth is not the answer. And one should remember Berkeley economist Brad DeLong’s question: “Does it really improve the national security of the United States for schoolchildren in China to be taught that the United States sought to keep them as poor as possible for as long as possible?”

If one rejects the fool’s errand of trying to stunt the economic growth of a dangerously unpredictable China, the best course to protect freedom and relative peace in the world is to make the free world stronger: numerically, economically, militarily, and in the quality of life freedom can be shown to provide. On all of these fronts, I worry about what I see as a lack of seriousness by the leaders and citizens of the free world about meeting the challenge of China.

Strengthening the free world numerically

Bringing more people into the free world is easier than it sounds. The key is to focus on people, not patches of ground. Although it is hard to bring a patch of ground currently subject to an oppressive regime under free institutions, the economic importance of land—apart from what is on top of the land—continues to decline relative to the importance of people, education and training, ideas and capital. Once one focuses on people, the answer is clear: bring people to where freedom already rules. That is so easy it is hard to do the opposite. Many people in benighted countries seek freedom and the prosperity that full freedom enables. Standing in the way of those hopes, many otherwise free countries make strenuous efforts to keep those people seeking prosperity and freedom out.

The rhetoric is all about those hoping to join the free world taking away the jobs of those already there. Forgotten is the fact that those hoping to join the free world will also serve in the armed forces and pay taxes to support those armed forces, as well as raise children who will invent the technologies that can help us meet the challenge of China economically as well as militarily. (For the record, the only persuasive evidence for immigrants materially hurting the job prospects of those already here is for them hurting the job prospects of other recent immigrants.)

Despite the relative difficulty of bringing nations closer to full freedom, there is important work to be done in that arena—particularly in solidifying and deepening freedom in nations that are well along the road toward freedom, but need to go further. The people in Turkey recently voted decisively against creeping dictatorship. I agree with The Economist in calling for the European Union to move forward with admitting Turkey in order to solidify those gains. And because of the number of people involved, helping India reach its full potential is of crucial importance for the free world.

Strengthening the free world economically

It is much better to have the democratic tug of war between different groups each looking to get their share of the pie than it is to have one favored group that alone gets its way. But when it comes to strength in a dangerous world, it is the size of the pie that matters most. Economists actually have excellent tools for understanding what it takes to foster economic growth. Monetary policy tools for stabilizing the economy are advancing faster than most people realize.

And although issues of taxation and certain labor market rules continue to be contentious, there is broad agreement among economists about many key measures to foster long-run economic growth: improving education, pouring resources into research and development, and preserving economic freedom: the ability to do new things in new ways without your competitor being able to get the government to stop you. In the area of economic policy, one of the biggest problems is simply the amount of political airtime taken up by a small set of issues that leaves little time to discuss everything else.

Strengthening the free world militarily

Militarily, one of the free world’s successes is now also a weakness. After World War II, great efforts were made to encourage pacifism in Japan and Germany. Those efforts bore remarkable fruit. Anyone who spends any time in Japan or Germany soon learns how deep pacifism runs in those countries now. Japan’s pacifism only affects its own military efforts, but Germany’s pacifism has contributed to pacifism in the rest of Europe. For the rest of the free world, I would riff on St. Augustine by saying “Make me pacifist, but not yet.” Peace is important, but so is freedom. Let freedom triumph; then we can hope to be able to afford pacifism. In the meanwhile, the pacifism of Japan and Germany means that the rest of the free world needs to shoulder a bigger military burden.

Given numerical and economic strength–fostered by more immigration, education, research and economic freedom–there is no lack of ideas for how to turn technological sophistication and military spending into military strength (with all the frightfulness inherent in military strength). A fascinating article in The Economist details some of these ideas:

  • putting a new generation of autonomous drones in the air and under the sea
  • lasers and electromagnetic rail guns to protect aircraft carriers against incoming missiles without the huge expense of current anti-missile missiles
  • making our own communications and computing networks robust to enemy attack, while going after theirs.

For the free world, the objective of military strength is not war, but deterrence. What all scenarios for China’s future hold in common is that China is likely to behave better if it faces a relatively strong American military than if it faces weakness.

Strengthening the case for freedom

When the free world does well, it is much harder for the unfree world to keep out the winds of freedom. But autocracies use every failure of the free world to argue that autocracy isn’t so bad in comparison. In making the case for freedom, good economic policy in the free world goes a long way. But making sure that the benefits of freedom extend to everyone is also crucial.

Some argue that the way to make sure that the benefits of freedom extend to everyone is to expand government social programs. But the use of government power when it is not necessary is itself an affront to freedom, since people are in effect being told to “get with the program” or be thrown in jail. I don’t think we currently know how to get done what needs to be done with a doctrinaire libertarian approach, but we can edge in that direction. People want to help others who are less fortunate. The only thing that stops them from doing what needs to be done voluntarily is concern about the time and resources that might take away from their own families.

So, as I advocated here in “Yes, There is an Alternative to Austerity vs. Spending: Reinvigorate America’s Nonprofits,” it is enough to use the arm of the government to require more substantial charitable contributions, while giving people wide latitude to decide which particular causes they want to support. This can both assist in things the government is now doing, such as taking care of senior citizens and supporting medical research, and begin to take care of things that should be done, but aren’t. With millions of people each required to do something, but allowed to think and decide for themselves what most needs to be done, the odds that the benefits of freedom and prosperity extend into all the nooks and crannies of society improve dramatically.

Finally, though efforts to measure national well-being in ways that respect the full range of things human beings care about are still in their infancy, there is hope that developing such measures as counterpoints to GDP can guide public policy toward ways of improving the quality of life in nations that use them in unexpected ways. Such measures of national well-being might also be used by autocrats to keep those they rule over just happy enough to forestall rebellion, but those rulers would be faced with this truth: people love freedom, and will never be content for long without it.

Nigeria Struggling to Be Free

The June 20th issue of the Economist had a special report on Nigeria. It is very illuminating. In particular, it illustrates what I meant in my July 3d Quartz column “An economist explains why the key to a free world lies with China” when I wrote about how ‘freedom from injustice, corruption, and abuse of power in your nation,’ is the key to ‘people having many options and possibilities in their lives and the freedom to choose among them.’ 

It also illustrates Daron Acemoglu and James Robinson’s claim in “Why Nations Fail” that injustice, corruption and abuse of power are what keeps most nations poor (in the sense of a low per capita GDP). Here is a nice summary of the Economist’s special report, from a page entitled “Buhari’s chances: Can he do it?”:

Despite these frequent disappointments, Nigeria remains hopeful, and for good reason. It does not require a miracle for its economy to grow at a consistent 7-8% a year. What it does need is better roads, rail connections and power lines. If the poorest states had the infrastructure to allow farmers to get their produce to market, it would open up the prospect of vast numbers of new jobs in farming and agricultural processing, giving young men an alternative to joining the jihadists or ethnic militias and lifting tens of millions of people out of poverty.

Yet the cure is not as simple as it sounds, for at the root of many of Nigeria’s problems are well-entrenched vested interests and pervasive corruption. If the country’s roads are crumbling, it is not for lack of competent engineers or money to repair them: it is because the money has been diverted to someone else’s pocket so that many of the engineers sit idle. If people pay more than they should for food, power and imported manufactures, it is not because Nigeria is inherently a high-cost economy: it is because politicians, officials and their friends in business have found nefarious ways to profit from shortages and waste. If large parts of the country are ruled by armed gangs, it is because so many of the state’s institutions, from local government to the national police and army, have been hollowed out by corruption.

Bruce Greenwald: The Death of Manufacturing & the Global Deflation

This is a fascinating discussion by Bruce Greenwald of

  1. the difficulties of shifting people from working in sectors like agriculture and manufacturing where employment is declining because productivity is going up faster than demand,

  2. the efforts of some countries to export this problem to other countries, and

  3. the effect of these forces on interest rates, and therefore, implicitly, their interaction with the zero lower bound.

It is very interesting to think about how these issues could play out if there had been no zero lower bound and their had been aggressive negative interest rate policy. Regardless of the low interest rates, it still doesn’t work to have more manufacturing output that people want to buy any more than it makes sense to have more food grown than people can possibly eat. So at the end of the day, manufacturing capacity would get high enough to put a brake on further investment in manufacturing despite very low interest rates. Either people will start consuming a lot more because of the low interest rates, or more likely there would end up being extra investment in something else. A good possibility is education. Education is a form of investment that can easily absorb a huge amount of resources simply in student time, even if in the future it doesn’t need much in the way of buildings or professors because it has gone electronic. Standard human capital theory suggests that a low enough long-run real interest rate can have a big effect on the amount of education chosen.