Now, many of the important issues related to productivity - education and government regulation for example - are ones we have been discussing for years. In some cases the government has acted, for example with No Child Left Behind, with questionable results. One issue that is somewhat new, and which has been pushed into relief by the financial crisis, relates to the allocation of resources - labor specifically. Some of the ideas are stated nicely in this book review by Robert Solow. Toward the end of this piece, he states:
We would be much poorer without a functioning financial system, and the flow of credit and equity purchases that it permits. If anyone who wanted to start a business--a software company, a biotechnology laboratory, a retail store--had to do so with his or her already saved-up wealth and the help of relatives, many good ideas would go unrealized, and some wealth would lie idle or be wasted. If every time you chose to invest in an existing company it was forever, because there was no way to sell your share and invest somewhere else, it would be much harder for promising enterprises to attract capital and grow.As is all-too-obvious now, how our financial industry is regulated is important for the allocation of resources. A poorly-regulated system can create profit opportunities in activities that have no social value and which cause us to sacrifice highly-skilled people that might have otherwise been engaged in science, engineering, and research. Further, when the system fails, the skills of an army of lawyers are required to sort out the losses - another misallocation. But maybe that's not what is going on. Maybe all this financial innovation is indeed socially useful and we're better off for all of it, in spite of suffering the odd financial crisis. In any event, this is something the Council might study and sort out.
But those needs were being taken care of a quarter-century ago, and well before that. The real question, to which Greenspan gave such a confident and grandiose answer, is whether anything much was added to the system’s ability to allocate capital efficiently by the advent of naked CDSs and CDOs and the rest of the alphabet. No blanket answer is possible. The securitization of mortgages and college loans is not intrinsically a foolish or useless idea--it enlarges the pool of capital available to finance home purchases and college educations; but the opportunity for you and me to bet a large sum of money on the outcome of somebody else’s bond issue is not nearly the same sort of thing.
Take an extreme example. I have read that a firm such as Goldman Sachs has made very large profits from having devised ways to spot and carry out favorable transactions minutes or even seconds before the next most clever competitor can make a move. Deep pockets in a large market can make a lot of money out of tiny advantages. (Of course, if you have any such advantage the temptation is irresistible to borrow a lot of money to enlarge your bets and your profits. Leverage is good for you, until it isn’t. It is not so good for the system.) A lot of high-class intellectual effort naturally goes into trying to invent ways to find those tiny advantages a few seconds before anyone else.
Now ask yourself: can it make any serious difference to the real economy whether one of those profitable anomalies is discovered now or a half-minute from now? It can be enormously profitable to the financial services industry, but that may represent just a transfer of wealth from one person or group to another. It remains hard to believe that it all adds anything much to the efficiency with which the real economy generates and improves our standard of living.
What is the Council on Jobs and Competitiveness actually up to? Well, judging from this WP piece by Jeffrey Immelt, who is to chair the Council, apparently not much that is useful. In particular, here is one of Immelt's points:
We need a coordinated commitment among business, labor and government to expand our manufacturing base and increase exports. The assumption made by many that the United States could transition from a technology-based, export-oriented economic powerhouse to a services-led, consumption-based economy without any serious loss of jobs, prosperity or prestige was fundamentally wrong. But there is nothing inevitable about America's declining manufacturing competitiveness if we work together to reverse it. For example, we have returned many GE appliance manufacturing jobs to the States by collaborating with our unions and making our operations more efficient.Seems like what he has in mind is subsidizing the production of refrigerators in the US. Here is an instance where I can actually agree with Krugman, who calls this "hackneyed." That being successful as producers of tangibles rather than intangibles is a good thing, and that we need government intervention to reverse the long-run shift from manufacturing to services is quite wrongheaded. Hopefully Obama will use this Council only to cozy up to the business community, and no legislation will result.
When reading some of your post, I have a feeling of the old "it's not the central planning that's bad, it's always the central planners". I think it was Mises who said that if offered the job of 'king', he would abdicate. Most other people always come with the idea that they have to fix the central planning and devise new, effective ways to make the markets efficient.ReplyDelete
John Stossel did a nice job travelling to Hong-kong and India to try to start some enterprenuership. In India he basically had to convince a bureaucrat that his enterpreneurship will be socially useful. How is this different from "In any event, this is something the Council might study and sort out."?
To top all of this: I don't think it is socially useful. I wonder why there doesn't appear a competitive financial intermediate who would design the buing/selling in such a way that these things would disappear. Who would integrate his system internationally, so that the arbitrage possibility would disappear. Why? How hard it is to start a webservice that would provide this service? A good programmer can write such application in a few months - what's the problem?
You could see the same with the bank card companies (Visa, Mastercard..). I am from central europe and we didn't have regulation on these. You know what? When you travelled around the country, you actually did find competition; small, but it was there. When you looked over the internet, you had several systems specializing in micro-payments. This was 2000!!! And than they came with regulation that financial transactions can be intermediated only by companies with bank lincence.
Don't you think that regulation might have something to do with all this?
Hey andy, we don't need to regulate how parents treat their kids, as it is their best incentive to treat their kid decently. We don't need any regulation on business that is incentive compatible with "social benefit". That may be your bank card case.ReplyDelete
The important thing seems to be how the "wrong" incentive arises in the first place - the aspect we do want to have regulation
I was confused by the fact that Immelt wrote: "But there is nothing inevitable about America's declining manufacturing competitiveness if we work together to reverse it."ReplyDelete
The United States produces more manufacturing goods today than it ever has. Do we judge the manufacturing sector by employment or production? Hopefully we judge it by the latter.
I thought that the share of manufacturing was falling no matter how you measure it - employment, output, whatever. What data are you looking at?
Doubt on Immelt's logic. Manufacturing in Guangdong China, like those toys making and assembly of electronics, are very productive if we are looking at the unit cost of production. But it is because of the land grant, tax privilege and other subsidy of local gov't.ReplyDelete
Somehow manufacturing's TFP is gov't choice too. So how can we set our policy based on various measure of productivity? You know that's Lucas critique
Manufacturing's share of total output hasn't changed in the post-WWII era. Here is a link from the Cleveland Fed:
That's interesting. Manufacturing's share in employment has fallen steadily since WWII, but the share in output has been roughly constant. The short piece in the Cleveland Fed piece compares this to an earlier phenomenon in agriculture - secular decline in employment coupled with a secular rise in productivity in the sector.ReplyDelete