January 15, 2004

The Future of the Economy: The Next Year--and the Next Decade

The Future of the Economy: The Next Year--and the Next Decade

J. Bradford DeLong

What will the future bring for the world economy? What will happen to production in the developing world, and in the rich industrial--no, we dare not call it that anymore: it is post-industrial, for the developing portions of the world have or will rapidly have as great a share of their population working in "industry"--core?

Only fools, it is said, make a forecast in which they give both numbers and dates. So let me wave my hands in the air and talk mostly about things that I am reasonably sure will happen, but have no idea when they will happen.

In the United States the fears of nine months ago that the U.S. economy might (never would) succumb to deflation have been dispelled. What remains is a sense of tremendous waste of opportunity. Since George W. Bush took office, American real GDP has grown at 2.3% per year--a pace of growth that would have been acclaimed as normal and as satisfactory for the American economy back when George W. Bush's father or Ronald Reagan was president. But it is clear that the American economy could have grown much faster: the Bureau of Labor Statistics's household survey reports a drop in the employment/population ratio from 64.4% in 2000 to 62.3% today, the BLS's establishment survey reports a decline in nonfarm payroll employment from 131.8 million in 2000 to 130.2 million today. The story of the U.S. economy since 2000 is one of a remarkably unfavorable business-cycle outcome--a remarkably large shortfall of economic growth relative to potential--indeed.

Underlying the surface ripples of the business cycle, however, is a much stronger tide. The rapid progress of the information-technology revolution is pushing American productivity growth ahead as fast as--or faster than--ever. Had the Federal Reserve been more aggressive in pushing interest rates down over the past several years, or had George W. Bush and the Congress passed tax cuts aimed at boosting short-term demand and employment, then the U.S. economy would have grasped its opportunity to grow at a pace not seen in a generation and a half.

Will the U.S. economy grasp its opportunity to grow rapidly over the next year? Probably. There is a lot of reason to hope that growth in the next year will be faster than the 2.5% averaged so far under the George W. Bush administration. Unless stagnant employment causes a sudden cutback in household consumption spending, tax rebates and low interest rates should push the U.S. economy ahead at a 4% growth rate over the next year. This growth will probably not be fast enough to produce lots of payroll jobs and significantly cut the unemployment rate: hence Democratic presidential candidates will have plenty of traction as long as they focus the press's attention on jobs and wages, and George W. Bush's flacks and spinners will have plenty of traction as long as they focus the press's attention on production and profits.

Nevertheless, it is highly likely that there will be enough growth for the U.S. to continue to be the fastest-growing component of the world economy's post-industrial core. But the post-industrial core's economy as a whole will continue to be like an airplane with only one working engine. Real GDP growth in Japan and western Europe will be unlikely to grow at even half the pace seen in the United States. Germany is in recession, and unlikely to emerge from it. Japan is now one and a half decades into its now-permanent economic crisis.

For developing countries, however, the absence of rapid growth in western Europe and Japan is not a great handicap: those economies were never that open to imports to begin with. Solid demand growth in the United States will provide increased demand for developing-country products--albeit not at the prices that prevailed when the dollar was stronger. More important, the world has little to fear from sudden panic on Wall Street. U.S. domestic interest rates are so low and the fear of a large further decline in the dollar so great that it is nearly impossible to envision a sudden withdrawal of capital from developing countries to the post-industrial core: 2004 is unlikely to see a repeat of Mexico 1995 or East Asia 1997-1998. (If there is great excitement in world capital markets, the excitement is much more likely to come in the form of a sudden withdrawal of capital from the United States--a bursting of a possible bond bubble, with interesting movements in U.S. domestic long-term interest rates and in the value of the dollar.)

But more important than the short-run cycles are the long-run trends. Labor productivity growth in the United States rose from 1.2% per year from the mid-1970s to the mid-1990s to 2.3% per year in the late 1990s to 4.2% per year--so far--in the 2000s. How much of that second jump-up in productivity growth will be sustained? We do not know, but it is safe to bet that some of it will. (Me, I don't believe those numbers: I prefer to look at the income rather than the product side of the National Income and Product Accounts, and say that the three economy-wide productivity numbers are 1.2%, 3.1%, and 3.2% respectively, with the difference between the income and product side blamed on an erratic "statistical discrepancy.") When will the rapid productivity growth that we have seen in the United States and ascribed to information technology spread to the rest of the rich countries? We do not know, but we do know that one of these years it will make itself visible. How long will it take world trade in information-services like form-processing, accounting, and customer service to truly boom as a result of the internet and the fiber-optic cable in the same way that the iron-hulled ocean-going steamship and the submarine telegraph made world trade in staple goods--not just luxuries and preciosities--boom in the late nineteenth century? Once again we do not know, but once again we do know that one of these years it will make itself visible.

It is time for governments, firms, investors, workers, and parents worldwide to begin betting on the long-run trends that have become visible over the past decade. Such bets probably won't pay off in the next year, or two, or three. But they surely will start to pay off sometime in the next ten.

Karl Marx was not wholly wrong when he wrote that the more industrialized country is a mirror in which the rest of the world can see its own future. The mirror that is the United States is showing that the returns from taking advantage of the economic changes made possible by the information technology revolution are very high. The hard question is how.

Posted by DeLong at January 15, 2004 07:18 PM | TrackBack

Comments

Based on Brad's thoughts about long-term growth in the US and the further development of the world trade in information services, it's hard not to bet on India. Drucker agrees in a great interview from Forthune a couple of weeks back.

Posted by: AJ Colyer on January 15, 2004 08:25 PM

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I have just one concern.

Productivity towards *what* exactly? Are we seeing greater productivity that leads to increase secondary and tertiary activities? So long as the current trends of little capital investment and low wage shares, I'm not sure the magic of productivity matters...

Posted by: shah8 on January 15, 2004 08:37 PM

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I'm not sure the magic of productivity matters...

I'm sure the Old Bearded One would say that it's simply speeding up the conveyor belt that transfers wealth from Labour to Capital.

Posted by: Davis X. Machina on January 15, 2004 08:46 PM

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"So long as the current trends of little capital investment and low wage shares, I'm not sure the magic of productivity matters..."

It does and significantly so. It means your economy has evolved to a new structure in which you can increase production while reducing use of labor (low wage shares) and do so with little additional investment. It is a blessing, in fact.

"Structure" is the operative word here. "New structure".

It means time has come to revise policial economy accordingly or else things will develop increasingly more out of balance.

Posted by: bulent on January 15, 2004 08:53 PM

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bulent,
What do you suggest? A better way to employ more people? Bigger transfer payments to those who lose out on the productivity increase? I really do want to know because I wondered this myself.

Posted by: heeter on January 15, 2004 09:31 PM

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what structure are you talking about? It sounds like you *like* the 1870s and 1890s...All I'm saying is that if people aren't allowed to profit from becoming productive, or businesses don't expand production, then it really wouldn't be worth much...just a transfer of wealth, would it not?

Posted by: shah8 on January 15, 2004 09:45 PM

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Heeter:

Productivity increase makes economic, social and political change both possible and inevitable. Ultimately, it is going to have be collective ownership of capital and direct democracy, on top of free market and free enterprise mechanisms. So one needs to chart a course of transition, a series of restructuring. I envisage a key initiative at this time in moving towards 16 year mandatory education, while also heavily investing to improve pre-school and primary-secondary education as well. Such an initative would involve both of what came across your mind : better ways to employ people and bigger transfer payments, in a way. I think simulation studies, economic projections should be undertaken to evaluate and compare scenarios with and without 16 year mandatory education.

Shah8:

I'm not sure about years 1870 or 1890 but I do keep in mind that lots of things changed in US when the economy took towards a new structure in which one percent of population could feed the entire nation. A similar transition is occurring now, due to automation and information technologies, in manuf and service sectors. As shrinking and virtual dissappearence of employment in agriculture was permanent, the same is happening now in manuf and service sectors. That means a new structural change is due, economically, socially, and politically.

Posted by: bulent on January 15, 2004 09:55 PM

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“Ultimately, it is going to have be collective ownership of capital and direct democracy, on top of free market and free enterprise mechanisms.”

I’m not sure what “collective ownership of capital” means, but we already have widespread ownership. People own stock both directly and through their pension funds, and investment in mutual funds. How would people come to own more capital? Would they buy it? If so, how? Even with widespread ownership of capital we would still have the principal agent problem. What do we do about that? Do bonds count as capital? Are you advocating massive default on on private and government bonds, and distributing that capital to the masses? Translating slogans into reality can be quite difficult.

Posted by: A. Zarkov on January 15, 2004 10:28 PM

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So if there is no shocks the current trend continues with some possibility for further drop in the value of the dollar and higher interest rates. Yawn.

Posted by: Leopold on January 15, 2004 10:44 PM

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"Translating slogans into reality can be quite difficult."

Very true. In this case, it is indeed difficult, but not impossible, in fact, ultimately inevitable.

"Are you advocating massive default on on private and government bonds, and distributing that capital to the masses?"

Not unless chaos breaks out first followed by order restored -- and I'm not saying that as a sufficient condition. I advocate that debts be paid at all times.

"...but we already have widespread ownership..."

Yes. That's why I think transition to collective ownership of capital would develop in US. Essentially, I mean more and more of what you have in US. Ultimately, it will be "to each as he needs and from each as he can produce". Yes, communism. But not state capitalism or any kind of dictatorship. On the contrary, more and more democracy.

In the version of communism I envision, which I sometimes call "democratic communism", the principle "from each as he can produce" would include the travaille of the entrepreneur as well, as "to each as he needs" would include capital for the entrepreneur.

The entrepreneur, of course, would not expect to get "rich" -- in fact he would neither need or want to. A successful entrepreneur, however, would accumulate a lot of social, political, and emotional capital.

Once again, it won't be easy. Moral values would need to change, to the extent of re-inventing the science of economics. But all that is also inevitable. The trick is to channel the change to something pleasant and sustainable for all.

And I feel step number one would be to institute 16 year mandatory education.

Also let us not forget that Europe has a lot of potential for developing in those directions as well.

Posted by: Bulent Sayin on January 16, 2004 12:11 AM

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Bulent: In the version of communism I envision, which I sometimes call "democratic communism", the principle "from each as he can produce" would include the travaille of the entrepreneur as well, as "to each as he needs" would include capital for the entrepreneur.

You just cannot be serious. Since the property-owning classes will not surrender the property without struggle no communist change is possible without the dictatorship of the proletariat - and we all know where _that_ leads. Your 16-years mandatory education may turn out to be _very_ mandatory indeed - and an education only in a brodaest sense of the word.

Posted by: Leopold on January 16, 2004 12:34 AM

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"to each as he needs and from each as he can produce"

But who determines what a person “needs” and who determines what he can “produce?” These are vague concepts in any case.

“The entrepreneur, of course, would not expect to get "rich" -- in fact he would neither need or want to.”

Herein lies the fundamental problem. What if the entrepreneur wants to be rich, otherwise he would just as soon skip the hard work. You are assuming something about human nature that is not likely true. This is why these kinds of ideas lead to dictatorships or at least very coercive governments. We’ve done the experiment and it has failed. There is also the fallacy of comparing a real country like the US with all its problems to some ideal, which does not exist, has never existed and most likely will never exist. In reality the entrepreneur can get branded a Kulak and liquidated. The following illustrates what happens when someone grabs the power to implement the utopia of equality. In 1917 a Bolshevik named Rakhya told the world famous bass player Chaliapin that the new Communist government in Russia would “cut off” talented people—intellectuals and artists. It was explained to him that talent destroys equality. Chaliapin got the point and fled to France. There is the problem of the 80/20 rule, which states that 20% of the people produce 80%. This empirical rule seems to apply in many diverse areas. For example 20% of college professors write about 80 of the journal articles. Often that 20% wants the 80% they produce and get conflict.

It’s really the principal agent problem we need to deal with. The owners of capital don’t make the decisions and their agent abuses his position. Some feel some kind of “market socialism” would cure this. But under market socialism you would still have inequality and concentrations of wealth.

Posted by: A. Zarkov on January 16, 2004 12:52 AM

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"But who determines what a person “needs” and who determines what he can “produce?” These are vague concepts in any case."

No, no, not vague at all. As it concerns needs, there is already social safety net and the experience thereof. And there are also venture capital mechanisms and public offerings etc., all on basis of project appraisal, all of which are well developed and can be improved even further.

As it concerns what one can produce, the assumption is that one would produce all he can any way. This assumption would become valid for more and more people as automation and other technology elimate chores. Of course, considerable education and evolution of moral values would also be needed.

"Herein lies the fundamental problem. What if the entrepreneur wants to be rich, otherwise he would just as soon skip the hard work."

Entrepreneurs are motivated by all kinds of reasons, getting rich is only one of them, and not all entrepreneurs are really motivated by prospects of getting rich in financial terms. The society gets the kind of entrepreneurs it pays premiums to. If the society provides financial incentives, you get people who want those incentives. If the society offers security and intangible incentives, you get entrepreneurs motivated by that.

The key question is, which social system builds a more competitive economy. The American system based on financial incentives proved more competitive so far. But I think it will change and societies that are able to operate more with collective ownership and direct democracy will prove to be more competitive, and that will of course have to include defense sector capabilities.

"For example 20% of college professors write about 80 of the journal articles. Often that 20% wants the 80% they produce..."

Professors write not just for financial incentives and they are perfectly aware that their existence is a happier one thanks to the remaining 80 percent.

"It’s really the principal agent problem we need to deal with. The owners of capital don’t make the decisions and their agent abuses his position. Some feel some kind of “market socialism” would cure this. But under market socialism you would still have inequality and concentrations of wealth."

I don't know what "market socialism" is, I will look it up. At any rate, I don't hope for a perfect-for-all-times system. All I hope is one that is more productive, competitive, sustainable, stable, equitable, and pleasant as well, than the one we have now. And I think we'll get there.


I am not responding to Rakhya anectode because it is simply not relevant to what I have in mind; and besides Rakhya obviously confused Russia with Mao's China and I understand America has its own anti-communist Rahkya's even today.

Posted by: Bulent Sayin on January 16, 2004 02:00 AM

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By the way, new communicaiton technologies are making it much easier for people who engage in a process called "shareholder activism".

So, you just don't run out of solutions in democracy.

:)

Posted by: bulent on January 16, 2004 02:09 AM

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Finally, for today, consider OSS, whereby people are motivated by many factors beyond financial incentives -- and I imagine those people would not give a hoot to financial incentives at all if they were assured of a generous social safety net. They would then think nothing but produce, produce, produce...

Posted by: bulent on January 16, 2004 02:12 AM

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bulent: I believe that Leon Walras proved about a century and a quarter ago that a socialist government could be just as efficient as a capitalist one but that would only work if the government set prices to be the same as they are under capitalist market pricing anyway, which means that the basic inequalities of capitalism would be retained under this particular form of socialism.

Posted by: Julian Elson on January 16, 2004 02:29 AM

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> In the version of communism I envision,
> which I sometimes call "democratic communism"

I'm not an expert, but this sounds similar to the old "Social Credit" theories....

Posted by: Mark on January 16, 2004 03:51 AM

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Chaliapin was a basso, not a bass player. Lovely rich voice I had a record of him at one time.

Posted by: big al on January 16, 2004 04:02 AM

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Free trade and the principle of specialisation indicate that each nation will do what it does best, or at least most cheaply.

Since accumulated debt prevents a sharp downward trend in wages, we are seeing jobs outsourced in increasing numbers. Whether this is but a fad that will be reversed or whether this is a permanent trend remains to be seen.

But what does the US do the best? Where does the US win out in competitive advantage, and win in a manner that will provide work for people?

Posted by: Shawn Pickrell on January 16, 2004 04:27 AM

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Leopold, I don't know why but I didn't see your post until a few minutes ago. You say:"Since the property-owning classes will not surrender the property without struggle no communist change is possible without the dictatorship of the proletariat ..."

Hufs! Gimme a break! There is a very much communist tax law right there in US-- the estate tax.

Of course, under "democratic communism", once there is a generous social safety net with a hundred percent coverage of population, estate tax will become about a hundred percent too.

In fact, I hear at least one American capitalist plans to implement that "democratic communist" kind of 100 percent estate tax voluntarily. His name is Bill Gates.

We'll get there. We will evolve there!

:)

Mark:"I'm not an expert, .."" Neither am I, and I don't even know about "social credit" theories..

Julian Elson:"...that a socialist government could be just as efficient as a capitalist one but that would only work if the government set prices to be the same as they are under capitalist market pricing anyway,..."

No, no, no, I am not dreaming of doing away with the market economy. Rather, dreaming of building on top of market economy...

Posted by: bulent on January 16, 2004 05:18 AM

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Shawn Pickrell:

"Since accumulated debt prevents a sharp downward trend in wages, we are seeing jobs outsourced in increasing numbers. Whether this is but a fad that will be reversed or whether this is a permanent trend remains to be seen."

How does accumulated debt prevent a sharp downward trend in wages?

Posted by: Barry on January 16, 2004 05:46 AM

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Much of this discussion on various other econ systems would be clearer if it incorporated some discussion of how you get around the key role of profits in a few market system as the steering wheel for the economy. You talk about pricing, but the real issue is profits. In a mkt econ investment flows to the area with the highest returns, either because that area is growing faster -- a new technology -- or because the area has been neglected for some period and
under investment means it has inadequate capacity.

Pricing is just part of the mechanism for profits
to be higher in areas needing more capacity or investment but the really critical issue is investment returns, not pricing. You can have some sort of social ownership of capital, but it still need a mkt mechanism to determine where the capital should be invested.


Posted by: spencer on January 16, 2004 06:20 AM

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--------quote-----------
In the version of communism I envision, which I sometimes call "democratic communism", the principle "from each as he can produce" would include the travaille of the entrepreneur as well, as "to each as he needs" would include capital for the entrepreneur.

The entrepreneur, of course, would not expect to get "rich" -- in fact he would neither need or want to. A successful entrepreneur, however, would accumulate a lot of social, political, and emotional capital.
-----------endquote-------------

Marx was right! Communism was first a tragedy, and bulent is repeating it as farce.

Posted by: Patrick R. Sullivan on January 16, 2004 07:45 AM

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All this talk about communism is fascinating, but let's get back to the real issue - Is all that productivity growth actually contributing to the economy at large or just the very few?

It is all very fine that corporate profits are growing because corporations have managed to limit the cost doing business through lower taxes, less regulation and lower cost of labor (the latter two go hand in hand) - but this does not benefit the public at large or the economy in the long term.

In the old economy, because the labor market was a lot less fluid, higher economic growth would eventually translate into more employment which would sustain growth.

What I see happening is the same thing that is happening to our inner cities - Pittsburgh and Baltimore come to mind off hand - where the actual tax base has left the city bounderies but still take full advantage of that city's resources. Over the long term the same thing could happen to the West; where corporations take advantage of a country's resources while eliminating the tax base within it.

As long as corporations have little to no incentive to hire a local workforce they will not do so. Incentives would include, for example, not allowing corporations that are based in Bermuda, etc. to bid on any government contracts, albeit federal, state or local. There are certainly other ways in order for corporations to pay their due for using local resources.

I therefore wholeheartedly agree with this: "It is time for governments, firms, investors, workers, and parents worldwide to begin betting on the long-run trends that have become visible over the past decade. Such bets probably won't pay off in the next year, or two, or three. But they surely will start to pay off sometime in the next ten." Unfortunately, politicians are notoriously shortsighted and I don't know who the foregoing will become a reality

Posted by: DBaker on January 16, 2004 08:16 AM

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"For developing countries, however, the absence of rapid growth in western Europe and Japan is not a great handicap: those economies were never that open to imports to begin with."

There are quite a few developing countries in Central and Eastern Europe who would say different.

And even leaving the CEECs aside, what is the data (even better, literature) arguing that EU is less open to imports than the US? And are we talking mainly or solely agriculture?

Posted by: Will on January 16, 2004 08:37 AM

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DBaker--Thanks for the clear crap-free post. One look at the changes in compensation levels of CEOs over the past decade underlines exactly what you point out: "... productivity growth actually contributing to the economy at large or just the very few?"
The cities you mention pale in comparison to some States you don't. And issuing more debt to solve California's problems is like kicking your children ( and maybe your grandchildren) in the teeth.
Getting the panoramic view is good but let's make sure we don't trip over the mess at our feet.

Posted by: calmo on January 16, 2004 08:39 AM

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Prof Delong,
You are sometimes a bit kryptic.
As a parent, a worker and an investor, I would like to know in more details what you mean by:

"It is time for governments, firms, investors, workers, and parents worldwide to begin betting on the long-run trends that have become visible over the past decade."

Posted by: amusedfrog on January 16, 2004 08:45 AM

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Bulent: You still did not tell us who makes the decisions about who needs what and who produces what. In the US, individuals make some of these decisions, and governments and corporations others. For example, the federal government tells me we (collectively) “need” Hoover Dam to produce electricity and put people to work building it. I determine what I personally need and communicate my desires by what I am willing to pay for something. The problem we have is that a self-appointed elite does not like individuals deciding what they need because they will choose the wrong things. Cosmetics over a moon base say. So the elite wants to transfer power to another agent who will make consumption and investment decisions more in line with the elite’s concept of what is needed.

Stiglitz discusses Market Socialism in his book “Whither Socialism” which is an expansion of his Wicksell Lectures given at the Stockholm School of Economics in 1990. He is critical of the Walrasian model used by market socialists because it does not incorporate the costs of getting information. It’s a little like Maxwell’s demon in thermodynamics. The demon closes a door (separating two rooms) whenever a fast moving molecules approaches it. After a while you get slow molecules in one room and fast in the other. So one room gets hot with respect to the other, and you have a heat engine apparently for free. But you don’t. As the physicist Brillouin showed in 1956, the demon must expend energy to make the decisions on the speed of molecules, exactly the amount of energy you would get from the heat engine. No free lunch again. Stiglitz offers his theory as to why Market Socialism failed and guidance for countries trying to make the transition to a market economy.

Thanks for the correction Big Al. You are absolutely correct, Chaliapin was indeed a basso.

Posted by: A. Zarkov on January 16, 2004 09:03 AM

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Just to clarify my earlier post - by West, I mean the established Western "rich" (it's all relative of course) countries. I certainly do not advocate more debt, just finding a way for everyone to pay their way, especially (large) corporations.

My example of the cities is just only that, an example, of which I have first hand knowledge. I have read stories about states such as Mississippi and Oklahoma where the same is true; I just have never been to those places so I have no reference point.

In order to frame this properly, a lot of Americans still believe the old "what's good for General Motors is good for America matra". This is no longer the case. It should be what is good for the small entrepreneur is good for America - there is a distinct difference between the needs and goals of large (multi-national) corporations and smaller ones. Unfortunately, those corporations are the ones that fund our politicians and powerbrokers. I don't see this cycle ever being broken.

Posted by: DBaker on January 16, 2004 09:20 AM

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Bulent: There is a very much communist tax law right there in US-- the estate tax.

I rest my case.

Posted by: Leopold on January 16, 2004 09:35 AM

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Barry: >

My bad. Accumulated debt makes downward adjustments in wages that might be necessary for the US to remain competitive in a global economy very difficult, politically, socially.

The market forces will likely still work but the accumulated debt makes it a lot painful. Or, it's like 1890 all over again.

Posted by: Shawn Pickrell on January 16, 2004 09:54 AM

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“It is time for governments, firms, investors, workers, and parents worldwide to begin betting on the long-run trends that have become visible over the past decade.”

As a worker and a parent what do I bet on, and where is the casino? If Brad means bet on information technology, then is he telling me to buy tech stocks? As a parent is he telling me to encourage my children to become computer science majors in college? Or is he saying to invest in “emerging market” (I hate that term) economies because they will copy US methods of increasing productivity and reap tremendous rewards after about ten years?

Posted by: A. Zarkov on January 16, 2004 10:07 AM

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Hoy! I checked the dictionary for the word "farce" that Patrick used, just to be sure, and the meaning listed number one was more or less what I thought it was. But there was also a meaning number three, which gave me the laughs:

"A seasoned stuffing, as for roasted turkey."

For the curious soul, the link:

http://dictionary.reference.com/search?q=farce

As to communism, Patrick: It never existed on earth and it won't come to exist until we achieve super duper productivity like about one percent of the population being enough to produce /manufacture all food, shelter and basic social and infrastructure services for the entire nation. Soviet Union at one point claimed to have completed the stage of "workers' dictatorship" and having achieved "communism", but it was a big lie, of course. In fact, both were lies. I mean it was never "workers' dictatorship" either.

A Zarkov: I'll give two short answers now and try to elaborate later.

1- Markets remain, so does bureaucracy,"bureaucracy" meaning a process for placement of public funds in accordance with the law, the budget act, in particular, obviously.

2- Bureaucracy, however, would become one without the bureaucrats, who would be replaced by (a) computers, for routine decision making and (b) elected councils / stakeholder committees, where human judgment is needed. In other words, more and more there would be a shift from representative democracy to direct democracy (corporate governance is perhaps the best place to start transition towards direct democracy).

3- Basically, perhaps I can describe all of what I have in mind in short statement in the following manner: Take market economy and free enterprise, add on top of it (a) transition to direct democracy, (b) 100 percent higher education coverage, (c) 100 percent coverage under a generous social safety net and (d) gradual and further democratization of capital ownership (collective ownership of capital, pension funds etc) and investment decisions (shareholder activism, for example).

4- Perhaps I am envisioning an evolutionary process starting with the existing system and gradually expanding equal rights for all while reducing privileges for the few.

Well it looks like I had four short answers at this time.

:)

Posted by: Bulent Sayin on January 16, 2004 10:42 AM

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In the United States the fears of nine months ago that the U.S. economy might (never would) succumb to deflation have been dispelled.

Dispelled? As in "to drive away by scattering, or to cause to vanish"? I'll find that easier to believe when:

a.) The Fed has dared to raise the funds rate at least once,

b.) The dollar has stabilized,

c.) the structural federal budget deficit is shrinking,

d.) the economy is creating enough jobs to pull the real -- as opposed to the official -- unemployment rate down towards the NAIRU,

e.) The annual rate of change in the core CPI is no longer falling.

Until then, I'll continue to have my doubts.

Posted by: billmon on January 16, 2004 11:48 AM

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Interesting artice on Flight of the creative class -

http://www.washingtonmonthly.com/features/2004/0401.florida.html

"the bigger problem isn't that Americans are going elsewhere [although many are]. It's that for the first time in modern memory, top scientists and intellectuals from elsewhere are choosing not to come here.
...
...disastrous economic consequences of [current U.S. govt's] Know-Nothing views. In the post-1990s global economy, America must aggressively compete with other developed countries for the international talent that can spur new industries and new jobs. By thumbing our nose at the world and dismissing the consensus views of the scientific community, we are scaring off that talent and sending it to our competitors. "

Posted by: Anna on January 16, 2004 12:30 PM

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o for the good old days - I'm already starting to miss those double posts.

Posted by: Anna on January 16, 2004 12:31 PM

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"Karl Marx was not wholly wrong when he wrote that the more industrialized country is a mirror in which the rest of the world can see its own future."

This is exactly why as a European (chocolate makers, will all die in a heat wave etc, I know) I care so much about what is going on in this country, good and bad. Realistic Europeans know that this is pretty much where we're headed, up to some cultural idiosyncratic differences. So, I guess when I participate, however humbly, in the American economic and political debate, it's a bit like taking a Time Machine and trying to influence Europe's future before it gets there, without the risk of temporal inconsistencies, that is :-)

The only thing that surprised me in this otherwise impressive economic roadmap for the world economy, is to read statements that seem to assume that technological progress is entirely exogenously determined. Whereas, I believe it's no chance that the true spread of IT technology really began during the glorious late 90s and its budget surpluses. Surely, the US is still reaping some hefty productivity increases from that, but for how long? How many years of budget deficits will it take for technological progress to slow down. That is my question.

Posted by: Jean-Philippe Stijns on January 16, 2004 02:36 PM

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Spencer -- vital remarks, indeed. Yes, market economy does depend on profits and I am counting on it as assurance that productivity will always keep increasing, eventally bringing about my "democratic communism".

But what is profit? At the root of it, it is value added.

So market economy depends on creation of value added, not necessarily profit.

Indeed productivity is defined in terms of value added.

At this time, economic systems that can do full throtle with profit maximization (which country was that again that was good at it?) also happen to achieve highest productivity growth rates, at least relative to their current level of development. But that is not any rule of God. It just happens to be that way at this time. It can change. I think it will change when levels of productivity and education become high enough.

A time will come, it seems to me, that wage and profit parts of value added would just seamlessly blend. In fact, I expect wage employment to just dissappear. Wage employment is really an invention of the industrial society. As industrial society fades away, so may wage employment, and I think it will.

Wait a minute! What I'm really advocating here is ultimate profit maximization: Zero wages!

:)

Posted by: Bulent Sayin on January 16, 2004 02:53 PM

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LIBERTE, EGALITE,FRATERNITE ne viennent pas sans PRODUCTIVITE!

:)

Posted by: Bulent Sayin on January 16, 2004 07:29 PM

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Other thoughts about the future:

Automation complete, all chores transferred to machines/robots. Population hundred percent college grads, every body gets good arts and science at an age they can better appreciate and digest it, and every body likes opera!! There is a lot of interesting work to do for humans. But you don't HAVE to work, thanks to generous and comprehensive social safety system, to enjoy any "unmerited blessings" like wife, kiddos, Monty, Gudinov, or a cupotea par ci par la. Then you do work only if it is interesting to you or you hope to engage in luxury consumption or maybe you want fame or maybe you want a bit of each, but NOT to just to survive. As such, all work place environment is extremely cvilized -- no patronizing. Then:

You just go take a job that is to content of your heart, knowing that value added will be distributed through a transparent process defined and executed via direct democracy. Since every body is well educated and blessed with high moral values, you are assured of fairness. And it is a competitive market out there. So you do your best to maximize value added of the enterprise you are joining and your share in that value added.


Posted by: Bulent Sayin on January 16, 2004 09:00 PM

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"Had the Federal Reserve been more aggressive in pushing interest rates down over the past several years,"

To where? They're at historic lows. In addition, the DJIA is back at stratospheric heights. All the loose monetary policy is possibly already inciting another market bubble. In addition, the Fed has had to fear a 'liquidity trap' effect like Japan where they hit rock bottom on interest rates and they still can't get traction.

While I've disagreed with Greenspan several times, it's pretty clear that he's been trying to walk a middle-road this time.

" or had George W. Bush and the Congress passed tax cuts aimed at boosting short-term demand and employment, then the U.S. economy would have grasped its opportunity to grow at a pace not seen in a generation and a half."

This is a sounder critique. However, the problem is primarily a political one. As long as most people don't grasp the unfairness of the distributions, politicians and idealogues will always be able to obscure the truth with plausible-sounding but completely erroneous accusations. In some of the cultures of ancient Persia, lying publicly was considered a capital offence. The older I get, the more attractive such a law appeals to me.

Posted by: Oldman on January 16, 2004 09:32 PM

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Dear Bulent Saying,

You remind of a different poster called Dave Thomson, except that he used the same argument for opposite ends. He claimed that it didn't matter how unfair income distribution was, as long as the 'mininum social/economic good' was always improving. If beggars live in palaces, who cares if rich men own moons?

Wouldn't work, because of human nature both at the top end or the bottom end. Humans get complacent and greedy if they don't have to work for what they get - and rich men can always think of ways to use their wealth to unfairly extend it. Humans also won't work hard without the hope of reward, so without opportunity to better themselves they get lazy and do nothing.

Your idea wouldn't work either. Yes, yes there are some simple tribal societies that share everything and have simple communistic ideals. The problem is that the reason why we know about them is that they remained unchanged for thousands and thousands of years. Complete group consensus and complete equality is a recipe for stagnation, paralysis, and stasis. If you allow voting, then it becomes tyranny of the majority. Some bastard always wants to vote themselves an advantage over another. This is human nature. Your society wouldn't stay equal for long. The key concept here is that equality can never be politically enforced, while structural inequality can never go politically unaddressed. If you got that, maybe you'd get how to make a government that would work.

Posted by: Oldman on January 16, 2004 09:41 PM

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Dear Bulent,

There are old sci-fi stories (and some newer knock-offs) that ask the question of what will humans do with their time if all manual labor is made obsolete? This is a question of extreme economic modernization.

There is an answer. Imagine a people wholly composed of designers, engineers, composers, gourmet chefs, authors, scientists, project managers, artists, professional athletes, and performers. It would be a utopia beyond what we could imagine.

However that's not what is happening. Right now, the modern economy is running into a wall. Productivity continues to increase due to changes, but the state of mind of people and the systems of educating them have stayed static. Indeed, it may be regressing because the new jobs that take the place of the old may be lower pay, benefit, status, and creativity.

Without even approaching ideal phase transition points, the political legitimacy of free trade, globalization, etc. may be undermined by bloody minded politics, poor education systems, resource shortages, environment consequences, and a lack of vision in economic modernization. Things aren't going to get better from here on out, without them getting a while lot worse first.

Posted by: Oldman on January 16, 2004 09:48 PM

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sci-fi novel, Down And Out In The Magic Kingdom, depicts a near-future utopia that's seen "the death of scarcity" (and "the death of death"),
nanotechnology takes care of everyone's basic needs, eliminating material scarcity.
As a result, the population doesn't have any need for money. Instead, what they aspire to is "Whuffie", which serves some of the functions of currency, but is much closer to such concepts as "the approval of your peers" or "respect".
The theory goes thus: if you write a symphony or contribute to society, people give you Whuffie. Your personal Whuffie rating is constantly updated online so everyone can view it. The more you have, the higher the esteem in which you're held. It is like the way Google ranks web pages according to how many people link to them: the more people who like your page (or symphony), the higher you get rated. Or, if you've contributed a lot of unpaid programming to an open source project such as Linux, then appreciative users will buy you drinks wherever you go.
The higher your Whuffie, the more people will listen to you. Plus, it helps allocate access to the scarce resources
"sympathy Whuffie", implying you can be respected for your needs as well as abilities, along with "left-handed Whuffie", the esteem of people who have different belief systems, which opens up a range of Whuffie-conversion rate possibilities.
Early on, one of the characters argues that Whuffie captures "the true essence of money [...] if you were broke but respected, you wouldn't starve".
http://www.guardian.co.uk/online/story/0,3605,889293,00.html

Posted by: JohnSmith on January 16, 2004 11:16 PM

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I used to teach. Then I got bored and quit -- in 1987. Last summer I went back to that university and had some contact with some people in there. Now that John Smith tells us about Whuffies, I now notice that my old colleagues, some of them my old students, had all become Whuffie-gulping you know whats. (It may be that I too was a Whuffie-gulpin you know what and I didn't know it while I was it. But, very possibly not. One of the colleagues did tell me that things have changed and that every body now was trying to increase his or her own sphere of influence. And, I recall reading some place that it was a similar situation at CERN, I think the term used was "cut-throat competition"! I wonder what kind of atmosphere they have at NIH, NASA, Planck Institute...)

Short of it, I didn't like it in there. Poor pay was the principal reason why I had gotten bored in 1987 but last summer I just didn't like it in there.

I should be careful about what I wish for this world.

And perhaps I should give some thought to how higher education is organized. Way back in days when I was thinking about it a bit, I recall thinking that universities were organized after a fashion of the Catholic church and that perhaps some things had to change.


Oldman: Productivity and competitiveness, and military strength that goes with it, will determine the kind of organization the human society will have in the future. This is one rule that won't change, I guess. And I think it will always be more equal rights for all and less privileges for the few (even though perhaps new privileges for the "new" few), as productivity keeps increasing. History, I think, verifies that assertion. What if productivity increase stops? Only a catastrophy can cause it to stop and then we're all back to the stone age and start all over again. Productivity just stopping to increase is about as likely as a cruising aircraft "stalling suddenly".

Posted by: Bulent Sayin on January 17, 2004 01:14 AM

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Something about returns to higher education -- I had posted it before in a thread where it was less relevant:

"A percentage point increase in the supply of college graduates raises high school drop-outs' wages by 1.9%, high school graduates' wages by 1.6%, and college graduates wages by 0.4%. The effect is larger for less educated groups, as predicted by a conventional demand and supply model. But even for college graduates, an increase in the supply of college graduates increases wages, as predicted by a model that includes conventional demand and supply factors as well as spillovers."


Source:Enrico Moretti, NBER Working Paper No. w9108 Issued in August 2002

Link to Abstract:

http://papers.nber.org/papers/w9108

Posted by: bulent on January 17, 2004 01:50 AM

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"By empowering consumers, the Committee believes, America's higher education system will be more accountable to the students it exists to serve."

Which Committee is that?

http://edworkforce.house.gov/issues/108th/education/highereducation/collegecostcentral.htm

Posted by: bulent on January 17, 2004 04:38 AM

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Here is the link to an OECD page at the lower side of which se trouve a table showing percent of age groups 45-54 and 25-34 who have completed 4 year higher education programs in G-7 countries:

http://nces.ed.gov/surveys/international/IntlIndicators/index.asp?SectionNumber=3&IndicatorNumber=42

Range is 9 percent (Italy) to 29 percent (US). But something funny is going on in US and Germany:

In all other countries, percentage for the younger group is larger than that for the older group. In US and Germany, percent of college graduates in 45-54 age group is larger than 25-34 age group, even though the difference is only one percent for each country: US moved from 29 back to 28 percent; Germany moved from 15 to 14 percent.

Three countries made big jumps in increasing coverage of higher education for younger generations: France moved from 10 percent for age group 45-54 to 15 percent for age group 25-34; Canada moved from 19 to 23 percent; and Japan made the biggest jump, moving from 15 to 24 percent.

Italy stuck with 9 percent; UK slightly increased from 15 to 17 percent.


Posted by: Bulent Sayin on January 17, 2004 06:25 AM

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Shawn Pickrell:

"Barry: >

My bad. Accumulated debt makes downward adjustments in wages that might be necessary for the US to remain competitive in a global economy very difficult, politically, socially.

The market forces will likely still work but the accumulated debt makes it a lot painful. Or, it's like 1890 all over again."

I see what you mean. For households, debt is at high rates; increasing interest rates will make it hurt more. However, for most people, salaries and other compensation are more likely to decrease than increase.

I agree, and am not hopeful.
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Posted by: Barry on January 17, 2004 07:25 AM

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You do not mention the potential adverse effects of the large and growing current-account and US-budget deficits. By not mentioning them you seem to imply that these deficits do not matter. Is this interpretation correct? If so, can you post another note explaining why?

Posted by: Raul Martinez on January 17, 2004 01:01 PM

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"When will the rapid productivity growth that we have seen in the United States and ascribed to information technology spread to the rest of the rich countries?"
When they start doctoring the numbers like the U.S. does. Some time ago, the "Economist" ran an article that featured a comparison of productivity data between Europe/Japan and the U.S. obtained by employing the same price distortion techniques as are evident in official U.S. statistics. I may even have read it on this website.
Most of this forecast seems to be linearly extrapolated. Japan remains mired in a "now-permanent" crisis, but doesn´t have to fear that its bond bubble might be bursting, whereas the U.S. needs to be concerned in that respect? Why?

Posted by: Joerg Wenck on January 18, 2004 10:48 PM

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The small rise in UK numbers of graduates aged 25-34 compared with age 45-54 may have a cause in the rise of "distance learning", in the UK evidenced by the Open University, which has given a number of people in my age range a chance to get a degree later in life. I'm 58, and when I got my first degree only about 8% of people my age went to university. But afterwards, a large number of people with, as an example, teaching certificates that were not degree level (though they would be easily degree-level these days), took Open University degrees.
So if 17% have degrees by the time they're 35, there may be more by the time they're 54.

Posted by: dave heasman on January 19, 2004 09:20 AM

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