(2011-03-29) Kling Psst Economic Activity Recovery

In thinking about recovery from Credit Crisis 2008, Arnold Kling has started staying that we need to think of Economic Activity not in terms of GDP (spending) but rather PSST - "Patterns of Sustainable Specialization and Trade".

Feb14 summary - It is possible that some economic slumps can be traced to un-discovery. However, the more interesting possibility is that slumps can be caused by very rapid technological discovery (he's referring to widespread adoption of the Internet), with the process of discovering new patterns of specialization and trade lagging behind... It is no longer appropriate to treat the economy as a system of equations with a definite solution. Instead of the Walrasian auctioneer, we have individual business ventures groping for sustainable patterns. Some new ventures will work. Most will fail, as will some existing ventures. There is a tendency for some industries to rise as others fall, but there is no automatic guarantee that the successes and the failures will exactly balance one another. Sometimes, the adjustment can be a difficult one, and the successful new ventures can lag behing the failing old ones. To put it in terms of a single sentence, slumps can occur because discovery takes time. See Technological Revolutions And Financial Capital.

Feb15: he contrasts his thinking with Tyler Cowen's Great Stagnation thinking (which implies permanent UnEmployment).

• quick summary of Cowen
  • we have been stagnant for decades: as measured by median household income (is that really an Income Inequality story?)
  • we have run out of 3 key sources of growth
    • free land to develop (that seems bizarre given low US Population Density)
    • technological Innovation
      • measured by yearly innovations per person - given scalability of technology, is this the right measure?
      • the Internet doesn't count for much because it does relatively little Job Creation (meaning there's huge ConsumerSurplus?)
    • undereducated population (relative to their potential) that can be improved via wider College Education
• David Henderson critique
• Aug01'2011: Byrne Hobart sides with Tyler Cowen. A heavily indebted country doesn’t have the freedom to allow deflationary forces without facing some serious consequences. Interestingly enough, these consequences are somewhat balanced: older people tend to spend far more money on the Internet, and they tend to get far more of their income from fixed income sources, whatever those might be. So this web-based deflation will transfer money to older, wealthier savers—who will promptly transfer some of it right back to web companies. Whether that is an unstable equilibrium or a self-balancing one depends mostly on whether or not web companies will hire more people.

Feb21: In the long run, if more people adopt the paradigm of Patterns of Sustainable Specialization and Trade, they will stop looking at static concepts like sectors and instead look at the dynamics of what I call discovery. I think if we are going to get anywhere with the new paradigm, we will have to come up with new metrics. I think we will have to get a handle on adjustment costs, including the cost of firm formation, the cost of expanding enterprises, and the cost of integrating new labor and capital into an existing enterprise.

Nov'2011: Race Against The Machine by Erik Brynjolfsson and Andrew McAfee (ASIN:B005WTR4ZI) sounds a lot like the Great Stagnation argument.

• Tyler Cowen compares them. The story of a largely stagnant median will become progressively less important relative to the story of labor market polarization (Income Inequality), and I suspect that over time Erik and I (I didn’t get to chat with Andrew as much) will agree increasingly.
• Arnold Kling does the same. My opinion is that the chances are increasing that we will see sudden "tipping" in Education away from traditional models. I think that the technology is pretty much here to do better than the old-fashioned classroom. It's being held back by the incumbents, but they are going to lose, just as the music publishers have been losing and the book publishers have been losing. In HealthCare, I am not sure that all of the necessary technology has arrived to replace your doctor with a computer that uses DNA, scans, and blood samples to develop treatment plans. But I would estimate that the chances are greater than 50-50 that we will be there within a decade. Again, there will be adoption lags. I expect the medical profession to undertake an all-out effort to raise fear, uncertainty, and doubt about technology to replace the doctor, until eventually people realize that they have more fear, uncertainty, and doubt about doctors themselves. (Education Healthcare And Leisure)
• Arnold Kling has his another comparison of these ideas to his PSST thinking. I believe that the Great Depression of the 1930s can also be interpreted in part as an Economic Transition. The impact of the internal combustion engine and the small electric motor on farming and manufacturing reduced the value of uneducated laborers. Instead, by the 1950s, a middle class of largely clerical workers was the most significant part of the labor force... What took place after the Second World War was not the revival of a 1920s economy, with its small farming units, urban manufacturing, and plurality of laborers. Instead, the 1950s saw the creation of a new suburban economy, with a plurality of White Collar workers. With an expanded transportation and communications infrastructure, businesses needed telephone operators, shipping clerks, and similar occupations. If you could read, follow simple instructions, and settle into a routine, you could find a job in the post-war economy. (A 20th Century Economic Theory) The proportion of clerical workers in the economy peaked in 1980... If a job can be characterized by a precise set of instructions, then that job is a candidate to be automated or outsourced to modestly educated workers in developing countries (Off Shoring)... In the long run, the economy does not run out of jobs... There are two challenges. One is the sheer speed of adjustment. In a hyper-Schumpeterian economy, the main work consists of destroying someone else's job. GarettJones has pointed out that the typical worker today does not produce widgets but instead builds Organizational Capital. The problem is that building organizational capital in one company serves to depreciate the organizational capital somewhere else... The second challenge is the nature of the emerging skills mismatch. People who are self-directed and cognitively capable can keep adding to their advantages. People who lack those traits cannot simply be exhorted into obtaining them. The new jobs that emerge may not produce a Middle Class... I think it is possible that technocrats will be able to come up with programs that offer decent work and reasonable incomes for workers with modest skills. However, I have more faith in a process in which technocrats must compete for charitable donations than a process in which they compete for government power. I guess the point here is that the transition from farm-drone blue-color-drone to white-color-drone is less psychologically dramatic than the transition from drone to Network Economy Free Agent.
  • Jan'2012: Joseph Stiglitz seems to agree in some ways. The real economy has been in a state of wrenching Economic Transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression... It was government spending—a Keynesian Economic Stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery. The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending... What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now... The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. (Those don't sound like a transition to a service/info economy.)
    • Steve Denning agrees with some adjustment. Stiglitz sees it as a transition from manufacturing to a Service Economy. A service economy is certainly one looming possibility for the US economy, but a service economy per se is unlikely to be an American success story... Instead the needed transition is from a factory economy to the Creative Economy (Creator Economy?).
  • Feb'2012: Arnold Kling again: If the Keynesian demand story is not valid today, then perhaps it was not valid during the Great Depression either. The 1920s and 1930s were, like the present, a period in which major technological changes were working their way through the economy. Economic historian Alexander Field has argued that the decade of the 1930s saw more technological progress than any other decade in American history... The Keynesian story would lead one to expect a recovery to consist of workers returning to the jobs that they held prior to the recession. That is not what happened after the Great Depression. It is not what has happened in recent recessions in the U.S., particularly the one that ended in 2009. Regaining full employment requires significant restructuring of the economy, rather than simply returning to the pre-slump status quo. More government spending can at best create some UnSustainable jobs in the short run. In the long run, it will only distort and impede the adjustments that are needed to create patterns of sustainable specialization and trade.