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

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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.