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Home Publications Blogs Beat the Press The Food Here is Poison and the Portions Are So Small (Paul Krugman Edition)

The Food Here is Poison and the Portions Are So Small (Paul Krugman Edition)

Wednesday, 29 August 2012 07:04

The economics profession tends to be bipolar. It swings from periods of wild optimism to wild pessimism while rarely stopping anywhere in the mild. Hence we had the new economy optimists in the late 90s who insisted that all the problems of scarcity had been solved forever by the wonders of the information age. Now we have Paul Krugman citing new work by Robert Gordon which tells us that growth is dead.

Wow, that's quite a shift in a relatively short period of time. Let's back up a second.

First, we should distinguish between two diametrically opposite problems, too few jobs and too many jobs. We have a lot of people today concerned with the problem of too few jobs. This is because we can produce everything we are now consuming with somewhere close to 18 percent of the potential labor force unemployed, underemployed, or out of the labor force altogether. In this context, if we snapped our fingers and productivity fell everywhere by 10 percent, it could actually be a good thing. We would suddenly have more people employed.

Of course in a rational world there would be other ways to employ these people since there are certainly useful things that they could do. Alternatively, we could have everyone work fewer hours, which would also be a good thing. But our problem at the moment is clearly not one of inadequate productivity, our problem is too few jobs.

Some folks may recall seeing a NYT piece last week on the new generation of robots being deployed in factories. According to the article, these robots effectively have sight so they can do very detailed tasks that previously required human labor. Many readers of this piece reacted by expressing concern that we would have no need for workers in the future.

Those who expressed such concerns (which are in fact needless) should be cheered by Krugman's column. Insofar as Gordon is right about slow productivity growth, the fears that a robotic revolution will displace tens of millions of workers will prove to be wrong. But seriously, is there any reason to believe that Gordon's analysis is correct; that productivity growth will grind to a halt?

It's hard to see if you take the step of looking at the places where people work. A bit less than 12 percent of our current workforce is employed in the retail sector. Are there no opportunities for productivity gains here? What about the self-service checkout counters that many stores have now? As the costs of these counters fall and wages of clerks rise (the response to a labor shortage -- remember inadequate productivity growth means workers are in high demand), wouldn't we expect to see these counters displace workers? How about robots in the stocking department? Will we never be able to design robots that can go up and down aisles after hours and restock the items that are in short supply? That seems unlikely.

Moving on, we have about 10 million workers, or 8 percent of the labor force, employed in restaurants. There aren't possibilities for productivity gains there? Have you heard the word "cafeteria?" In our world of labor shortages we might expect that cafeterias will come to displace sit down restaurants as wages rise. I'm not scared yet.

We have about 11 percent of our workforce employed in health care. Are there opportunities for efficiencies there? How about if we adopted a universal Medicare system so that hospitals and doctors offices didn't have to employ so many people in the payments department. Yeah, this is politically difficult, but that doesn't mean that it is not economically possible.

In the same vein, we can probably reduce the 800,000 people employed in the securities and commodities trading sector (i.e. investment banking) by 50 percent with a modest financial speculation tax. This would hugely improve the efficiency of this sector with no cost to the economy. Again, the obstacle is powerful interest groups, not anything inherent to the economy's potential for growth.

Manufacturing still employs more than 9 percent of the workforce. Presumably people do not need to be convinced that there are still opportunities for productivity gains in that sector.

Also, a major way that the economy experiences productivity gains is that demand switches to areas that achieve large gains from areas that don't. This means that if we can't improve the productivity of cab drivers, then we will likely see fewer people taking cabs in the future. They will instead spend their money on other things. And before we despair too much about the lack of productivity growth, remember we still have all those unemployed people who could be doing productive work, making us all richer.

There is a slightly different story that what Krugman, or at least Gordon, is telling. The problem would not be that in general we are suffering from an inability to increase productivity, but rather we will run into bottlenecks in the form of labor shortages for skills that are desperately needed. This can in principle impede growth.

The problem with this story is that there is zero evidence for any such shortage now (in what sector of the economy are wage growing rapidly?) and it is difficult to see a story where one develops in the future. What are the jobs for which we will be unable to train people or attract immigrants from India, China or elsewhere? It is difficult to imagine what that would look like.

My take away on this, as someone who was never a new economy optimist, is that with good economic policy we will be able to maintain solid rates of productivity growth over any time horizon that we can intelligently discuss. (Sorry folks, none of us knows anything about the 22nd century.) Let's get the policy right and get people back to work.


Comments (23)Add Comment
written by skeptonomist, August 29, 2012 9:22
Why has productivity increased so much since, say, 1700? There is actually a single answer, in a way, and it is fossil fuels. We produce so much more because most of the work that was done by humans, animals, wind and biofuels is now done by burning coal, gas and oil. These fuels are going to run out eventually - oil production may already have peaked - and if we don't find replacements, or are forced to stop burning because of global warming, there will be an end to productivity increase, and probably even a massive decline.

Economists need to get over the ideas that populations can increase indefinitely and that "technology" under free markets will automatically solve problems of energy production. There is no reason to think that individual entrepreneurs can solve problems this big.
written by Ellis, August 29, 2012 10:25
The elephant in the room is corporate profits. You never talk about that. Yet profits count more than everything else put together. As for "economic policy" -- there is none, except how to buttress corporate profits. All the talk about "creating jobs" is just a deception. When high unemployment leads to higher profits-- so much the better!
Great blog!
written by Fred List, August 29, 2012 10:40
Fantastic blog! Gordon's piece also reveals something I've found annoying about US economists: their provincialism. Gordon airily claims England was the lead economy from 1300 to 1906 (which doesn't make any sense: the Italian city states led in the 1500's, the Dutch in the 1600's). If he's right, we should see falling incomes across the developed world today; we don't. Singapre/S. Korea/Israel/Switzerland are doing fantastically well. Argentina grew by 7-8% a year from 2001 to 2009. If they can do it, why not us? ohh.... but that would mean doing things neoclassicals dislike...

written by liberal, August 29, 2012 11:17
skeptonomist wrote,
Economists need to get over the ideas that populations can increase indefinitely and that "technology" under free markets will automatically solve problems of energy production.


I don't have the link handy, but some physicist had a blog post about this kind of thing. He pointed out that energy use has increased geometrically, and that even if we found replacement energy sources, it can't go on like this forever because the geometric rate of increase will eventually lead to so much waste heat that that alone will greatly increase temperatures on earth. And this was all in the context of a discussion with an economist at a dinner party, where it was clear the economist had no understanding of these issues.
written by Eclectic Obsvr, August 29, 2012 11:20
Not sure you captured Krugman's point which was more about technology.
written by liberal, August 29, 2012 11:21
Fred List wrote,
...Switzerland are doing fantastically well

I'm not sure Switz. is a great example, seeing that one of it's main industries is money laundering.
written by AlanInAZ, August 29, 2012 1:14
Liberal said:

"waste heat that that alone will greatly increase temperatures on earth"

I would like to see that calculation. I don't think it is correct if the source of energy is solar, wind or wave or hydroelectric. In those cases we would be extracting energy from active systems in the biosphere to do work. This would possibly reduce temperature rather than increase temperatures. Fossil fuels and nuclear however use potential energy sequestered in the biosphere to do work and would in fact increase the temperature.
Robo Vision
written by Ron Alley, August 29, 2012 1:18
We have had "sighted" robots for many years. Think about the smart bombs and cruise missiles used in both Iraq wars.

In factories, the application of video imagery is a work in progress and getting better every month.
We don't need no stinkin' jobs!
written by rationalrevolution, August 29, 2012 1:34
The problem with this whole thing, and 99.9% of economic thinking in America, is that it fundamentally fails to understand the purpose of an economy.

The purpose of an economy is NOT to produce jobs, it is to produce wealth. The problem with our economy, and with all capitalist economies, is that as ownership becomes increasingly concentrated, the PROFITS go to an increasingly smaller and smaller portion of the population.

Today the richest 0.01% of the population receives MASSIVE levels of income that those people perform no JOBS for, they get this income via ownership of capital.

The fundamental problem with the American economy is the concentration of capital ownership, which is an inherent aspect of capitalism. This is the basis of Marx's prediction for the "crisis of capitalism".

What we need is not a way to "create more jobs", what we need is a way to more equally distribute "capital gains".

Any industrialized economy will be held back and have its hands tied, thus experiencing a death of growth as Gordon described, so long as it is based on traditional capitalism. Capitalism will always reach a point where it dies, naturally, where productivity can no longer increase, because increases in productivity put workers out of work, who then have no means to consume, creating a vicious cycle.

The only way to break this cycle is to ensure an equal distribution of productivity gains to all people, irrespective of work.

The 20th century form of State Socialism clearly isn't the answer, but fundamentally the objectives of Communism are still the only solution for a growing industrial economy. You have to break the link between "working" and income in order to allow continuing advances in industrialization and automation. We have to be able to have an economy where the income of all people increases as productivity increases.

I think the best way to do that is via something called "Distributionism", which is the relatively equal distribution of capital ownership to private individuals. In other words, retaining private ownership of capital, but ensuring that everyone shares an equal ownership of capital.

Doing that would ensure that everyone would have increasing incomes as productivity increases, so that even if people's wage income went down, their capital income would go up. This breaks the feedback loop between unemployment and economic growth.

This was, of course, the major point of Karl Marx over 150 years ago, but the problem was that the Marxists settled on using "the state" to take ownership of all capital, which led to the inevitable corruption, inefficiencies, and abuses that we have seen in all "Communist" countries. What we need is equal distribution of capital ownership, but retained in individual private hands, not held by the government. The government should merely be the mechanism of distribution, not the actual holder of the capital.

For more see my website:
written by bobs, August 29, 2012 1:59
Gordon factors out the 2007 crisis from his analysis, so current unemployment is irrelevant.

If all Baker can respond with is cafeteria and automated restocking (both of which already exist), then he's conceding the point to Gordon.
written by David, August 29, 2012 3:33
... I can't see Mitt Romney's country club going cafeteria style, the whole point there is conspicuous consumption, and what is more conspicuous than having a fellow human shine your shoes, polish your silver, etc. Productivity gains are always second to pursuit of social status in these poor creatures' minds, and their only interest in productivity gains is to cement their social status as 'the elite.'

@bobs: although cafeterias and automated restocking exist, they are not yet generic. Engines are generic, as are plumbed residences, electricity, ... And just because Gordon or Baker can't envision the next big invention that meets a REAL need, doesn't mean there isn't one waiting to eventually manifest. That's hardly a concession on Dr. Baker's part, methinks.
Productivity Of, For and By the People
written by Last Mover, August 29, 2012 3:56
This post by Baker is a prime candidate for addition to the GOP platform as proof that people create jobs.

Not government, not robots, not capital, not technology, not deficits, not spending, not tax reductions, not stimulus, not even labor.

People. They're the other input factor.
Putting words in other people's mouths
written by KJMClark, August 29, 2012 4:29
Um, you are actually reacting mostly to Gordon's paper. Krugman only pointed it out, said "Hmm" about it, and remarked that a significant point Gordon made (about the value of indoor plumbing vs. Facebook) was interesting.

Looks like you're criticizing Gordon, and pointing out Krugman, mainly to drive traffic.
written by AlanInAZ, August 29, 2012 6:05
Fred List wrote,

...Switzerland are doing fantastically well

I can't speak about other countries but I do have family in Switzerland and I can tell you that the middle class is under the same pressure there as in the US. Don't trust economic statistics to paint a true picture of the life of real people. There has been a large influx of people from all over the world at both ends of the economic scale. The rich make the country seem more prosperous than it really is and the poorer immigrants keep wages down. Virtually all of Switzerland's population growth is from immigration. My sister in-law is a doctor and she faces competition from all of Europe, including the low wage eastern countries.
written by liberal, August 29, 2012 6:18
AlanInAZ wrote,
I would like to see that calculation. I don't think it is correct if the source of energy is solar, wind or wave or hydroelectric.

OK, I found it: http://physics.ucsd.edu/do-the...physicist/

At that 2.3% growth rate, we would be using energy at a rate corresponding to the total solar input striking Earth in a little over 400 years. We would consume something comparable to the entire sun in 1400 years from now. By 2500 years, we would use energy at the rate of the entire Milky Way galaxy—100 billion stars!
written by JSeydl, August 29, 2012 6:19
I agree that it's better to have strong rather than weak productivity growth, but the issue, as many commentators have already noted, is about who enjoys the gains from rising productivity. If Gordon is right and productivity growth slows dramatically, then it just might push enough people into the streets, demanding a fairer distribution of wages -- primarily because the top 1 percent will no longer be able to hide behind slogans like, "a rising tide lifts all boats." That, I think, would be a good thing.
written by AlanInAZ, August 29, 2012 7:13
Thank you liberal,

I read the post and I stand by my original thought. Extracting energy to do work from wind, solar etc will lower the temperature based on the first law of thermodynamics, namely conservation of energy. The wind will have less energy after it passes the windmill and the earth will heat less because some of the incoming radiation is used for work. However, when we eat a cookie or burn gasoline we are releasing the potential chemical energy stored inside those items, and that does raise temperature.

On a more practical level let me say that the growth of energy intensity will level off in the future as developing countries become more advanced so I don't think overloading the planet with energy will be a problem. The possible burning of all the sequestered fossil fuels is a huge problem which is not on the radar at the moment.
written by Fred Brack, August 30, 2012 12:41
I think you diss Krugman unfairly here. By no means did he endorse Gordon's views. Now you didn't say he did. But then why did you even mention Krugman -- if, in fact, your disagreement was with Gordon? You seem to be dragging Krugman into the middle of your beef with Gordon for no other reason but to diss him -- at least a little.
written by liberal, August 30, 2012 8:21
AlanInAZ wrote,
I read the post and I stand by my original thought.

That's crazy. The only conclusion from reading that blog entry is that geometric increase in energy usage cannot continue, regardless of whether it's from renewables or not.
written by AlanInAZ, August 30, 2012 10:49

Calling me crazy doesn't refute my claim about the energy balance. This blog isn't the right place to discuss the nuances of the physics arguments. I agree that energy use cannot continue to increase indefinitely and I agree there are limits to growth due to many resource constraints. The problem claimed in the post is that the earth will heat too much REGARDLESS of energy source and I think the physicist is wrong (as explained earlier). Waste heat from work derived from the energy flux of incoming solar radiation (solar, wind) will not add thermal energy to the earth. These solar sources have limits but not because of heat buildup on earth. I think he was being a bit too clever and did not analyze the earth's energy flux budget correctly. However, relying on nuclear (fission or fusion) will lead to his conclusion of a cooked planet. I think the physicist should have said that solar alone cannot provide unlimited energy and other sources will result in a cooked planet because of the second law of thermodynamics (cannot convert energy to work with 100% efficiency).
written by liberal, August 30, 2012 1:33
AlanInAz wrote,
Calling me crazy doesn't refute my claim about the energy balance.

I didn't call you crazy. I called your claims crazy.

The problem claimed in the post is that the earth will heat too much REGARDLESS of energy source and I think the physicist is wrong (as explained earlier).

No, you're wrong.

The physicist's claim is a statement: X implies Y.

Here, X is "Human energy budget increases geometrically, at a rate of at least 2.3% per year."

Y is "In the not too distant future, so much heat is generated that the earth heats up."

The physicist's claim that X => Y looks pretty correct to me.

Your reasoning doesn't contradict the claim, because if we only rely on renewables, we cannot have geometric increase in energy usage, i.e., X is false.

That case cannot be used to falsify the claim "X => Y". To do that, you need to find a case where X is true and Y is false.
written by Downpuppy, August 30, 2012 2:20
Global warming has zip to do with the release of fossil fuel energy. The real issue is the differential absorption of short & long was radiation by the atmosphere. The amount of radiation released and absorbed by the earth daily is far higher than released by human activity, and a tiny change in the atmosphere has a much larger effect on the greenhouse equilibrium.

Physicists like to play games with exponential growth to show things getting crazy. We had exponential growth in the 20th century. Population growth is linear now, and the odds are we're headed to dieoff.
written by liberal, August 30, 2012 2:44
Downpuppy wrote,
Global warming has zip to do with the release of fossil fuel energy.

So? The physics guy I cited isn't talking about global warming as usually defined.

We had exponential growth in the 20th century. Population growth is linear now, and the odds are we're headed to dieoff.

I might be wrong, but I'm pretty sure the physics guy claimed the data show that per capita energy use has increased exponentially for quite a while.

Of course, the correct conclusion to draw from his considerations is that that won't continue, because it can't continue.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.