Whither the UK Economy?

In my experience, discussions of the UK economy almost immediately jump to the “Brexit” question, or whether it was wise for the United Kingdom to leave the European Union. But the Brexit vote was in 2016, and problems with the UK economy are apparent in the data well before the bill passed. Ending Stagnation
A New Economic Strategy for Britai
(December 2023, Resolution Foundation & Centre for Economic Performance)is one of those reports that draws on multiple study groups and background papers, in an attempt to build some consensus on an underlying narrative.

We [that is, the United Kingdom] were catching up with more-productive countries like France, Germany and the US during the 1990s and early 2000s. But that came to an end in the mid-2000s and our relative performance has been declining ever since, reflecting a productivity slowdown far surpassing those seen in similar economies. Labour productivity grew by just 0.4 per cent a year in the UK in the 12 years following the financial crisis, half the rate of the 25 richest OECD countries (0.9 per cent). The UK’s productivity gap with France, Germany and the US has doubled since 2008 to 18 per cent, costing us £3,400 in lost output per person. …

Weak productivity growth has fed directly into flatlining wages and sluggish income growth: real wages grew by an average of 33 per cent a decade from 1970 to 2007, but this fell to below zero in the 2010s. In mid-2023 wages were back where they were during the financial crisis. 15 years of lost wage growth has cost the average worker £10,700 a year. …

While Britons have been living with stagnant wages for the last 15 years, high inequality has been a problem for more than twice as long. Having surged during the 1980s, and remained consistently high ever since, income inequality in the UK is higher than any other large European country. … This toxic combination is a disaster for low-to-middle income Britain and younger generations. We might like to think of ourselves as a country on a par with the likes of France and Germany, but we need to recognise that, except for those at the top, this is simply no longer true when it comes to living standards.

Indeed, one can make a plausible case that the UK combination of stagnant growth and high inequality fed the political pressures for the Brexit vote. Here, I won’t work through the details of the nearly 300-page report, but instead offer some of the figures that caught my eye.

UK productivity fell behind France and Germany in the 1980s, but while those countries are now close to US levels (albeit based on fewer hours worked per person), the UK economy has not been closing the gap with the US.

Average weekly earnings in the UK are below the peak they reached in 2008.

The gap in average incomes between London and the other nations/regions of the UK has been rising.

Slower growth means fewer resources for many purposes. For example, waiting lists for the National Health Service have more than doubled since 2014–a change that started well before the pandemic.

Rates of fixed investment in the UK are at the bottom end of the range for advanced economies.

Other advanced countries are gradually expanding the area of their “built-up land,” but not the UK.

The grim news in the report goes on and on: shortcomings of public infrastucture, energy costs, pensions, housing prices, support for the working poor, and so on and on. The report discusses in some detail how Brexit isn’t helping the UK economy, either, but the country’s economic issues clearly run a lot deeper. One source of comfort for the UK: Sure, we’re not keeping up with Germany and France, but Italy is worse-off!

What Would a Job-Based Industrial Policy Look Like?

In some ways, “industrial policy” is a triumph of marketing and branding. With most proposals for corporate tax breaks or subsidies, there is a healthy dose of skepticism and pushback, often using of critical terms like “corporate welfare” or “trickle-down economics.” But if corporate tax breaks and subsidies can be relabeled as “industrial policy,” then a considerable share of the skepticism and pushback seems to evaporate.

However, most “industrial policy” isn’t likely to raise the number of well-paid jobs by very much, or at all. Dani Rodrik uses this insight as a starting point for what a jobs-based industrial policy might look like in “Productivism and new industrial policies: learning from the past, preparing for the future” (one of the essays in Sparking Europe’s New Industrial Revolution: A Policy for Net Zero, Growth, and Resilience, edited by by Simone Tagliapietra and Reinhilde Veugelers, Brueghel Blueprint Series #33). Rodrik writes:

As the name suggests, productivism focuses on enhancing the productive capabilities of all segments and regions of a society. While traditional forms of social assistance, especially better access to education and healthcare, can help in this regard, connecting people with productive employment opportunities requires interventions that go beyond these. It requires improvements on the demand side of the labor market as well as the supply side. Policies must directly encourage an increase in the quantity and quality of jobs that are available for the less-educated and less-skilled members of workforce, where they choose (or can afford to) live.

In the future, most of these jobs will come not from manufacturing, but from services such as health and long-term care and retail. Even if policy succeeds in reshoring manufacturing and supply chains, the impact on employment is likely to remain limited. The experience of East Asian manufacturing superstars such as South Korea and Taiwan provides a sobering example. These two countries have managed to rapidly increase the share of manufacturing value added in GDP (at constant prices), yet they have experienced steady declines in manufacturing employment ratios.

Whatever might be in support of an industrial policy of encouraging domestic semiconductor manufacturing, it’s a very capital-intensive industry that doesn’t employs a lot of people, and especially not those with lower levels of skill. Similarly, while I’m a big supporter of support for expanded R&D, the direct effect of such support is to pay for highly-skilled researchers. In addition, as Rodrik writes:

Policies that target climate change are not a substitute for good-job policies, and vice versa. Shoring up the middle class and disseminating the benefits of technology broadly through society requires an explicit good-jobs strategy. Such a strategy would not be so fixated on competition with China; it would target services instead of manufacturing, and it would focus on incentivising worker-friendly technologies.

What might a jobs-oriented industrial mean in practice? Rodrik offers two main thoughts.

First, he suggests setting up “regional business bureaus,” which would be less about handing out subsidies to companies who relocate, and more about helping firms to solve problems. Some standard examples would be if a group of employers, defined either by industry or by geographic location, would come to the business bureau with a problem: perhaps a lack of local workers with specific skills they need, or a local zoning rule that is blocking expansion, or a problem with a local intersection that is always jammed with traffic, or lack of high-speed internet, and others. The businesses would make a commitment that if this problem was addressed, they would expand employment to average and below-average wage groups. Although the business bureaus would also be able to help arrange financing for certain business investments, the priority would be on job-creation. The business bureau would then try to work with government, with local high schools and community colleges, and with banks or financing options to address the specific problem. Ideally, the process would be step-by-step, with requests made and jobs created, thus building credibility for future requests.

Second, in thinking about how government supports new technologies by encouraging research and development, and how firms choose to invest, it should be an open topic of conversation for whether these new technologies are likely to substitute or existing workers, or to complement and increase productivity of existing workers. For example, if a firm is deciding between retrofitting an existing factory with new equipment, or moving the factory to another country and investing in really good broad-band internet, the choice of investment will matter to existing workers.

A standard dynamic of the information technology revolution as it evolved through the 1990s and early 2000s was that it tended to, in the buzzword of the time, “hollow out the middle class.” The idea was that in old-style factory, a firm needed multiple layers of middle-management to monitor workers and to collect information for top management. However, computerization reduced this need to middle-management. Instead, it increased the productivity of a smaller number top managers who could now monitor and get information on their screens.

However, drawing on the work of Daron Acemoglu and Pascual Restrepo, Rodrik argues that certain new technologies may instead increase the productivity of existing labor. For example:

AI could be used in education to create more specialised tasks for teachers, personalise instruction for students, and increase effectiveness of schooling in the process. … [I]individual students have different learning styles, which requires teaching to be adapted to their specific needs. By generating real-time information on learning and making recommendations, AI tools can enable customised, smaller-group teaching. They can also allow instruction to respond more rapidly to evolving technologies and labour-market needs. Such tools are unlikely to replace teachers; they might in fact increase the demand for teachers (as well as redefine their roles) by enhancing the return to individual or small group instruction. …

[I]n healthcare … AI tools can significantly enhance the diagnostic and treatment capabilities of nurses, physicians’ aides and other medical technicians. They can, in effect, allow “less skilled” practitioners to perform tasks that only physicians with many more years of professional education have traditionally undertaken. The same logic also applies to other areas to boost job opportunities for those without the most advanced skills. For example, AI systems already enable the drawing up of simple contracts (such as wills) and the provision of many other services without the actual involvement of lawyers. To date, such systems have replaced primarily paralegals rather than lawyers themselves, but more advanced systems could enable paralegals to perform more advanced tasks, such as document review, due diligence and document drafting (Remus and Levy, 2016). Machine learning and neural networks can enable mid-level finance professionals to do financial risk assessment, loan underwriting and fraud detection tasks that would otherwise be undertaken by more senior professionals …

[A]ugmented and virtual reality technologies in manufacturing … [can enable] humans and robots to work together in performing precision tasks (rather than the latter replacing the former). Such technologies are based on smaller, more nimble robots that also enable greater customisation of production in response to specific customer needs. … More broadly, shop floor apps augment relatively unskilled labour by allowing workers to carry out operations that more-skilled employees typically perform.

I guess the new buzzword here is “cobot,” a neologism based on “collaborative robot.” For many of us, our mental vision of a factory is a giant assembly line, producing mostly identical products. If the workers on such an assembly line are doing the same repetitive task all day, then yes, many of those jobs can be replaced by automation. But perhaps the mental vision of a future assembly line should instead include a substantial number of humans walking around, with lightweight cobots rolling after them as needed, with the human jobs being complemented by the cobots.

In short, it’s wise to be skeptical about promises that “industrial policy” will more-or-less automatically expand the number of well-paid jobs at the middle and bottom of the income distribution. If you want an expansion of well-paid jobs, that needs to be its own actual focus of policy.

“Academic” Freedom Has an Adjective in Front of the Noun

Stanley Fish argues that “academic freedom” is “an unfortunate phrase because those who invoke it usually emphasize the word “freedom” and “forget about its controlling and limiting adjective. `Academic’ tells you what the scope of the claimed freedom is: It is the freedom — or, as I prefer, the ‘latitude’ — necessary to the performance of the academic task for which you are trained and paid.”

In an essay in the Chronicle of Higher Education (“Do Nothing Until You Hear from Me,” November 30, 2023), Fish spells out some implications of this view:

The bottom line, then, is that academic freedom is not a general license to say whatever you like on any topic under the sun. It is a limited freedom to follow where the evidence pertaining to an academic question leads. It certainly does not include the freedom to advocate for your political views or turn (or try to turn) your students into social-justice warriors or anti-social-justice warriors. You and they are jointly engaged in an intellectual effort to understand something, and that engagement is, or should be, intensely focused and has no legitimate room for activities that belong to other enterprises.

What is true of faculty is true of the administration. Those who insist, or should insist, that faculty stick to their academic knitting should stick to it too, pronouncing only on matters that directly affect their institutional — not general or human — responsibilities. …

This severely narrow view of what colleges are about is not in fashion now, but it has a long and rich history of adherents, including Aristotle (Ethics, book 10), Kant (What Is Enlightenment?”), Cardinal Newman, Max Weber, Michael Oakeshott, and Harry Kalven, whose report, issued on behalf of the University of Chicago in 1967, put it this way: “Since the university is a community only for limited and distinctive purposes, it … cannot take collective action on the issues of the day without endangering the conditions for its existence and its effectiveness.” And in the current scene there is this recent statement by Richard Saller, president of Stanford University, and Jenny Martinez, its provost: “We believe it is important that the university, as an institution, generally refrain from taking institutional positions on complex political or global matters that extend beyond our immediate purview, which is the operation of the university itself.” To the point, but a bit wordy. I much prefer the succinct response by the then provost of the University of Wisconsin at Madison to demands by students that the university speak out against the impending invasion of Iraq. He said, “The University of Wisconsin does not have a foreign policy.” That is beyond perfect.

Fish doesn’t mention it in this short essay, but this interpretation of “academic freedom” as specific and focused is also the one from the “General Report of the Committee on Academic Freedom and Academic Tenure,” as presented at the annual meetings of the American Association of University Professors in 1915, and as far as I know still the official guidance from the AAUP. A few years ago, I offered some discussion of that statement in “The Free Expression of Professors and Its Prudential Limits.”

A Pro-Globalization Banquet

If you want to drink deeply of unabashedly pro-globalization essays, the Cato Institute has a “Defending Globalization” project underway. The well-written essays are mostly short or mid-length, and clearly aimed at the general public–including undergraduate students. I can’t hope to summarize the essays here, and indeed, more essays are on their way (and you can sign up at the website to be on the distribution list).

But for a flavor of one essay, there’s are a few of the comments that caught my eye from the characteristically trenchant essay by Deirdre N. McCloskey titled “Globalization Creates a Global Neighborhood, Benefiting All,” and subtitled “Globalization puts everyone whose government permits it into a global neighborhood in which the price of a Samsung TV at a Best Buy in Washington is pretty much the same as in Beijing or New Delhi” (September 12, 2023).

McCloskey on the false allure of economic self-sufficiency:

A hermit could refuse to take advantage of globalization and achieve self‐​sufficiency in his own little hut. It sounds lovely and brave. Grow your own wheat. Make your own accordion. But it’s been calculated that nowadays a hamburger made wholly self‐​sufficiently would cost about $83. Perhaps it would be better to work a little in a market and then take the earnings to spend at the neighborhood McDonald’s. When Henry David Thoreau went to be self‐​sufficient for two years from 1845 to 1847 on the banks of Walden Pond in Concord, Massachusetts, he still bought nails in town for his hut, and hoes for his crops, and books to read. Every Sunday, he went into town for dinner. Towns and trade are mighty tempting, with their low prices in production achieved by specialization and their low prices in marketing achieved by arbitrage.

McCloskey on “if trade and globalization is so bad, then why has the rise in globalization since the 1960s and 1970s coincided with ongoing economic growth?”

If the neo‐​mercantilism of the 1930s, or for that matter the long‐​running opposition on the left of politics to “neo‐​liberalism,” as the left calls it, and now also on the right in the “new economic nationalism,” was a good idea, then the Kennedy Round and the GATT/WTO and the second globalization would have been a global disaster. It would have impoverished the poor of the world. One could buy bumper stickers declaring, “Milton Friedman, Father of Global Poverty.” But in 1960, four billion out of the five billion people in the world lived at an appalling $2 a day in present‐​day prices, cooking over cow‐​dung fires, hauling water two miles for drinking, and dying young and illiterate. It was how almost all humans had lived from the beginning. By now, one billion of the present eight billion people still live in such misery. But the other seven billion have leapt forward, many to the “superabundance” that Marian Tupy and Gale Pooley have recently chronicled. It happened in the face of gloomy predictions that rising population would starve us all, that our best days were behind us.

McCloskey on the gains from creative destruction:

Furthermore, the force of arbitrage works to erode pools of great wealth. The Nobel economist William Nordhaus has calculated that the gain from all the innovations in the United States since World War II went overwhelmingly to us, the customers, American and foreign, when competitors to General Motors, General Electric, and General Foods rushed in. Once upon a time we faced the terrible “monopolies” of Kodak, Nokia, IBM, Toys R Us, Tower Records, and Blockbuster. They are all now one with Nineveh and Tyre. Eighty‐​five percent of the Fortune 500 firms in 1955 are gone. That’s good, not bad. New ideas replace the old ones, and then new investment replaces the old, and new jobs replace the old, which is to our benefit.

McCloskey on globalization as a form of liberty:

The ethical case for globalization is not simply that it enriches us all, though it does. It’s also that permitting arbitrage is an implication of allowing you to buy and sell with anyone you wish. It’s elementary liberty. And liberty is liberty is liberty. The liberty to trade is among the liberty to speak and read and vote and live and love. The left and the right, and often enough the center, disagree. They want to stop you from buying marijuana or buying a Toyota or buying a book with gay characters, even in the land of the free. The economic historian J. R. T. Hughes pointed out long ago that Americans have two contradictory positions, “Don’t tread on me” and “Don’t do that.” That “that” consists of things like dressing as you want or loving whom you want or buying where you want. Globalization is part of liberty.

The Reputation of Karl Marx and the Soviet Revolution of 1917

Karl Marx (1818-1883) remains one of the most highly cited authors in academic literature, 140 years after his death. But when did his writing become especially prominent? During his lifetime or after? And how has his prominence trended in recent decades?

Philip Magness and Michael Makovi discuss the history and offer some measurements of how often Marx is cited in “The Mainstreaming of Marx: Measuring the Effect of the Russian Revolution on Karl Marx’s Influence” (Journal of Political Economy, June 2023).

Marx is not cited much by economists. The authors quote the 1925 comment of John Maynard Keynes that Marx’s Capital is “an obsolete economic textbook . . . without interest or application for the modern world.” However, Marx has become immensely popular in other fields:

A century later, Marx enjoys an immense scholarly stature—albeit almost entirely outside of economics. His critiques of capitalism are taught as foundational texts in sociology, political theory, philosophy, and literary criticism, and his socioeconomic doctrines of alienation, class consciousness, and historical materialism exert heavy influence through the academically fashionable analytical frameworks of critical theory, postcolonial theory, and cultural studies.

One 2013 paper estimated that Marx was the most-cited author in history. Looking at college syllabuses (and leaving aside textbooks), Marx remains among the most-assigned authors, rivaled only by Plato, and far ahead of John Stuart Mill, Adam Smith, Martin Luther King Jr., Jean-Jacques Rousseau, John Rawls, and others.

I will not try here to unpack just why economists in general have been dismissive of Marx’s work since the 19th century, although Magness and Makovi go into that topic in some detail. Instead, I focus on the evidence they compile from Google’s Ngram Viewer, which measures how often an author or a term is used in printed books over time. For comparison, they compare citations to Marx with the average of a group of other socialist writers from the 19th century, weighted so that their citations match those of Marx in the lead-up to 1917. This “synthetic Marx” group is mostly made up of mostly Frederick Lassalle, Johanne-Karl Rodbertus, and Oscar Wilde (who wrote a prominent 1891 essay called “The Soul of Man under Socialism”). Here’s a figure, with the solid line showing citations to Marx and the dashed line showing citations to “synthetic Marx.”

The fact that the two lines track each other before 1917 isn’t a surprise: “synthetic Marx” was constructed to track Marx before that date. What’s interesting is the divergence around 1917, when citations to Marx rise dramatically, and then keep rising. The authors write (citations and footnotes omitted):

The Bolshevik political ascendance drew widespread attention to Marx’s system particularly as the Western press sought to contextualize the revolution. … For many observers abroad, Marx became a clue to understanding the “Bolshevik threat” … Lenin’s political rise simultaneously enabled a sizable boost to the academic study of Marx’s doctrines. In 1919, the Soviet state created the Marx Engels Institute … Working with the newly established Frankfurt Institute of Social Research (the “Frankfurt School”), the Marx-Engels Institute published 12 volumes of the Marx-Engels-Gesamtausgabe (“MEGA1”) in German.

The Soviet state became the primary translator of Marx’s works through the government-funded Progress Publishers, founded in 1931. Marx played a similarly prominent role in Soviet propaganda through artwork and statuary, dating to Lenin’s personal direction . Indeed, Lenin initiated the practice of pilgrimage to Marx’s grave in 1903 and personally supervised the first of several unsuccessful Soviet attempts to have his remains relocated to Moscow in 1918. While other factors certainly shaped Marx’s reception in the mid-twentieth century, including the diaspora of the German-speaking academic Left in the face of Nazi persecution, the catalyzing event in the elevation of Marx’s intellectual stature appears to be the Russian Revolution. …

We hypothesize that the Soviet embrace of Marx not only elevated Marx absolutely but also crowded out other socialist traditions. Several of these competing thinkers linger in relative obscurity today, despite being closely matched contemporaries of Marx in the eyes of late-nineteenth-century socialists.

All of my professional life, it has been common for me to hear people argue that while they are a Marxist, they are not therefore a Stalinist, a Leninist, or a supporter of the politics, economics, and philosophies of Soviet Russia. At some level, this is all fair enough: blaming Marx for events that happened decades after his death seems unfair, as silly as blaming, say, Adam Smith (died in 1790) for modern capitalism. But on the other side, those who choose Marx as the avatar for their socioeconomic doctrines do bear some responsibility for their emphasis on Marx, who was uplifted by a considerable publicity effort from Soviet Russia, rather than choosing to fly the banner of his socialist contemporaries like Lassalle (who favored social-democratic labor reform in Germany and was denounced by Marx in anti-Semitic terms) or Rodbertus (who may well have originated the “surplus value” concept used by Marx). As Magness and Makovi put it:

While much of the discussion surrounding the bicentennial of Marx’s birth sought to differentiate consideration of his modern relevance from the totalitarian track record of twentieth-century communism, the elevation of Marx’s stature provided by the Russian Revolution illustrates that the two cannot be easily separated. It is insufficient to portray Soviet communism as an aberration from true Marxist doctrine, as the intellectual mainstreaming of Marxist theory is intimately intertwined with the political establishment of the Soviet Union. In assessing how this historical link shapes current interpretations of Marx, one must grapple with the implications of Marxism’s early twentieth-century intellectual ascendance as a Soviet political project.

Spreading Accounts Across Banks for the Deposit Insurance

One of the strange aspects of the collapse of Silicon Valley Bank back in March (discussed on this blog here, here, and here) was the realization that many banks hold deposits are much larger than $250,000. Thus, the depositors are not covered by federal deposit insurance and are ready to participate in a bank run if the bank looks shaky.

An obvious question arises: For these large depositors–often businesses using the bank account to receive payments for sales and to make payments to workers and suppliers–why not spread out their bank accounts over several or many banks, so that each account would be covered by deposit insurance? In the modern financial sector, is this really so hard to do?

Dylan Ryfe and Alessio Saretto of the Dallas Federal Reserve provide an explainer on how this process was already going on before the downfall of Silicon Valley Bank in “Reciprocal deposit networks provide means to exceed FDIC’s $250,000 account cap” (Federal Reserve Bank of Dallas, November 28, 2023).

The authors point out that there are about $16 billion US bank accounts covered by deposit insurance. About 99% of those accounts are below the $250,000 limit. But the other 1% of accounts hold $7 billion–about 43% of the total. They write:

Reciprocal deposit networks have aided this recent growth of insured deposits. These networks, which have been around since the early 2000s, essentially offer a matching service that allows banks to interchange deposits in order to increase exposure to FDIC insurance. Reciprocal deposits rose to more than $300 billion in second quarter 2023, up from almost $157 billion at the end of 2022

The idea is that big depositors in one bank can go through networks like IntraFi or R&T Deposit Solutions and “swap” with big depositors at another bank–thus spreading out bigger deposits over many banks so they can be covered by deposit insurance.

One of the main beneficiaries of reciprocal deposit networks seems to be medium-sized banks. Such banks might have trouble attracting big corporations as customers, if the big corporations reason (perhaps unfairly) that a medium-sized bank is a less secure place for deposits. But if the medium-sized bank use reciprocal deposits to provide a federal insurance guarantee for all deposits, then the big corporation doesn’t have to worry about the solvency of the bank. Apparently, one after-effect of the Silicon Valley Bank failure was a movement of big deposits away from medium-sized banks, and then the banks responding with an expanded use of reciprocal deposits (as reflected in the figure above).

How do bank regulators look at a situation where banks are participating in reciprocal accounts? Up to a certain amount, they don’t worry about it much: that is, “up to the lesser of $5 billion or 20 percent of liabilities for low-risk, well-capitalized banks.” To put it another way, $5 billion would allow for 20,000 swaps of $250,000. Above those levels, regulators would start taking a closer look at the risks involved.

But there are big-picture issues here as well. One of the dynamics of current banking regulation is that the 99% of accounts holding deposits below $250,000 don’t need to worry about whether their bank is safe, because they can rely on deposit insurance. However, the 1% with larger deposits should be worrying, at least a little! Together with federal regulators, outside investors, and financial press, those big depositors are part of the network that gathers information and provides feedback about bank safety. As Ryfe and Sarreto put it:

More deposit insurance can alleviate safety concerns and instill faith and security in the banking system, increase depositor welfare and incentivize small-versus large bank competition. However, it also raises concerns that banks, due to this increased perceived security, might engage in more aggressive profit-seeking activities …

Of course, none of this explains why the supposedly super-sharp venture capitalists, who had put their funds into the companies that held large deposits at Silicon Valley Bank, were not already requiring the use of reciprocal deposit arrangements before March 2023. A blind spot that big makes one worry about the existence of other blind spots.

Andrew Gelman: “Any Sufficiently Crappy Research is Indistinguishable from Fraud”

The prominent science fiction author Arthur C. Clarke developed “Clarke’s laws” over time. The ideas originally appeared in his 1962 essay, “Hazards of Prophecy: The Failure of Imagination” (in the collection Profiles of the Future: An Enquiry into the Limits of the Possible. They were reformulated as “laws” in the decades that follow.  The best-known of Clarke’s laws is: “Any sufficiently advanced technology is indistinguishable from magic.”

Back in 2016, statistician Andrew Gelman offered some reflections and updating on Clarke’s laws on his blog. Of his updates, my favorite is: “Any sufficiently crappy research is indistinguishable from fraud.” But here are Clarke’s laws and Gelman’s updates:

Clarke’s first law: When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.

Clarke’s second law: The only way of discovering the limits of the possible is to venture a little way past them into the impossible.

Clarke’s third law: Any sufficiently advanced technology is indistinguishable from magic.

My [that is, Gelman’s] updates:

1. When a distinguished but elderly scientist states that “You have no choice but to accept that the major conclusions of these studies are true,” don’t believe him.

2. The only way of discovering the limits of the reasonable is to venture a little way past them into the unreasonable.

3. Any sufficiently crappy research is indistinguishable from fraud.

For the literal-minded, it’s perhaps useful to note that just as Clarke was not claiming that a sufficiently advanced technology is literally magic, Gelman is not claiming that a sufficiently crappy research is literally fraud. In both cases, the claim is just that for an outside observer with limited knowledge, it’s impossible to tell the difference.

An Economist Chews over Thanksgiving

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change in turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there’s anything wrong with that. [This is an updated, amended, rearranged, and cobbled-together version of a post that was first published on Thanksgiving Day 2011.]

Maybe the biggest news about Thanksgiving dinner this year is that the overall cost of a traditional meal is down 4.5% from last year–although still up 25% from 2019. For the economy as a whole, the starting point for measuring inflation is to define a relevant “basket” or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical US household buys. But one can also define a more specific basket of goods if desired, and since 1986, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The cost of buying the Classic Thanksgiving Dinner rose 20% from from 2021 to 2022, but then fell back 4.5% from 2022 to 2023. A significant part of the reason for last year’s price increase was an outbreak of Highly Pathogenic Avian Influenza (HPAI), which took a toll on turkey production, but HPAI been much less of an issue this year. The top line of the graph that follows shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The lower line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been an OK measure of the overall inflation rate over long periods of time.

Of course, for economists the price is only the beginning of the discussion of the turkey industry supply chain. This is just one small illustration of the old wisdom that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. The last time the U.S. Department of Agriculture did a detailed “Overview of the U.S. Turkey Industry” appears to be back in 2007, although an update was published in April 2014  Some themes about the turkey market waddle out from those reports on both the demand and supply sides.

On the demand side, the quantity of turkey per person consumed rose dramatically from the mid-1960s up to the early 1990s: for example, from consumption of 6.5 pounds of turkey per person per year in 1960 to 17.8 pounds per person per year in 1991. But since the early 2000s, turkey consumption has declined somewhat, falling to 14.6 pounds per person in 2022.

On the supply side, turkey companies are what economists call “vertically integrated,” which means that they either carry out all the steps of production directly, or control these steps with contractual agreements. Over time, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which the steps of turkey production have become separated and specialized–with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys. Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:

In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg capacity per hatchery in 2007.

Some decades ago, turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised while supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.

Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.”

U.S. agriculture is full of examples of remarkable increases in yields over periods of a few decades, but such examples always drop my jaw. I tend to think of a “turkey” as a product that doesn’t have a lot of opportunity for technological development, but clearly I’m wrong. Here’s a graph showing the rise in size of turkeys over time from the 2007 report.

more recent update from a news article shows this trend has continued. Indeed, most commercial turkeys are now bred through artificial insemination, because the males are too heavy to do otherwise.

The production of turkey is not a very concentrated industry with three relatively large producers (Butterball, Jennie-O, and Cargill Turkey & Cooked Meats) and then more than a dozen mid-sized producers.    Given this reasonably competitive environment, it’s interesting to note that the price markups for turkey–that is, the margin between the wholesale and the retail price–have in the past tended to decline around Thanksgiving, which obviously helps to keep the price lower for consumers. However, this pattern may be weakening over time, as margins have been higher in the last couple of Thanksgivings  Kim Ha of the US Department of Agriculture spells this out in the “Livestock, Dairy, and Poultry Outlook” report of November 2018. The vertical lines in the figure show Thanksgiving. She writes: “In the past, Thanksgiving holiday season retail turkey prices were commonly near annual low points, while wholesale prices rose. … The data indicate that the past Thanksgiving season relationship between retail and wholesale turkey prices may be lessening.”

If this post whets your your appetite for additional discussion, here’s a post on the processed pumpkin industry and another on some economics of mushroom production. Good times! Anyway, Thanksgiving is my favorite holiday. Good food, good company, no presents–and all these good topics for conversation. What’s not to like?

No, The American Dream Is not about Getting Rich

Somewhere along the way, the idea of “the American Dream” became constricted, and started referring purely to economic success: that is, the idea that if you just worked hard, you could become at least comfortably well-off, or even rich. Here is a sampling of examples. Mrinal Mishra, Jonathan Fu, and Steven Ongen recently published a paper called “Do Narratives about the American Dream Rally Local Entrepreneurship?” looking at the connections between mentions of the “American dream” in newspapers and local rates start-ups and entrepreneurship. They refer to the “American dream” as “the quintessential story of entrepreneurship and advancement.” A few years ago, Jimmy Narang, Robert Manduca, Nathan Hendren, Maximilian Hell, David Grusky, and Raj Chetty published a paper called “The fading American Dream: Trends in absolute income mobility since 1940,” in which the American dream is equated to income mobility. In a similar spirit, the American Enterprise Institute has started an “American Dream Initiative” to look at upward economic mobility. In 2014, Mark Robert Rank, Thomas Hirschl, and Kirk Foster, wrote a book called Chasing the American Dream: Understanding What Shapes Our Fortunes, which they defined as a combination platter of mostly economic outcomes, like economic security for oneself, the idea that one’s children will have more opportunities, and the freedom to pursue one’s passions,

Compare these definitions of the American dream to how Martin Luther King referred to the American Dream in his 1963 “I Have a Dream” speech:

I still have a dream. It is a dream deeply rooted in the American dream. I have a dream that one day this nation will rise up and live out the true meaning of its creed: “We hold these truths to be self-evident, that all men are created equal. I have a dream that one day out in the red hills of Georgia the sons of former slaves and the sons of former slaveowners will be able to sit down together at the table of brotherhood. I have a dream that one day even the state of Mississippi, a state sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice. I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by their character.

Clearly, King’s description of the central message of the “American dream” has a different tone from middle-class economic security, increasing business start-up rates, and intergenerational income mobility.

In my own mind, I tend to label the dream of economic progress within and across generations as the “Horatio Alger myth.” For those unfamiliar with the name, Alger became in the years after his death in 1899 the best-selling American novelist of all time, with between 100 and 500 million copies in print by the end of the 1920s (publishing statistics at this time were not a precise science), although his total has been surpassed over the years by a few others including Danielle Steele and Dr. Suess.

As literature, Horatio Alger stories aren’t much. He turned two basic plots into almost 100 books. His alliterative heroes like Ben Bruce, Ned Newton and Dean Dunham rise from humble beginnings. They are tempted by bad companions, threatened by bullies, and unfairly accused, before winning the attention of a benefactor by saving a drowning child, returning a lost gem, or stopping a runaway horse. The message, pounded home with sledgehammer subtlety, is that through frugality, honesty, abstaining from smoking and drinking, standing up to bullies, and answering the door when fortune knocks, anyone can reach middle-class respectability.

Horatio Alger himself was not a sympathetic character, but his books caught something in the zeitgeist of his time. His books were best-sellers into the 1920s, and one shouldn’t underestimate how they continue to capture a powerful element of popular imagination. Modern-day popular culture still celebrates when a high school graduate, an immigrant, or garage entrepreneur rises to fame and fortune. 

The British scholar Sarah Churchwell has gone looking for the origins of the terminology of the “American Dream.” She writes:

The American dream was rarely, if ever, used to describe the familiar idea of Horatio Alger individual upward social mobility until after the Second World War. Quite the opposite, in fact.  … Although many now assume that the phrase American dream was first used to describe 19th century immigrants’ archetypal dreams of finding a land where the streets were paved with gold, not until 1918 have I found any instance of the “American dream” being used to describe the immigrant experience …

Instead, Churchwell points out that the terminology of the “American dream” was popularized by the Pulitzer prize-winning historian named James Truslow Adams in his 1931 book The Epic of America. Adams acknowledges that economic security is part of the American dream, but insists on a much broader meaning as well–the version of the American dream to which Martin Luther King was referring. Adams wrote:

But there has been also the American dream, that dream of a land in which life should be better and richer and fuller for every man, with opportunity for each according to his ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position. I once had an intelligent young Frenchman as a guest in New York, and after a few days I asked him what struck him most among his new impressions. Without hesitation he replied, “The way that everyone of every sort looks you right in the eye, without a thought if inequality. Some time ago a foreigner who used to do some work for me, and who had picked up a very fair education, occasionally sat and chatted with me in my study after I had finished my work. One day he said that such a relationship was the great difference between America and his homeland. There, he said, “I would do my work and might get a pleasant word, but I could never sit and talk like this. There is a difference there between social grades which cannot be got over. I would not talk to you there as man to man, but as my employer.”

No, the American dream that has lured tens of millions of all nations to our shores in the past century has not been a dream of merely material plenty, though that has doubtless counted heavily. It has been much more than that. It has been a dream of being able to grow to fullest development as man and woman, unhampered by the barriers which had slowly been erected by older civilizations, unrepressed by social orders which had developed for the benefit of classes rather than just for the simple human being of any and every class. And that dream has been realized more fully in actual life here than anywhere else, though very imperfectly even among ourselves.

As Churchwell points out, Adams ends his book by suggesting that the Main Reading Room in the Library of Congress was a useful metaphor for the American Dream. Churchwell writes:

James Truslow Adams ended The Epic of America with what he said was the perfect symbol of the American dream in action. It was not the example of an immigrant who made good, a self-made man who bootstrapped his way from poverty to power, or the iconic house with a white picket fence. For Adams, the American dream was embodied in the Main Reading Room at the Library of Congress.

It was a room that the nation had gifted to itself, so that every American — “old and young, rich and poor, Black and white, the executive and the laborer, the general and the private, the noted scholar and the schoolboy” — could sit together, “reading at their own library provided by their own democracy. It has always seemed to me,” Adams continued,

to be a perfect working out in a concrete example of the American dream — the means provided by the accumulated resources of the people themselves, a public intelligent enough to use them, and men of high distinction, themselves a part of the great democracy, devoting themselves to the good of the whole, uncloistered.

It is an image of peaceful, collective, enlightened self-improvement. That is the American dream, according to the man who bequeathed us the phrase. It is an image that takes for granted the value of education, of shared knowledge and curiosity, of historical inquiry and a commitment to the good of the whole.

Once I have started thinking about the “American dream” in these terms, I find that I am unpleasantly startled when I see the term reduced to a narrowly economic vision.

South Africa’s Economy: 30 Years Since Apartheid

In April 1994, almost 30 years ago, Nelson Mandela was elected as the first black president of South Africa. The hopes at the time went beyond developing a representative political process, and included the idea that policies of inclusive growth would raise the standard of living for whose who had been excluded.

How is that economic promise working out? A research group at Harvard’s Growth Lab spent two years researching the issues, and has now published its discouraging findings in “Growth Through Inclusion in South Africa” (November 15, 2023). The authors are Ricardo Hausmann, Tim O’Brien, Andrés Fortunato, Alexia Lochmann, Kishan Shah, Lucila Venturi, Sheyla Enciso-Valdivia (LSE), Ekaterina Vashkinskaya (LSE), Ketan Ahuja, Bailey Klinger, Federico Sturzenegger, and Marcelo Tokman.

The basic story is that for the first decade or so after 1994, South Africa’s economy performed reasonably well; since then, not so much. This panel shows annual growth rates for South Africa (red line), compared with the rest of sub-Saharan Africa (blue line), and the upper-middle income countries of the world (gray line).

This graph shows South Africa’s real per capita GDP since 1994. You see the pattern of reasonably rapid growth for the first decade, and then no growth since then. (In other words, the growth shown in the figure above has only been keeping pace with population growth since 2004 or so.) The dashed lines on the far right show pre-pandemic and post-pandemic projections.

As the report says:

Income per capita has been falling for over a decade. Unemployment at over 33% is the world’s highest, and youth unemployment exceeds 60%. Poverty has risen to 55.5% based on the national poverty line, yet many more households depend on government transfers to sustain meager livelihoods. Most cities are failing to adequately connect people to productive opportunities and are failing to innovate, grow, and drive inclusion. Rural areas in former homelands, where almost 30% of South Africans live, exhibit dismally low employment rates and remain exceptionally poor.

The report suggest two main categories of economic failure that are plaguing South Africa’s economy:

This report aims to answer why South Africa is failing to grow and failing to move the needle on economic inclusion three decades after the end of apartheid. The evidence points to two causes: collapsing state capacity and the persistence of spatial exclusion.

State capacity has collapsed across many government functions that are essential for a functioning economy. Critical network industries, including electricity, transport infrastructure and services, security, and water and sanitation have experienced major deteriorations over the last 15 years. The economy has been forced to cope with increasing electricity rationing, leading to a declaration of national disaster in February 2023 after more than 15 years of load shedding. Rail and port capacity has declined, generating large losses in exports. The collapse in state capacity to deliver key inputs has, in effect, squandered the country’s comparative advantage in cheap, coal-fired electricity. Urban crime is very high, and theft and sabotage undermine the functioning of many national infrastructure systems. Communities across the country are increasingly vulnerable to all forms of disaster — both natural and manmade — due to weakened public services. National finances are under increasing strain as South Africa relies on fiscal transfers to bail out state-owned enterprises (SOEs) and to redistribute national income to households to alleviate poverty and hardship. Many municipalities now face severe fiscal challenges which undermine already weak public service delivery. South Africa is seeing signs of unsustainability in its repeated credit downgrades and large sovereign risk premia. All the while, as growth slows, exclusionary forces are becoming more entrenched.

Spatial exclusion has been entrenched by well-intentioned policies in urban areas and an absence of effective strategy to include rural former homelands. Under apartheid, townships were intentionally separated from central business districts and economic infrastructure, leading to fragmented and disconnected cities. Apartheid also relied on differential treatment to former homelands vis-à-vis the rest of the country, effectively separating those areas from the industrialized economy. Despite attempts to reverse this exclusion, policies since 1994 have unintentionally perpetuated many aspects of spatial exclusion. We find that urban planning regulations and zoning policies prevent dense, affordable housing in desirable locations and consequently limit both formal and informal employment. We also find strong evidence that formal jobs are limited because long commutes from low-density areas in and around cities make transportation costs and reservation wages high, while low residential densities prevent the development of a thriving informal economy. Meanwhile, rural former homelands continue to be economies separate and distinct from the rest of the country and face extremely low rates of employment. …

It is unfortunately clear that South Africa’s trajectory is not one of growth or inclusion, but rather stagnation and exclusion. South Africa’s economy is stagnating and, in fact, losing capabilities, export diversity, and competitiveness. While the racial composition of wealth at the top has changed, wealth concentration in South Africa has not and remains very high. Moreover, the broader structures of the economy have not allowed for the inclusion of the labor and talents of South Africans — black, white, and otherwise. There appear to be major spatial impediments to labor market inclusion in cities and large spatial patterns of exclusion in former homelands. As the performance of network industries and public capabilities have deteriorated and growth has slowed, exclusion has only worsened. Empowerment of a few has de facto come at the expense of the many.

The report goes into considerable detail on these issues. It also raises the possibility that South Africa could be well-positioned to benefit from a global shift to carbon-free and low-carbon electricity production: as a producer of key minerals needed for batteries and other uses, as a producer of domestic solar and wind power, and as a source of technological expertise in these areas. These shifts could also rebuild what used to be a comparative advantage for South Africa as a place with cheap (albeit coal-generated) electricity.

But overall, South Africa’s economy is on a disheartening path. The issues of improving the functioning of government and addressing the long-standing patterns of spatial exclusion is hard, and in the last couple of decades, South Africa’s government and political system hasn’t been up to the task. A virtue of this report is that it effectively lays out an agenda for what needs changing.