US Economy Contracts in the First Quarter

The initial release of the GDP figures earlier already showed growth close to zero. The revision has lowered even that unexpectedly negative news. The economy actually shrank last quarter.

The figures show that a good chunk of the decline was due to declines in inventory accumulation. This has lead some (here, for examples) to predict that the economy will correct in the second quarter and we will see growth above-trend growth in the coming quarter. I do not buy it. Consumer confidence and personal finance indicators are declining as well; why should firms accelerate inventory accumulation when demand is lacklustre at best? On top of that, the world economy is looking rickety, with political crises in Ukraine, Thailand, and Turkey plus a number of Eurozone countries still looking at recessions

I would even say there is some probability of the economy going into recession, but I definitely do not see growth getting much above the anemic rates that have become the new normal in recent years, and I anticipate it will be low even by those standards.

April 17th Links

Al-Jazeera America Article on the Gap Between Executive Pay and Worker Earnings

Paciffic Standard on the Counter-Cyclical Nature of Country Music

New York Times on Rising Rent In the United States

Megan McArdle on the Detroit Pension Deal

Sociological Images on American Working Hours

"     On average, U.S. workers with jobs put in more hours per year  than workers in most OECD countries. In 2012, only Greece, Hungary, Israel, Korea, and Turkey recorded a longer work year per employed person.

       A long work year is nothing to celebrate. The following chart, from the same Economist article, shows there is a strong negative correlation between yearly hours worked and hourly productivity. "

 Full article here

When you factor in the opportunity costs of time spent working, such as forgone unpaid work and social capital accumulation, the picture is probably even worse.

Al-Jazeera Article on Renewable Energy Investment

The results of the report should give governments the confidence to embark on plans to cut emissions by investing in renewables before the 2015 climate change conference in Paris, Steiner said...
 
The renewable market and cost reductions are out-pacing the impacts from reduced investments and government support, Nathanael Greene, director of the National Resource Defense Council's renewables program, told Al Jazeera. 


So from the sounds of it, renewable electricity generation may finally be becoming competitive with fossil fuels. It would be all well and good to see a big push of public sector support for renewable right now, which is what the National Resource Defense Council seems to be pushing for. What would be just as good though is if renewables are able to maintain their expansion without such an outpouring of public money. Aside from the fact that that would save tax payers money and be easier to manage politically, it would set renewable energy capacity on a stronger  base independant from the ephemeral support of strained government budgets. It seems like this is where the technology is taking it anyway, but if renewables are proving themselves able to grow even as public support withers, might that be the trajectory we want to maintain?

Emergent Economics on "Poverty Porn"

Full post here

"Ogling the dispossessed misrepresents poverty, says Emily. Poverty isn’t just an individual experience that can be reduced to an image — it’s rooted in social and economic conditions. Poverty porn makes it seem like you can sort out deprivation with handouts when it’s really part of a complex set of circumstances including the behaviour of rich-world consumers and producers. Charity isn’t enough; a change to the system which creates poverty is essential."

 To its credit, the post later acknowledges that 'poverty porn' is often effective at raising money for efforts to ameliorate poverty. It is fair enough for someone to question whether or not the money raised is worth the resulting misconceptions. I think what is important, is to explore other ways of fundraising that do a better job representing the people the money is meant to help. Maybe such methods are too unprofitable, and so the misconceptions are just something we have to tolerate, but I have not really seen much experimentation with anything besides 'poverty porn', so how can we know.

Interfluidity on the Consequences of Inequality for Incentives and My Thoughts

We should expect the prevalence of rent capture (or worse) as a source of economic profit to increase with technological progress. Why? Because, absent chicanery, technology increases the ease of production and the efficiency of distribution. As Schumpeter pointed out, the source of profit in real-life capitalism is the fact that monopoly power is ubiquitous because of natural barriers to competition. The corner store has a monopoly on the convenience of its neighbors, and so can capture some of the surplus that might otherwise be bid away to customers by competitors. On-demand delivery drones would eliminate that monopoly. Yet the corner store industry might lobby to prevent residential rooftop deliveries, in which case it is no longer exploiting a natural inefficiency but capturing a rent. In business school, students are taught that a successful business has a “moat” that makes it difficult for competitors to bid away ones margins. Technological progress renders moats that derive from nature harder to come by. Instead, successful businesses — and successful people (since under capitalism, a human is just a small business) — must rely increasingly on moats that result from social and political arrangements...

“Inequality” — high dispersion of outcome — creates a strong incentives to be on the side of winners. There are some circumstances where being on the side of winners means making an outsize contribution to economic production. There are other circumstances where winning means aligning oneself with coalitions capable of winning legal and political contests that may be orthogonal to, or much worse than orthogonal to, any contribution to production. The two strategies don’t preclude one another...

Instead of talking about “incentives to” (produce, extract rents, whatever), we might describe outcome dispersion as a tax on refraining from mercenary behavior. If the difference between economic winners and losers is modest, people of ordinary virtue might refrain from participating in activities they consider corrupt, might even be willing to “blow the whistle”, because the cost of doing so is outweighed by their preference for behaving well. But as outcome dispersion grows, absenting oneself from or even opposing activities that would be personally remunerative but socially undesirable becomes too costly.

Full post here

If this line of thinking is right, in a world with enough inequality, technological progress will have two counteractive effects on growth. It will of course tend to push up real wealth production by improving productivity. However, it will also tend to reduce output by diverting activity away from production and towards the artificial maintenance of the displaced natural rents. The question becomes, how long can this process last?

It is hard to say. Obviously, if technological progress increases productivity faster than it diverts productive activity, the process could continue more or less indefinitely. A smaller and smaller fraction of society would work to produce the goods and services society uses. While everyone else worked to maintain the social arrangements that enabled that. The total size of the 'pie' would increase fast enough that everyone is still better off in absolute terms (even if inequality increases), so no one has a strong incentive to complain.

If the increase in productivity does not outpace the diversion of resources from productive activity, the picture becomes more complicated. As before, fewer and fewer people work to produce what everyone consumes, but now there is not enough for everyone to be at least as well off as they were before. Especially if inequality is rising, some people start to see their material interests sacrificed. It could just as well be some of those people who are now working to maintain rents instead of the 'productive' workers; exactly who loses out is somewhat beside the point. This in turn leads to agitation by those who see their lives worsening, further diverting resources away from productive activity, as everyone else takes steps to protect themselves and their wealth. 

It is possible that the 'losers' are a sufficiently small and disorganized group, such that it is not particularly costly for everyone else to repress their agitation and the process to continue as normal. However, if this is not the case, then a destabilizing downward spiral could begin. The response to the serious threat posed by the recently disenfranchised proves too costly for everyone else to be protected, more people see their material conditions worsen (and are simultaneously forced to resort to increasingly difficult and drastic measures to protect what they still do have), swelling the ranks of the disaffected, forcing yet more and more costly protective measures and so on and so forth.

One can easily imagine all of this being rigorously constructed as a formal model, with intersecting lines and curves representing productivity, productive labor, rent seeking labor, the costs of protection et cetera. It would of course have a few different equilibria and a nice explanation of what factors might determine which equilibria the hypothetical society ends up at. Such a model would be pretty neat, but I do not know if it would do much for answering the most important question it would raise: exactly where on these curves are  we?

March 25th Links

Bloomberg: How Not to Report on the Obamacare Numbers

Rap News: Crimea Media Games

Marginal Revolution: Metadata Reveals Sensitive Private Information