Monday, May 27, 2013

(Very) Long-run Economic Problems

            The figure below plots real per capita economic growth over the last 500,000 years.  The dramatic fact is that virtually all of the increase in living standards that humanity has experienced occurred in the last 500 years!  To be sure, there were economic fluctuations prior to that.  Living standards ebbed and flowed with wars, droughts, floods, plagues and so forth, but there was no trend.  One century looked much like the next.  It was not until the scientific revolution that humans begin to understand and exploit natural laws so as to better the conditions in which they lived.  And the impact has been dramatic.  A middle class family today lives far better than royalty of 500 hundred years ago when you consider things such as dentistry, medicine, sanitation, indoor plumbing, dwelling climate control, transportation, and electric lighting and appliances.  Real per capita growth of 1.7 percent per year may not sound like much but compounded over three centuries it leads to an improvement in the standard of living of more than 150 times!

       This fantastic growth, however, does not come without risk.  It allows for dramatic increases in population with associated demands for clean water, fresh air, sufficient sources of energy, and adequate natural resources.  It also means that for the first time human activity is having a measurable impact on the global environment.  What makes these risks new is that they are the result of slow, but steady, compounding.  In response to economic growth and rising population, the global environment does not change noticeably from day-to-day, or even year-to-year, but it keeps changing.  Over the course of a century that change can be dramatic.  This impact of compounding is well known.  What is less commonly appreciated is that it is far from clear that we have developed the social and political institutions necessary to cope with it.  Until the last few centuries all of humanity’s problems were the result of short-term crises that attracted our attention and focused our minds.  It is uncertain how well we will be able to deal with problems that seem almost boring in the short run, but could well threaten our species in the long run.  We have never faced such problems in our evolutionary history.

Sunday, May 26, 2013

Political Economic Leadership

            One of the most important aspects of political leadership is accurately framing an issue so that the populace can understand what is at stake and choose accordingly.  Unfortunately, this aspect of leadership often comes into conflict with getting elected.  In no area is that more clear than medical care and retirement savings.  Providing for lifetime medical care and adequate retirement income are issues that have to be addressed early in life and monitored continually.  By the time old age arrives it is typically too late to adjust.  For that reason, people need a clear understanding of what the government can be expected to provide and what it will cost.  Because estimating these costs and benefits is complicated, particularly at a national level, it is not something that individuals can do for themselves.  They rightly turn to their political leaders to present the trade-off.

            It is here that leadership, both Republican and Democratic, has failed at all levels of government.  With changing demographics, increasing life expectancy, and improving medical technology, we have some very difficult decisions to make regarding the allocation of resources.  For example, how much should the working young be expected to pay for the retired elderly?  The unfortunate fact is that with a few exceptions these issues have not be accurately depicted by those running for elected offices.  Governmental organizations from small cities to the federal government have made a host of promises regarding retirement and medical care that cannot possibly be fulfilled.  As a result, we will need even stronger more forthright leaders in the future.  Now we face the prospect of first telling people that the promises on which they based lifelong plans cannot be honored as a precursor to deciding what type of commitments can reasonably be fulfilled.

Monday, May 20, 2013

The Cost of Nuclear Weapons

            Here is an interesting fact hidden in David MacKay’s wonderful book “SustainableEnergy without the Hot Air.”  I quote:

The financial expenditure by the USA on manufacturing and deploying nuclear weapons from 1945 to 1996 was $5.5 trillion (in 1996 dollars).  Nuclear-weapons spending over this period exceeded the combined total federal spending for education; agriculture; training, employment, and social services; natural resources and the environment; general science, space and technology; community and regional development (including disaster relief); law enforcement; and energy production and regulation.

Saturday, May 18, 2013

Job "Creation"

            Hardly a day goes by without somebody trying to take credit for “job creation.”  Politicians from local mayors to the President are the most prominent claimants to the title of job creator but many business leaders also trumpet their achievements in this area.  The implication is that but-for the efforts of these people jobs would not have been created and employment would be permanently lower.  That makes no sense whatsoever.  People want to work to enjoy the fruits of their labor and others want to employ them for the goods and services they produce.  It is the role of the job market to bring together the buyers and sellers of labor services.  It is the labor market that creates jobs by matching buyers and sellers of labor services.

            But there is one BIG mystery.  Why does the labor market take so long to clear?  In other words, why do we have extended periods of unemployment?  As the attached graph shows, unemployment does tend to return to a normal frictional level of “full employment,” but it does so slowly.  The mystery of this slow adjustment has been an issue about which virtually every practicing macroeconomist has written at one time or another and I have nothing to add here.

         But there are two related points worth stressing.  First, the market does eventually clear and second, it is not the number of jobs that determines our well-being but the productivity associated with those jobs.  After all, we could virtually assure full employment by foregoing all technology in agriculture.  Under those conditions, the numbers of “jobs” in agriculture would be immense, as they were in 1790, but we were hardly better off.  The long-run path to prosperity is not through job creation, but productivity enhancement.  From a policy perspective, that means focusing on policies, including tax policy, which maximize the incentives for productivity growth.  Unfortunately, this does not seem to attract the same attention as the misguided focus on job creation.