J. Bradford DeLong's Blog, page 2073

Did the Singularity Already Happen?

Ezra Klein writes:

Ezra Klein - Our depressing robot overlords: Paul Krugman writes, “the idea that modern technology eliminates only menial jobs, that well-educated workers are clear winners, may dominate popular discussion, but it’s actually decades out of date.”... [T]he difference between what computers can do and what computers cannot do is not whether the job requires a college education, but whether doing the job can be broken into “routine and repetitive” tasks. Martin Ford, who has done some thinking on these issues, draws out the implications:

The key thing to understand here is that our definition of what constitutes a “routine and repetitive” job is changing.... As specialized artificial intelligence applications... get better, “routine and repetitive” may come to mean essentially anything that can be broken down into either intellectual or manual tasks that tend to get repeated.... [I]f 50% of a worker’s tasks can be automated, then employment in that area can fall by half. When you begin to think in these terms, it becomes fairly difficult to make a list of jobs that (1) employ large numbers of people and (2) are completely safe from automation.

The obvious set of questions this raises is “how will the economy adapt?” Krugman argues that “if we want a society of broadly shared prosperity, education isn’t the answer -- we’ll have to go about building that society directly,” perhaps through things like unions and universal health care....

But I’d pose a different question: How will we adapt psychologically?... How do you keep morale up in an economy when more people are simply less necessary than they used to be?

That’s a harder question to answer than “how do you make sure everyone has access to medical care?” But for a substantial fraction of the population -- not a majority, but certainly millions and millions of people -- it’s an increasingly pressing one. People get trained for a job in their 20s, and then, in their 40s, that industry gets disrupted by technology, or sent to China, and even if some of those people find jobs again, they tend to be at a lower level -- a drop in status and perceived usefulness that’s psychologically devastating. This is a question for not only the future, but given the number of long-term unemployed in the economy right now, the present. And it’s not a question that we have any very good answers for.

We have gone from having 80% of our males working outside-the-home as farmers and farm laborers down to 2%. We have gone from having a world in which nearly every female past puberty spends her life effectively chained to her children, her kitchen, or her loom to one in which I cannot think of a house I have been in in a decade that had a loom. We have already gone through the great transformation by which the general business of life--growing and processing our food, building our shelter, weaving our clothes, and telling ourselves stories for information and entertainment--has been extroardinarily, comprehensively automated. And yet we have found things to do.

Consider the room that I am now in as I wait for my 12:00 noon PBM down here in Durant Hall. In half an hour there will be twenty people in the room. There will also be lunch for 20 (market value $200), 10 tables (market value $1000), 30 chairs (market value $1500), one projector (market value $1500), one carpet (market value $500), and one conference room (market value $200,000). Given amortization rates of 3 years for the projector, 25 years for the building, and 5 years for the tables, chairs, and carpet, and assuming the conference room is used 4 hours a day, the economic activity in the room for our hour-long meting will consist of:

$14.00 for the room
$1.00 for the tables, chairs, and carpet
$0.50 for the projector
$200 for the lunch--of which $20 is the farm gate price of the ingredients

Figure that the people making these things are earning an average of $10/hour, and we have 22 hours' worth of work that will be contributed to the process. We will add another 20 hours as we discuss Berkeley's gen Ed curriculum--or maybe you should value our tie at the $50/hour that the market values it, and say that we in the meeting are contributing 5/6 of the work. Count our preparation time, and something like 90% of the value of the meeting comes from what we professional academics do. And only 1% of the value is the food, clothing, and shelter--putting the 7% or so that is making the food tastier.

The creation of food, clothing, and shelter that would have taken up more than 70% of work value now--for this meeting at least--takes up less than 2%. But the overwhelming automation of the business of providing us with calories, warmth, and dryness has not left us short of things to do, and not feeling as though we have suffered status degradation.

It's Not About Villains, It's About Incentives for Politicians

Tyler Cowen glosses my critique of his New York Times article:

Marginal Revolution: Assorted links: Brad DeLong on the fiscal illusion; it's about villains.

I think he is wrong: it's not about villains, but it is about incentives. Politicians who behave badly--who argue for and support destructive policies--should feel their bad behavior in their chances of reelection. If politicians don't have good incentives, they won't behave well.

And if economists don't teach their students which policies are destructive and which politicians support such policies, then their chances of reelection will not be affected by their bad behavior.

Paul Krugman: Turning a Blind Eye to the Obvious

PK:

Turning a Blind Eye to the Obvious - NYTimes.com: Brad DeLong is mad at Tyler Cowen, with reason — for Cowen writes about US fiscal irresponsibility, fairly sensibly, without mentioning the elephant, and I do mean elephant, in the room: the role of the post-Reagan GOP.

Look: until 1980 or so the United States generally paid its way; the ratio of debt to GDP generally fell over time. Then starve-the-beast came to power, and fiscal realism went away. That’s the story; anyone who glosses over that, who makes it a plague-on-both-houses issue or, worse, makes it seem as if Obama is the villain, is in an essential way misleading his readers.

Bear in mind, too, that the signature initiatives of Republican presidents — the Reagan tax cut, the Bush tax cut, the Medicare drug benefit — have all been unfunded deficit-raisers; the signature initiatives of Democratic presidents — the Clinton tax hike, Obamacare — have all been deficit-reducing. (Yes, the stimulus — but that was intended to be temporary, and has in fact proved too temporary; and Bush I’s tax increase was an exception, but the GOP has made it clear that nothing like that will ever happen again.)

Democrats aren’t fiscal saints. But we have one party that has been generally responsible, and tries to pay for what it wants, and another party that consistently, deliberately, takes actions to increase deficits in the long term. Saying this may be shrill; but not saying it is being deceptive.

Time on the Best Financial Blogs

Paul Krugman writes:

Best Financial Blogs - NYTimes.com: According to Time magazine; number 1 is at the bottom. I’m glad to see most of my favorites there. But where’s Mark Thoma? (They could have dispensed with some of the others; you can guess which.)

And:

The best financial blogs riff on each other « Talking Biz News: Time magazine compiled a list of the most influential — and useful — finance blogs out there and then asked some of the best-known bloggers to review one another’s work. Among the blogs selected were Business Insider, Felix Salmon’s blog for Reuters, Dealbreaker, DealBook from the New York Times, and Planet Money from NPR.

Cal-Berkeley economics professor Brad DeLong writes, “Felix Salmon suits me. Would he suit you? He really ought to. Too many people are either on Team Politics or Team Ideology or Team I Talk My Book. You cannot learn much from them. I can name 10 articles in the past month alone that I am grateful to have learned about because of Salmon. I would have gotten to about three of them without him.”

Dealbreaker editor Bess Levin writes, “No one wakes up earlier than the team at DealBook, and their efforts before most people have had any caffeine make it hard not to visit the site (if just to scan the headlines) every morning. In addition to the site, you can sign up for a 5 a.m. e-mailed newsletter that does one of the best jobs of providing a comprehensive look at the most important stories of the day, gathering everything you need to know from the major news outlets.”

DealBook editor Andrew Ross Sorkin writes, “If there’s one place online that has captured the zeitgeist of trading floors on Wall Street — the bathroom humor, the outsized egos and the language — it’s Dealbreaker. The site is run by Bess Levin, a humorist cum reporter who has successfully managed to turn Wall Street’s biggest names into cartoon characters — and into her most loyal readers. The site feels like a mashup of Page Six and Bloomberg News. The articles may be laced with humor, but beneath all that wit lies a remarkable truth that often cuts closer to reality than more sober news reports. Bess’s trick is that she’s not laughing at Wall Street; she’s laughing with them.”

The list:

Business Insider, Grasping Reality with a Sharp Beak, Econbrowser, Rortybomb, Dealbreaker, Paul Kedrosky, The Wealth Report, WalletPop, Naked Capitalism, Real Time Economics, Megan McArdle, DealBook, Street Sweep, Free Exchange, Economix, The Big Picture, Zero Hedge, Planet Money, Ezra Klein, The Consumerist, Freakonomics, Calculated Risk, Marginal Revolution, Felix Salmon, and The Conscience of a Liberal

Let me join Paul in saying that I learn more from Mark Thoma (and from Marginal Revolution) these days than from 4/5 of those on the list. And where are the people from the Financial Times? They are awesome...

Friends Really Don't Let Friends Support the Republican Party, the Committee For A Responsible Federal Budge, or the Concord Coalition

Outsourced to Jonathan Chait:

Health Care And Deficit Madness | The New Republic: The long-term budget deficit is primarily a function of explosive health care cost growth. We have a new law in place attempting to resolve the problem. The Republican Party is working feverishly to undermine that law. One of the oddities of the current moment is that the political class (though not the public as a whole) is laser-focused on the budget deficit as the central problem in American life, yet the discussion of the deficit is taking place as though none of the above facts were true. On national television, Mitch McConnell is sadly proclaiming that the administration is not serious about the long-term deficit.

Meanwhile, Michael Millenson reports from a health care conference at which some Republican staffers spoke:

The Prevention and Public Health Fund? "You mean, the prevention health slush fund, as we like to refer to it?" replied a GOP staffer.
The Innovation Center at the Centers for Medicare & Medicaid Services? "An innovation center at CMS is an oxymoron," responded a  Republican aide, before adding a personal barb aimed at the attendees: "Though it's great for PhDs who come to Washington on the government tab." There was also no reason the government should pay for "so-called comparative effectiveness research," another said. "Everything's on the chopping block," said yet another.

Everything? At HIMSS, where GOP staffers also spoke, attendees were chagrined to learn that "everything" applied to them, too. The subsidies for health information technology that were part of the American Recovery and Reinvestment Act were targeted in legislation introduced in late January by Rep. Jim Jordan, R-Ohio, chairman of the Republican Study Group. His bill would repeal this funding and eliminate all remaining stimulus spending, including about $45 billion in unspent health IT funds.

Those focused on the substance of health policy might be forgiven for feeling blindsided. After all, the McCain-Palin health policy platform in the 2008 presidential election called for coordinated care, greater use of health information technology and a focus on Medicare payment for value, not volume. Once-and-future Republican presidential candidates such as former governors Mike Huckabee (Ark.), Mitt Romney (Mass.) and Tim Pawlenty (Minn.), as well as ex-Speaker of the House Newt Gingrich, have long promoted disease prevention, a more innovative federal government and increased use of information technology. Indeed, federal health IT "meaningful use" requirements can even be seen as a direct consequence of Gingrich's popularization of the phrase, "Paper kills."

It's hard to capture the sheer absurdity of the situation. You have Republicans attempting to kill even no-brainer reforms to curtail the single greatest cause of skyrocketing spending. That's crazy enough. On top of that, they're doing so while lambasting the administration that pushed for these reforms for failing to address the deficit. And meanwhile, groups that are driving the deficit discussion are handing out fiscal responsibility awards to the Republicans behind this approach.... [T]he entire discussion is ignoring the fact that one party is working very hard to make things vastly worse.

Why the Concord Coalition and the Committee for a Responsible Federal Government have decided that their role is to provide cover for false Republican claims to be deficit hawks is something I have never understood, and still do not understand.

Winston S. Churchill Liveblogs World War II: March 6, 1941

WSC:

Recommended...

A book called The Wise Man's Fear.

Redhead writes:

Only 100 advanced reading copies were ever made, all signed for, tracked, and with RFID chips. Reviewers who received these books signed a contract in blood that they would not only buy an Eolian t-shirt, but that they would also have a lute tattooed somewhere on their body in a secret location known only to them and the author. It's been said the author can change the color of his beard by snapping his fingers. This book is so heavy you could never read it in the bathtub. An audio version would take you the rest of the year to listen to, the rest of your life to understand...

No, Medicare and Medicaid Are Not Worse than No Insurance at All

Austin Frakt continues to try to educate Avik Roy:

Debating Medicaid | The Incidental Economist: Recall that the UVa surgical outcomes study that includes quite a large set of controls illustrated that not only Medicaid but also Medicare is associated with worse health outcomes than no insurance at all. Why is that? One can claim that Medicaid leads to “family breakdown and social disrepair” (though one had better point to quite a pile of scientifically credible literature before I believe that’s the source of the problem with the IV approaches). But where does that leave Medicare? What’s the story there? Why is the UVa study telling us the right causal story in that case? It just doesn’t hang together.

Ultimately, I don’t see why we need to reject the studies that do reveal a credible causal link between Medicaid and improvements in health. They do not, and cannot, tell us that Medicaid is great in all possible ways. It is a program in need of reform. We can agree on that without needing to reject the good work that shows it is not bad for health. As I wrote before, I would worry about claiming that a study like the UVa one is sufficient for causal inference. My concern would be that any reform to Medicaid – even the one advocated by Avik Roy — would yield similar results based on a similar study, and, therefore, one would have to conclude that there is no program for that population that beats no insurance. (The results for Medicare show us that is likely since it does not have an association with the same social dynamics or provider restrictions as Medicaid.)

What will those who interpret such a study’s results causally say then? Actually, under a causal interpretation, the policy implication would be clear. Revoke Medicaid. Revoke Medicare. Replace them with nothing. Save a fortune, and produce better outcomes at the same time. The only problem is, that’s totally wrong because the study is one of associations, not causation, and the findings suffer from some selection bias. Even the authors of the UVa study admit as much. On what grounds could any reader of their paper steadfastly claim otherwise?

Political Illusions

Tyler Cowen writes a column that is both good and bad. It is good for what it says: it debunks fiscal illusions. It is bad for what it does not say, and for what it does not say it tends to deepen our political illusions. You see, for some reason Tyler Cowen does not mention the obvious solution at the ballot box to the very real fiscal illusion problems he writes about. If we simply stopped electing Republicans--if we simply elected presidents who would choose policies designed by the technocrats of the Clinton and Obama administrations and elected senators and representatives who voted for them--we would be absolutely fine.

He makes two mistakes in the article as well, but I will postpone them until later...

TC:

The Fiscal Illusion and How to Face It: James M. Buchanan, a Nobel laureate in economics — and my former colleague and now professor emeritus at George Mason University — argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains. We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society. As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic. We are fooling ourselves most of all. United States government debt in public hands is now more than $9 trillion, but most people still don’t realize what it will take to pay that off.

Here’s an example: Say that you have $20,000 in Treasury bills. You probably believe that you own $20,000 in wealth. This will encourage you to spend and come up with ambitious plans. Yet someone — quite possibly you — will be taxed in the future to pay off the government debt. The $20,000 may be needed in order to do that. The illusion is this: A government bond represents both a current asset and a future liability, yet for most people, those future tax payments feel less concrete and less real than the dollars they’re holding in a money market account.

Here I would have changed "dollars" into "bonds." The key is that there is real wealth--factories, equipment, business organizations, and the profits that they generate--in back of the money market fund, while there is only the government's taxing power in back of government bonds.

TC goes on:

The sorry truth is that our savings aren’t worth as much as many of us think, and a rude awakening is coming. One way or another, some of our savings will be taxed away to make good on governmental commitments, like future Medicare benefits, which we currently are framing as personal free lunches.... [E]ventually, the books must balance. There is then a fiscal crunch, a sudden retrenchment of plans and great rancor over budgets, as we have been seeing lately at both the federal and the state level.... [T]he federal government must act soon. Limiting Medicare and Social Security spending involves re-indexing benefits, adjusting eligibility ages, shifting the growth rates of costs and making other changes that have their full fiscal impact only over the longer run. Yet we are postponing even these actions. Experts’ recommendations might lead us toward a fiscal smooth landing, but at this point the fiscal illusion — and not the advice of experts — is in control. So Professor Buchanan’s argument is ringing true.

The technocratic Keynesian recommendation was to run deficits in bad times and surpluses in good times. But except for one stretch during the Clinton administration, this notion has been broken since the early 1980s.... Now that fiscal constraints are starting to bite, many politicians are afraid to reform or even to discuss changes in the largest problem areas: Medicare and Medicaid. Yes, some laudable cost controls on Medicare are embedded in the new health care law, but they’re not enough. Most likely, we will end up making other spending cuts that won’t solve our fiscal problems — and in areas that could instead benefit from Keynesian employment stimulus. These kinds of knee-jerk, poorly reasoned decisions are what happens when fiscal illusion reigns....

So, given this mess, what should be done?

As Matthew Yglesias from the Center for American Progress has proposed, President Obama could pledge to veto any budget that increases the projected medium-term deficit, relative to the status quo. He should include in that veto threat any deficit increases that arise from annual budgetary gimmicks like patches to the alternative minimum tax or the “doc fix” adjustment of Medicare reimbursement rates. Such an announcement would not fix health care costs, but it would force us to recognize them, and would move us away from purely short-term planning. It would force the government to consider both spending cuts and tax increases...

Tyler's second mistake? His writing "since the early 1980s" instead of "since supply-side economics took over the Republican Party during the Reagan administration." These are two ways of referring to the same thing--but the first does not explain why it happened or point to the easy cure: stop electing Republicans.

Tyler's third mistake? His writing "some laudable cost controls on Medicare are embedded in the new health care law, but they’re not enough." They are enough--or are almost enough--if they are allowed to go into effect: if the curbs on Medicare cost growth and the tax on Cadillac health plans both go into effect, we don't have a serious long-run budget unsustainability problem. If they do not both go into effect, we do. Who wants to repeal the curbs on Medicare cost growth and the tax on Cadillac health plans? You guessed it--Republicans.

All in all, I think Tyler Cowen's article is a net minus as far as American political economy and governance are concerned. There is nothing wrong with what it says--but what is wrong is what it does not say, and how it points readers who are not already deeply versed in the politics in the wrong direction.

Now those of his readers who are up on the politics will recognize that the political villains underlying Tyler Cowen's argument are today's Republicans. Who was it who broke the "technocratic Keynesian recommendation was to run deficits in bad times and surpluses in good times... [that] except for one stretch during the Clinton administration... has been broken since the early 1980s"? Reagan's Republicans. Why is that in the "United States... Keynesian economics has failed to find the necessary political institutions to enact and sustain a wise version of the theory"? Because the Reagan administration broke it in the 1980s, and after the Clinton administration fixed it the George W. Bush administratio broke it again in the 2000s. Who are the "politicians are afraid to reform or even to discuss changes in the largest problem areas: Medicare and Medicaid"? Well, the Democrats incorporated large cost-saving changes in Medicare in their 2010 health care reform--changes so large that many of us could not believe that the Democratic congressional caucus would actually vote for them. They did. And now who wants to repeal these cost-saving changes? The Republicans.

Readers up on the politics will read Tyler Cowen's article, learn quite a bit about our long-run budget dilemmas, and conclude that we need to do things to (a) prevent budget politics like we saw in the Reagan administration, (b) prevent budget politics like we saw in the George W. Bush administration, and (c) strengthen rather than repeal the cost controls in the Affordable Care Act. They will then conclude that the first step is that they should vote for Presidents like Clinton rather than Presidents like Reagan and Bush, and for representatives and senator who will strengthen the Affordable Care Act rather than those who are pledged to repeal the whole thing.

Those of his readers who are not up on the politics will hear only one single politician blamed--one single politician criticized by name in Tyler Cowen's article. TC is disappointed that Democratic President Obama has not and will not "pledge to veto any budget that increases the projected medium-term deficit, relative to the status quo. He should include in that veto threat any deficit increases that arise from annual budgetary gimmicks like patches to the alternative minimum tax or the “doc fix” adjustment of Medicare reimbursement rates." And they will conclude that, as a first step, we should probably have a president who does not act like Obama and that it would be good to have senators and representatives who will serve to check his policies.

And that would be destructive. Obama's Affordable Care Act, as enacted, is the largest long-run deficit reducing piece of legislation ever signed into law in America. He--and the Democratic congressional caucus that voted for it--deserve to be the deficit-hawk heroes of Tyler's piece, not the only named villain.

Now on the substance I agree with Tyler. President Obama should promise to veto everything that increases the national debt in the medium run. He should have done this in December 2008. It is very disappointing that he did not.

But since many fewer of Tyler Cowen's readers are up on the politics than are not up on the politics, I think that for what Tyler's column does not say it makes our fiscal illusions worse rather than better.

Mark Thoma: How Long Until We Reach Full Employment?

MT:

Economist's View: How Long Until We Reach Full Employment?: I took the month to month difference in the unemployment rate (from 1948:2 to 2011:2), then took two averages, one when the difference is positive (unemployment is increasing) and one when the difference in negative (unemployment is falling):

Average monthly increase in unemployment:   0.2143

Average monthly decrease in unemployment: -0.1143

Notice that, as is evident in the graph, increases in the unemployment rate are, on average, larger than decreases. Thus, unemployment generally rises faster than it falls. Next, I used the second number, -0.1143, to forecast the monthly changes in the unemployment rate (the red line in the graph). Since the precise value of the natural rate of unemployment is unknown, here are a few benchmarks:

7% unemployment in July of 2012

6% unemployment in March of 2013

5% unemployment in December of 2013....

If anything, relative to the last two recoveries, this forecast is optimistic. Even so, it will still take two years to get to 6% unemployment.... Things may be looking up, but we have a long way to go and it's too soon to turn our backs on the unemployed.

Let me second what Mark says in that last paragraph. We seem to have two types of recoveries: (i) recovery from Federal Reserve-inflicted liquidity squeeze recessions, and (ii) recovery from financial-market generated bubble-collapse recessions.

The history seems to be telling us that the recovery from (i) is rapid: once the liquidity squeeze ends, all economic activities that were profitable and productive before in the last boom are profitable and productive again, and so you simply reproduce your pre-recession pattern of economic activity, and voila!

The history also seems to be telling us that the recovery from (ii) is slow: the problem was that certain financial assets were grossly overvalued, and once they come back to reality there is an overall shortage of financial assets as savings vehicles or of safe financial assets that induces a shortfall of aggregate demand. A return to full employment requires that something happen to boost the economy's supply of financial assets as savings vehicles or of safe financial assets--whichever was the cause of the downturn in the first place. Only then will households and businesses be comfortable spending at a full-employment pace.

The problem is that you cannot boost the economy's supply of financial assets as savings vehicles--the thing that the economy was short of in 2002--by simply returning to the 2000 pattern of economic activity, for the problem is that the 2000 pattern of economic activity produced a lot of things--venture-capital investments in dot-coms--that people thought were savings vehicles but that were not so. The problem is that you cannot boost the economy's supply of safe financial assets--the thing that the economy is short of today--by simply returning to the 2006 pattern of economic activity, for the problem is that the 2006 pattern of economic activity produced a lot of things--mortgage CDOs on newly-built houses--that people thought were safe financial assets but that were not so.

This is not to say that we are doomed: there is no reason that the structural adjustment needed to build another and a different pattern of economic activity has to be accompanied by prolonged high unemployment. Indeed, prolonged high unemployment is an obstacle to structural adjustment: you cannot make private investments to serve as backing for financial savings vehicles when demand is so slack that those private investments do not generate any profits; you cannot find pieces of the real economy to back safe financial assets when demand is so slack that real economic activities that are perfectly safe in normal times are now accompanied by substantial amounts of risk.

But the process of structural adjustment does not happen quickly by itself: you cannot simply replace everybody on their pre-recession horse on the merry-go-round and start the music again. You need to do something big on a large scale if you want a rapid recovery: move risk onto the government's books (if you can do so without transforming government debt into a risky asset) in order to transform privately-issued risky assets into safe ones on the one hand or have the government invest and thus create safe savings vehicles on the other, banking policy or fiscal policy--those are your choices, because the conventional monetary policy of trading cash for short-term Treasuries works only if the economy's problem is a genuine liquidity squeeze.

And we are, right now, not undertaking either the expansionary banking policy or expansionary fiscal policy on a sufficient scale to generate a rapid recovery.