Tag Archives: economic growth

May 2015 in Review

Negative stories:

  • MIT says there is a critical long term decline in U.S. research and development spending, while spending is increasing in many other parts of the world.
  • Lake Mead, water supply for Las Vegas and several other major western U.S. cities, is continuing to dry up. The normal snowpack in Washington State is almost completely absent, while much of Oregon has declared a state of emergency. As the drought grinds on, recycled water (sometimes derided as “toilet to tap”) is becoming more common in Calfornia. This is not bad in itself – on the contrary it is an example of technological adaptation and closing the loop. It does have a cost in money and energy though, which are resources that are then not available for other things like education or infrastructure or whatever people need. In other words, drought makes us all a little bit poorer.
  • We’ve hit 400 ppm carbon dioxide in the atmosphere, not just some places sometimes but pretty much everywhere, all the time.
  • There may be a “global shortage of aggregate demand“, and most countries are not dealing with it well. In many developed countries, increases in average longevity could lead to a trend of long-term deflation. This could eventually happen in almost all countries.
  • Climate change is going to make extreme weather more frequent and more damaging in U.S. cities. The 2015 El Nino could break records.
  • There just isn’t a lot of positivity or hope for better passenger rail service in the U.S.
  • Human chemical use to combat diseases, bugs, and weeds is causing the diseases, bugs and weeds to evolve fast.
  • Unfortunately there is no foolproof formula to make education work.

Positive stories:

  • Less leisure time could mean less sustainable outcomes, because people just have less time to think and act on their good intentions. I’m putting this in the positive column because although people in the U.S. and many other countries still work long hours, the trend so far is less work and more wealth for human population as a whole over very long periods of time. Obviously the transition is not smooth or painless for all workers all of the time.
  • I found a nice example of meta-analysis, which aggregates findings of a large number of scientific and not-so-scientific studies in a useful form, in this case in the urban planning field.
  • May is time to pull on the urban gardening gloves.
  • Melbourne’s climate change adaptation plan focuses on green open space and urban tree canopy.
  • Painless vaccines may be on the way.
  • The rhetoric on renewable energy is really changing as it starts to seriously challenge fossil fuels on economic grounds. Following the Fukushima disaster, when all Japan’s nuclear reactors were shut down, the gap was made up largely with liquid natural gas and with almost no disruption of consumer service. But renewables also grew explosively. Some are suggesting Saudi Arabia is supporting lower oil prices in part to stay competitive with renewables. Wind and solar capacity are growing quickly in many parts of the world. Lester Brown says the tide has turned and renewables are now unstoppable.
  • Commercial autonomous trucks are here.
  • The UK may have hit “peak car“.
  • Seattle is allowing developers to provide car share memberships and transit passes in lieu of parking spaces.

Paul Romer and “mathiness”

Paul Romer has attacked a number of fellow economists for relying on what he calls “mathiness” rather than mathematical theory. He believes the study of economic growth and its practical applications have suffered because of this.

Academic politics, like any other type of politics, is better served by words that are evocative and ambiguous, but if an argument is transparently political, economists interested in science will simply ignore it. The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.

Solow’s (1956) mathematical theory of growth mapped the word “capital” onto a variable in his mathematical equations, and onto both data from national income accounts and objects like machines or structures that someone could observe directly. The tight connection between the word and the equations gave the word a precise meaning that facilitated equally tight connections between theoretical and empirical claims. Gary Becker’s (1962) mathematical theory of wages gave the words “human capital” the same precision and established the same two types of tight connection—between words and math and between theory and evidence. In this case as well, the relevant evidence ranged from aggregate data to formal microeconomic data to direct observation…

The market for mathematical theory can survive a few lemon articles filled with mathiness. Readers will put a small discount on any article with mathematical symbols, but will still find it worth their while to work through and verify that the formal arguments are correct, that the connection between the symbols and the words is tight, and that the theoretical concepts have implications for measurement and observation. But after readers have been disappointed too often by mathiness that wastes their time, they will stop taking seriously any paper that contains mathematical symbols. In response, authors will stop doing the hard work that it takes to supply real mathematical theory. If no one is putting in the work to distinguish between mathiness and mathematical theory, why not cut a few corners and take advantage of the slippage that mathiness allows? The market for mathematical theory will collapse. Only mathiness will be left. It will be worth little, but cheap to produce, so it might survive as entertainment.

climate change impacts

Here are a couple projections of climate change impacts.

The World Health Organization projects “Between 2030 and 2050, climate change is expected to cause approximately 250 000 additional deaths per year, from malnutrition, malaria, diarrhoea and heat stress.” This sounds awful, and of course it is. But if you compare this to other preventable causes of death like traffic accidents, smoking and air pollution, you could probably save a lot more lives with a given amount of money focusing on the latter group than exclusively on climate change.

A more sobering projection, at least to me, comes from an organization called DARA.  Although the report includes some truly awful and incomprehensible infographics, there is a very clear graphic on p. 21. Under a “no action” scenario, climate change subtracts about 3% from world economic growth in 2050 and 7-8% in 2100. If you believe technology will lead to a massive acceleration of economic growth, we may be able to afford even this (although our children will be learning about Earth’s original native ecosystems in history class). If long-term growth stays in the sub-5% range where it has been recently, this will mean the decline and fall of civilization as we know it.

money, debt, investment, and growth

It’s interesting how economists talk about money, debt, investment, and growth. If you’re not an economist, you have to tie your brain lobes in a few knots to make sense of it. This is Michael Spence from NYU:

high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.

Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.

Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.

Here’s what I think it means. “Global shortage of adequate demand” means people aren’t spending enough money to support productive activity in the economy. Either they don’t have the money or they are saving it instead of spending it. Of course, we need a productive economy to generate the jobs and wages that get people money to spend. So it’s a chicken and egg problem that can spiral downwards once it gets started (“deflationary pressures”). Governments also aren’t investing in productive activity, either because they are afraid of debt or aren’t taking in enough taxes, or both. “Available balance sheets” means they should just wish new money into existence (governments can do that!) and spend it on investments like infrastructure, education, and research that tend to support long-term growth, which would get people more money, which they could spend to support more productive activity, and so on in a virtuous cycle. Money isn’t really real, as long as we think it is real. Debt doesn’t matter, as long as we believe it does matter. Belief in money and fear of debt usually stops us short of the absolute physical limits placed on us by our physical environment.

aging and deflation

This study says the relationship between aging and deflation (as seen in Japan, but possibly coming to many more countries in the future) depends on whether the aging is driven by falling fertility (which shrinks the work force in absolute terms) or longevity (which shrinks it only in relative terms).

Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
Here is another study that concludes “a larger share of dependents (ie young and old) is correlated with higher inflation, while a larger share of working age cohorts is correlated with lower inflation.” So maybe it depends to what extent the aging population is dependent on the working population, and whether the working population has additional dependents in the form of children (who will become the next working population). It’s complex, dynamic stuff that is hard to puzzle out.

compendium of inspiring planning practices

Move over Agenda 21, we have a new contender for the world’s most boring urban planning related conspiracy theory, Resolution 24/3! Seriously, don’t read it. It’s boring. However as a supporting study, the UN has put together a book of case studies on planning best practices in cities around the world, which is actually interesting. I found the Melbourne case study particularly interesting, and would like to dig into it more:

Melbourne developed a new approach to urban planning, through an ecosystem-based climate adaptation programme, embracing what the City refers to as ‘nature sensitive’ urban design and planning. This approach emphasises the services that nature provides to the city and focuses on how it can be protected, restored, created, enhanced and maintained within the urban setting. The urgency posed by the current impacts of climate changes resulted in the City creating a multi-million dollar integrated ecosystem-based climate change adaptation program in 2010 – the ‘Urban Landscapes Adaptation Program’.

The primary goal of this programme was to reduce drought vulnerability and to cool the city by 4°C in an effort to safeguard its citizens and the ecosystem services of its environmental assets from the impacts of climate change. The programme is underpinned by two strategies: the Open Space Strategy, which aims to increase green space by 7.6% and the Urban Forest Strategy, which is projected to double the City’s tree canopy to 40%.

April 2015 in Review

Negative stories:

Positive stories:

  • Mr. Money Mustache brought us a nice post on home energy efficiency projects. This was a very popular post.
  • Biotechnology may soon bring us the tools to seriously monkey with photosynthesis. (This is one of those stories where I struggle between the positive and negative columns, but clearly there is a potential upside when we will have so many mouths to feed.)
  • Donald Shoup, author of The High Cost of Free Parking, is retiring. That might sound bad, but his ground-breaking ideas are continuing on and actually seem to be going mainstream.
  • Lee Kuan Yew, who took Singapore “from third world to first” in one generation, passed away (in March, but I wrote about it in April. Let me be clear – I am an admirer and it is his life I am putting in the positive column, not his death.)
  • Donella Meadows explained how your bathtub is a dynamic system.
  • Robert Gordon offers a clear policy prescription for the U.S. to support continued economic growth.
  • I explain how a cap-and-trade program for stormwater and pollution producing pavement could work.
  • Joel Mokyr talks about advances in information technology, materials science and biotechnology.
  • Some U.S. cities are fairly serious about planting trees.
  • Edmonton has set a target of zero solid waste.
  • Saving water also saves energy. It’s highly logical, but if you are the skeptical type then here are some numbers. Also, urban agriculture reduces carbon emissions.
  • Peter Thiel thinks we can live forever. (positive, but do see my earlier comment about mouths to feed…)
  • A paper in Ecological Economics tries to unify the ecological footprint and planetary boundary concepts.
  • Philadelphia finally has bike share.

U.S. Innovation Deficit

MIT is warning that U.S. investment in R&D has dropped enormously. I find this idea very disturbing, that in an age of accelerating science and technology, which corporations and governments should have every incentive to take advantage of, they are failing to do so.

Declining U.S. federal government research investment — from just under 10 percent in 1968 to less than 4 percent in 2015 — in critical fields such as cybersecurity, infectious disease, plant biology, and Alzheimer’s are threatening an “innovation deficit,” according to a new MIT report to be released Monday, April 27.

U.S. competitors are increasing their investment in basic research. The European Space Agency successfully landed the first spacecraft on a comet. China developed the world’s fastest supercomputer and has done research in plant biology uncovering new ways to meet global food demand and address malnutrition. Meanwhile, U.S. investment in basic plant-related research and development is far below that of many other scientific disciplines, despite the fact that the agricultural sector is responsible for more than 2 million U.S. jobs and is a major source of export earnings.

The report, entitled “The Future Postponed: Why Declining Investment in Basic Research Threatens a U.S. Innovation Deficit,” highlights opportunities in basic research that could help shape and maintain U.S. economic power and benefit society.

 

Joel Mokyr

I’m still reading about secular stagnation. Joel Mokyr from Northwestern University is one of the few optimistic voices in the book:

…digitalisation has penetrated every aspect of science. It has led to the re-invention of invention. It is not just ‘IT’ or ‘communications’. Huge searchable databanks, quantum chemistry simulation, and highly complex statistical analysis are only some of the tools that the digital age places at science’s disposal. Digital technology is everywhere, from molecular genetics to nanoscience to research in medieval poetry. Quantum computers, still quite experimental, promise to increase this power by orders of magnitude. In much recent writings, the importance of ICT on output and productivity has been stressed, and it is clearly of great importance. What needs to be kept in mind, however, is that the indirect effects of science on productivity through the tools it provides scientific research may, in the long run, dwarf the direct effects. A striking example is the growing use of high-powered computers and radically new software in material science.

Materials are the core of our production. The terms Bronze Ages and Iron Age signify their importance; the great era of technological progress between 1870 and 1914 was wholly dependent on cheap and ever-better steel. In many ways, core-materials can be viewed as general-purpose technologies made famous by Bresnahan’s and Trajtenberg’s (1995) seminal paper on the topic. But what is happening to materials now is nothing short of a sea change, with new resins, ceramics, and entirely new solids designed in silico, being developed at the nano-technological level. These promise the development of materials nature never dreamed of and that deliver custom-ordered properties in terms of hardness, resilience, elasticity, and so on. Graphene, the new super-thin wonder material, is another substance that promises to revolutionise production in many lines. The new research tools in material science have revolutionised research. Historically, progress in material science had been always the result of tedious and inefficient ‘trial and error’ or highly uncertain serendipity. The classic example is William Perkin’s discovery of aniline purple in 1856 and Henry Bessemer’s invention of the eponymous steel-making process the same year. Compare those with the situation today: researchers can now can simulate in silico the quantum equations that define the properties of materials, using high-throughput super-computers, and experiment with materials having pre-specified properties.

But not all research tools depend wholly on computational capacity. Of perhaps even more revolutionary importance is the powerful technology developed by Stanley Cohen and Herbert Boyer in the early 1970s, in which they succeeded in creating transgenic organisms through the use of micro-organisms. Genetic selection is an old technology; nature never intended to create poodles. But genetic engineering is to artificial selection what a laser-driven fine-tuned surgical instrument is to a meat axe. The potential economic significance of genetic engineering is simply staggering, as it completely changes the relationship between humans and all other species on the planet. Ever since the emergence of agriculture and husbandry, people have ‘played God’ and changed their biological and topographicalenvironment, creating new phenotypes in plants and animals. Genetic engineering means we are just far better at it.

Robert Gordon Revisited

In Robert Gordon’s chapter in the e-book Secular Stagnation: Facts, Causes and Cures, which I reviewed recently, he claims that he never said technological progress is slowing down, but only that future progress will be similar to the rate of the 1970s to now, not the faster rate that happened before the 1970s.

His main argument is that technology will not grow fast enough to offset economic “headwinds”, including population aging, inequality, government debt, and poor education. I don’t deny that these are all problems that we should be trying to address with better policy, and that addressing them would yield benefits. Gordon gives a policy presciption for the U.S. to address them:

My standard list of policy recommendations includes raising the retirement age in line with life expectancy, drastically raising the quotas for legal immigration, legalising drugs and emptying the prisons of non-violent offenders, and learning from Canada how to finance higher education. The US would be a much better place with a medical system as a right of citizenship, a value-added tax to pay for it, a massive tax reform to eliminate the omnipresent loopholes, and an increase in the tax rate on dividends and capital gains back to the 1993-97 Clinton levels.

However, where he doesn’t convince me is his argument that a constant rate of technological progress can’t lead to big gains. If the rate of increase in technology is constant in percentage terms, that means the level of technology is growing exponentially. We are constantly building on the advances of the past. There may be long periods when it seems like nothing is happening, but progress is actually happening behind the scenes, and then it suddenly seems to burst onto the commercial scene. Gordon actually talks about how the technologies that led to very fast productivity growth in the mid-20th century were actually inventions of the late 19th century (electricity, the telephone, etc.). It took a few decades for the technology to kick into everyday life. The 1970s to the present have been a time of huge advance in computer technology, so even if the lag times are not decreasing it should be about time for that to kick in. Biotechnology would be another couple decades behind, since the big advances in genomics started to happen in the 1990s. But there are reasons to be hopeful that the lag time between advances tends to decrease over time. So technology may be increasing not only at a constant percentage rate, which means exponential growth, but the rate of exponential growth itself may be accelerating. Ultimately, this lag time determines whether we are in for a lost decade or two as Gordon’s “headwinds” kick in before the next wave of technology-driven improvement. Of course, Gordon like most economists leaves out some other possible headwinds such as climate change, energy, and food, not to mention the really bad stuff like wars and pandemics.