Tag Archives: economic growth

what’s next for (incremental improvement of commercial) AI

We normals are hearing in the media that the large language model approach to AI has run its course, that further scaling it up is prohibitive in terms of energy, and that there is an AI-hype-driven financial bubble ready to pop any moment. According to at least one blogger though, the big breakthrough happening right now is having these models “reason” internally before they give an answer.

Two of those leading engineers are: Julian Schrittwieser who helped teach AlphaGo how to play Go at a level never witnessed in human history and is now a lead researcher at Anthropic. And Łukasz Kaiser, who whilst at Google Brain, co‑authored the paper that launched the architecture now driving every major released model on “Attention is all you need”…

Kaiser, for his part, corrects time horizons. The category of work that still belongs unquestioned to humans is shrinking. He states, with a deep belief, that these AI systems will be able to do any labor task currently performed on a computer within a timeframe of five years! …

The question is not whether machines will pass some imagined threshold in the future, but what it means that they have already crossed thresholds we still debate as hypothetical. A society reacts to what it believes is true, not to what is true. When the prevailing public understanding is delayed by years, institutions are, by definition, operating in a prior decade.

We can model technological progress as a series of sequential, overlaid S-curves that have to overlap in just such a way to produce continuous exponential growth. At least some insiders are still thinking in terms of keeping this S-curve going, in a competition between companies and countries. And when we see a new technology break through into widespread public, commercial use, it has already been going in the lab for awhile. That used to be measured in decades, now it is months if these optimist insider voices are to be believed.

https://onepercentrule.substack.com/p/is-ai-on-a-new-trajectory

how to be a traitor to the United States of America

I happen to like my country, but I would like to offer some suggestions on policy options for the aspiring traitor:

  1. Remove funding for basic scientific research other than in weapons. This investment will take a while to pay off, but long term it will remove the basis for economic growth as an advanced economy, until one day we can no longer be an advanced economy.
  2. Make sure only the rich can afford adequate child care. This will ensure that single parents and adults in single-income households (usually mothers) will not be able to work or study. This removes a good chunk of the potential work force, and makes sure those women will not gain new skills or knowledge that might allow them to contribute to our economy. You can also remove access to birth control to help reinforce this cycle, and you have also retarded any progress on new or better birth control technology.
  3. Undermine education at all levels. This is also a slow burner because it will take a generation for today’s toddlers to become tomorrow’s ignorant incompetent adults (he who knows not and knows not he knows not, he is a child, be careful not to teach him anything). There are some immediate things you can do though. A big one is stop issuing visas for full-pay international students. This immediately subtracts hard currency from the nation’s economy, and also has an additional payoff tomorrow of making sure they can’t stay in the country and add value to the economy.
  4. Identify industries where the United States has a comparative advantage, and sabotage them. Also reduce the pool of skilled workers they have access to. If you’re lucky, they will throw up their hands and leave the country for a techno-libertarian island dystopia.
  5. Invest heavily in industries with no comparative advantage for an advanced economy. Textiles and footwear come to mind. But then you can also undermine free trade in general so that nobody will be interested in buying inferior, high-cost products anyway. By undermining research and development, you have also made sure that potential high-value-added industries like robotics and autonomous electric vehicles can never keep up with higher-tech, more productive foreign economies.
  6. Let the transportation, water, electric, and food infrastructure decay. You don’t have to actually do anything here. Just don’t talk about it and nobody will know or care or do anything.
  7. Here’s where it gets wonky, but you want to put incompetent people in charge of monetary policy and generally all things to do with money and finance. Do this, then get out of the way while the financial industry captures and manipulates your idiots to its short-term advantage while creating an unstable house of cards that will come crashing down in the not-too-distant future. Crypto-currency is not the core of this strategy but just a little extra grease on the wheels of chaos.
  8. Undermine the nation’s ability to prepare for, respond, and recover from natural disasters, such as fires, coastal and inland flooding, hurricanes and other severe storms, and earthquakes. There’s a certain element of chance here. You could get a major volcanic eruption if you are lucky, but you can’t control that. Drought and generally poor water management are some of those slow-burn policies that could take a long time to pay off, but climate change is on your side here. As they say, the end of civilization as we know it is two meals away.
  9. This is somewhat of a tricky play, but through a combination of foreign aid removal, lack of action on climate change, and poor diplomacy with nearby countries, you can ramp up flows of desperate migrants. This gives local people somebody to blame for all their problems other than your policies.
  10. Apply propaganda judiciously to make sure Americans don’t know Chinese factories are building autonomous vehicles for $10,000 and investing in ultra-modern high speed rail and automated ports. Also use anti-tax, anti-immigrant, anti-city, and anti-poor people propaganda (the last two go together pretty well) so that nobody will be willing to fund the government or expect it to do anything.

You might be surprised that I have left certain seemingly obvious policies off this list. But I actually would not send an angry mob to attack the legislative building or set it on fire. It’s better to have the empty symbols of democracy sitting there for people to look at. I would not cancel elections, but rather limit the choices to a few very bad ones. I would not blatantly limit speech but rather do the opposite, encouraging a huge amount of meaningless talky-talk so that everyone’s jaws are flapping at the same time and there is no way anyone can be listening let alone thinking.

Good luck, modern day Benedict Arnold, in your quest. And may God Bless the United States of America.

Is the AI bubble bursting?

Apparently trying to answer this question is consuming a lot of bandwidth in the financial, tech, and even geopolitical arenas right now. Here is one answer from Larry Johnson, whose politics and past statements I do not necessarily endorse. Just to very briefly summarize his article: YES.

A few insights of my own:

  • The AI “hype bubble” has almost certainly reached a commanding height, and will pop at some point. This will probably be felt in stock market index valuations, which are dominated by a handful of large tech companies at the moment. In my lifetime now covering half a century, we have seen this cycle first with the personal computer itself and then with the internet. In both cases, the expectation that these technologies would super-charge economic growth in a few years did not happen, and led to financial market declines. Both technologies have in fact transformed the economy drastically, it just took a few decades rather than years. Things do seem to be happening faster this time around, I admit.
  • When it comes to stock market crashes, there is usually some precipitating event like the Asian financial crisis in 1997 or U.S. derivative bubble in 2007. The combination of technology bubble bursting and external financial shock seems to be particularly powerful. In fact, when I look back, I think I can argue the forward progress of the U.S. halted around that 1997 (financial crisis) to 2000 (Bush v. Gore) to 2001 to 2003 (9/11 attacks and Iraq invasion) period, and went into outright decline between the 2007 financial crisis and 2020 Covid crisis.
  • Apparently some in Silicon Valley thought the artificial general intelligence singularity was so near when the LLMs first came out, and that US tech companies were so far ahead of international peers, that it justified huge short-term investments in order to gain a first mover advantage that would then be insurmountable. This particular bubble seems to be popping at the moment, with AGI clearly not here right now, and perhaps a loose, emerging consensus that LLMs are a useful technology but not a likely path to AGI. So companies may have over-invested in infrastructure that will hurt some of them badly in the short term, while possibly benefitting us all in the longer term (think about 19th century railroads for a fairly obvious analogy).

So there is somewhat of a race here – will we start to see significant economic benefits of these new technologies before some external shocker hits us? This is the luck of the draw. It seems luck has not been on our side for the last 25 years or so. Perhaps we’re due.

what government policies ACTUALLY increase economic growth?

Wishful thinking and “starve the beast” ideology do not increase the growth rate of a national economy. There are some things that do, according to people who study the evidence (known as economists, although to be fair, some of them are also influenced by ideology if not wishful thinking). According to this Planet Money episode, policies that have been shown by evidence to increase economic growth include:

  • Building housing in cities with numerous and increasing jobs. I always thought of housing as more of a quality of life issue and not something that actually constrains growth, but this makes logical sense. Urban areas (central cities and their suburbs) are where most of the national economy’s growth happens, because they are where most of the workers and innovative ideas are. Available jobs attract people who want jobs, and this can happen faster than the housing market can grow, pushing up prices. At some point, constraints on housing can actually become constraints on growth. People seem to be focusing mostly on the federal government tail trying to wag the municipal government dog in terms of zoning codes, but I have a couple more thoughts to add. First, excellent transportation infrastructure effectively enlarges the housing market that provides access to a given job market. If I could buy a fixer-upper row house in Baltimore and take a bullet train to Manhattan, I would effectively be part of the Manhattan housing market. Our country does not have this (although Baltimore and New York City are connected by some of the best rail our country has to offer, the time and expense of that commute would not be reasonable.) Excellent communication infrastructure also helps, since many professional jobs are now remote or hybrid. Finally, there are technological advances to be made in the construction industry, which has been dead in terms of productivity growth for decades. The big one being talked about is much more factory manufacturing of modular components. Get this figured out, and you can either move some U.S. construction workers to much more productive factory floors, or you can consider allowing immigrant workers in to do these jobs at lower wages, or you can invest in factories in Central and South American economies, thereby relieving some immigration pressure on our borders. Then move it all by electrified freight rail. These are different political choices, but all economic wins. Beyond this technology, I think there are huge gains to be made on construction sites in more efficient risk-based scheduling and logistics, technology-assisted inspections of progress (with drones and cameras), and project controls (AI watching videos of the progress and comparing exactly what is happening on the ground to exactly what was planned, then advising humans on real-time adjustments to the schedule and logistics to manage risk and keep the project on track).
  • Cutting taxes on corporations generally increases growth, because the corporations will invest at least some of the savings in capital goods, work force training, and research and development. But my thought is, why not give them the tax breaks ONLY if they invest the savings in these things, which are also investments in our national economy.
  • Similar to housing, I have always thought of health care as more of a quality of life service and basic human right a benevolent government overseeing a growing economy should be providing to its citizens. But the podcast points out hard evidence that health care investments, particularly for children and low income people, have an economic payoff in terms of reduced health care costs and increased earning (and tax-paying) potential later in life.
  • Allowing in highly skilled immigrants benefits the economy.
  • Investing in the electric grid yields a greater payout in terms of lower energy costs than whatever is invested.
  • Research and development, in things OTHER THAN weapons and war, yields a big return to the economy. Investing in weapons and war crowds out more productive investments the government could be making.
  • The particular webpage covering the podcast doesn’t talk about education, but I know I have seen elsewhere that investments in childcare and education yield big benefits, particularly early childhood education.

So: housing and construction productivity; health care; childcare and education; research and development; incentives for corporate R&D, capital investment, and work force development; transportation and telecommunications infrastructure. Raise $1 in taxes, invest it in these areas, get back more than $1, and you could theoretically give the dividend back to the person who gave you the dollar, and everybody wins. Way too rational for our so-called political economy. And this doesn’t include rational risk management, like making sure those urban areas where most of the economic activity and housing are do not get destroyed by floods and fires.

March 2025 in Review

Most frightening and/or depressing story: The U.S. might be headed for recession. Recessions happen, but this would be the first one where the U.S. government obviously and counter to all competent advice throws a monkey wrench in a perfectly healthy economy, that I know of anyway. Lest we think GDP growth is only a statistic that does not affect real people, the U.S. poverty rate among children was 5% in 2021 and rose to over 13% in 2023, when the economy was doing relatively well as measured by GDP growth and employment, but Congress forced the end of Biden’s tax credits for parents. So pop quiz: force a completely unnecessary recession by choice and will more or less children suffer? Shame shame shame on the Trump administration and Congress you stupid assholes.

Most hopeful story: Trump seems to have some anti-nuclear (weapons) instincts. We will see if his actions bear any relation to his words.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: Prospera is a weird quasi-autonomous city-state nominally inside Honduras run by crypto-currency weirdos.

total factor productivity

This is mostly a review for yours truly, partly as I am pondering whether there is any economic theory or strategy that could justify the Trump federal budget cuts and tariffs. My verdict: no, I don’t think so, I think they are based on simplistic ideas: linear, short-term, misguided thinking about the national debt and trade deficits. Anyway, here are a few quotes from the IMF:

It’s a measure of an economy’s ability to generate income from inputs—to do more with less. The inputs in question are the economy’s factors of production, primarily the labor supplied by its people (“labor” for short) and its land, machinery, and infrastructure (“capital”). If an economy increases its total income without using more inputs, or if the economy maintains its income level while using fewer inputs, it is said to enjoy higher TFP…

Recent IMF research shows that TFP growth has slowed around the world since the global financial crisis. In low-income developing countries, it has come to a virtual standstill in recent years…

TFP is higher in countries where the average worker has more years of schooling, the quality of education and training is better, and the workforce is healthier. These advantages enable the average hour of work to generate more economic value added—in addition to improving the quality of life more broadly…

So what can advanced economies do? First, they should “do no harm,” by avoiding policy mistakes, such as permitting a decline in market competition, with powerful firms using their monopoly positions to stifle entry and innovation, or reverting to costly trade protectionism. Beyond this, policymakers should craft regulations that tap the possible productivity benefits of recent innovations in green technology, information and communications technology, and artificial intelligence. They should also tackle remaining barriers restricting the opportunity for women and minorities to bring their talents and innovative potential to all sectors of the economy.    

So, a long-term strategy to boost productivity and national wealth could be to invest in childcare and education (the people who will come up with tomorrow’s innovations, and also their parents who can’t come up with today’s innovations because they are too busy), research and development. The current U.S. administration is cutting all these things. Investing in infrastructure and physical capital also helps if you have underinvested in it in the past – there is a diminishing return to these investments, but the U.S. can’t be anywhere near the diminishing return. It also makes sense to invest in a counter-cyclical strategy – more when private sector unemployment is higher and less when it is lower.

 

The Atlanta Fed’s “GDP Nowcast”

The Atlanta Fed has a spreadsheet model that tries to forecast the U.S. GDP growth rate in real time. Right now, it is showing a sudden, sharp contraction. When I see something like this in any model, I first check the math to see if something got broken. Second, I check the input data for anything missing or otherwise weird. Assuming the Atlanta Fed has a functioning procedure for these checks before it makes its results public, here are some other possible explanations.

First would be the sudden contraction in government spending and general economic anxiety caused by the amateur economic policy the current U.S. administration is implementing. But it’s hard to believe this would be so sudden, and if it were true you might expect to see it in the stock market. The stock market is in fact down about 5% over the last month, which is a lot, but not the kind of discontinuous collapse shown by the Atlanta Fed.

J.W. Mason, and economics professor, suggests it may be caused by a sudden surge of imports as companies try to beat the clock before tariffs hit. Net imports get subtracted from GDP, which I guess makes sense because they represent a flow of money out of the country in exchange for goods and services produced in other countries. He explains though that this could just mean the goods are stockpiled in warehouses to be distributed over the next few months, in which case GDP growth should just bounce back to trend.

There is another theory involving gold. This is the same source (Mason) quoting a report by Goldman Sachs.

most of the widening in the trade deficit since November has been driven by higher gold imports … as participants in the gold market sought to insure themselves against potential tariffs on gold. Although this may seem like a frontloading effect ahead of potential tariffs, these imports are for the most part … being shipped to the US on the off-chance that physical delivery of the gold is required,… Importantly, the Bureau of Economic Analysis (BEA) excludes most gold imports when calculating the imports component of GDP. ….

The same reasoning applies more generally to front-loading by retailers, wholesalers, and producers ahead of tariff increases. Because these developments are unrelated to US production, they should have little net effect on US GDP. In the case of non-gold goods, higher imports should be offset by higher inventories in the national accounts. In practice, it is possible that front-loading exerts a modest drag on reported GDP because imports… tend to be measured more accurately than inventories. We suspect this dynamic is playing out now to some extent… But because front-loading these imports now implies fewer imports later, we think the net effect on 2025 GDP growth should be small.

This is largely over my head, but again it suggests some short-term accounting effect rather than something going on in the real economy that would have an imminent impact on employment and prices.

recession watch

I’ve been worried about Trump causing a recession. First, he firing federal workers willy nilly, and even if we accepted the idea that these people aren’t doing anything useful, they spend their salaries on groceries, household goods, haircuts, restaurant meals, home improvement, etc. Second, he is cutting federal contracts suddenly. A chunk of the private sector and certainly the research sector relies on federal contracts in one form or another, so this uncertainty will tamp down hiring and lead to layoffs. Then there is all the money that flows from the federal government to state and local governments and economies. That won’t just get magically replaced by state and local programs overnight, if ever. Then you have the tariffs and reduction of trade on top of all that. It sounds like a recipe for a recessionary shock to me.

I’m not an economist, but Claudia Sahm is. Here’s what she has to say, backed up by some facts and figures.

Civilian federal employment (including the Post Office) is currently 3 million or less than 2% of the labor force… About 100,000 workers have either taken deferred resignation or been laid off so far. Even if the total reduction doubles by the end of the year, it would still fall far short of a recessionary shock.

In fiscal year 2023, there were about three times as many federal contractors and grant employees as civilian federal employees (including the Post Office). DOGE canceling or modifying federal contracts and grants put that employment at risk. Elon Musk has set a goal of $1 trillion in savings this year, which most budget experts consider unrealistic. Still, these efforts will lead to a reduction in employment in the private and nonprofit sectors.

But even if DOGE reduces federal employment by 200,000 and canceling contracts reduces contact and grant employment (by a proportional) 600,000, the total is below (though close to) a recessionary shock. Moreover, the reality of the net employment reductions from DOGE this year is likely to be considerably smaller.

the 2024 Nobel Prize in economics

I learned about the 2024 Nobel in economics from this Planet Money podcast. Basically, the award is for work illustrating how economic growth, and hence economic inequality, can be explained by “institutions”. And specifically “inclusive institutions”. And inclusive institutions seems to come down to what is called (in academic circles and outside the U.S. political context) “liberalism”. Democracy, the rule of law, economic freedom, competitive and well-functioning markets including labor markets, free and fair trade. It all kind of makes sense, just as the world seems headed in other directions. The silver lining, I suppose, is that no matter what hand your country is dealt in terms of geography or natural resources, you can theoretically build good institutions and succeed over time.

the staffing crisis

This article in Longreads blames the degradation of hotels and restaurants in Yosemite National Park on the Aramark corporation. I think it is part of a larger trend of absolute bare-bones staffing in the U.S. service industry which has been going on at least since the pandemic. Something just seems out of whack when workers are barely getting by, prices seem so high, and service seems so poor. Like it or not, a drop in migrant workers during and since the pandemic is part of the story, whether those pre-pandemic restaurant and hotel workers were undocumented or not. In the U.S. childcare industry, where minimum staffing levels are highly regulated, prices are out of reach of even the upper middle class. In more competitive and less regulated hospitality industries, staffing levels are just cut to the bone. In Asia where I happen to be at the moment, staffing levels at tourist attractions are much higher. This works because tourists are willing or able to pay higher prices than what the local economy alone would otherwise support, and because higher-income countries bring in workers from lower-income countries. Since this will probably never be palatable in the United States, and rents and overhead costs are not going anywhere but up, we are probably stuck with shitty service and miserably overworked restaurant and hotel staff for the foreseeable future.