Month: September 2011

The Decline of American Prosperity–Causes and Cures

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For many decades, Labor Day was a holiday on which Americans celebrated (and maybe even felt a bit smug about) our nation’s economic prowess. This year, not so much. In our current economy, many people are suffering grievously. Moreover, an increasing number believe that the problems are permanent. Surveys show a significant proportion of the population believes that their own living standards will continue to decline, and that their children’s generation will live less-well than their own. In other words, the feeling is growing that what we face in not a normal cyclical downturn, but a sea change for the worse.

The proximate cause of the current situation was the housing bubble and bust, and more generally the excessive and irresponsible use/deployment of credit in both the public and private sectors. However, there is every reason to believe that there are structural problems with the economy that go well beyond the sort of things that are usually portrayed on graphs in economic discussion.

Politicians, economists, analysts, and bloggers have asserted numerous and sometimes conflicting factors as primary causes for our economic problems. This post will summarize some of the explanations most commonly proposed plus a few more. I don’t necessarily agree with all of these, and today I’m focusing on simply stating the proposed causal factors, leaving detailed analysis/assessment for a future post.

The possible causes of the economic decline:

1)The low-hanging fruit has already been eaten. Economist Tyler Cowen, for example, argues that America’s historical prosperity has been driven largely by: (i)the availability of free land, (ii)a sequence of key technological breakthroughs, and (iii)the high return on investment offered by providing schooling to motivated but uneducated immigrants. He further argues that the free land is gone, that today’s technological improvements are not comparable to those introduced in the period 1880-1940 (electricity, automobiles, airplanes, radio, mass production, pharmaceuticals, etc), and that the high % of the population already attending college makes additional improvements from this source difficult. (Tyler’s recent book includes a graph attempting to measure the “rate of global innovation” since medieval times; it shows innovation peaking over the period 1850-1905, and having now returned to the level where it was in the early 1700s.)

2)Technological unemployment. The argument here is that the advances in technology that have already occurred, and those that are likely in the near future, reduce the need for labor so radically that full employment will never again be possible. This assertion is basically the opposite of the low-hanging-fruit argument, at least the technological aspect thereof.

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Texas Travelogue:Gonzales

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The town of Gonzales is about an hour’s drive east and a little way south of San Antonio. In the days when Texas was a Spanish and then a Mexican posession, San Antonio, Goliad and Nacogdoches were the centers of what little population there was. But in the 1820s, the newly-established and independent Mexican nation sought to encourage America and European entrepeneurs to take up generous land grants, and bring in settlers. Stephen F. Austin was the one that everyone knows about: the urban heart – if you could call it that – of his grant was at San Felipe on the Brazos River.

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Palin?

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So she gave a speech in Iowa today and she didn’t pull the trigger either way.

I wish Gov. Palin would just run for president and get serious

Or, give it up, and say so, and go on to whatever her next project is going to be.

Either way would be fine.

I would like her to be part of the debate in the GOP in the next few months.

But I am getting sick of this ongoing dance of a thousand veils from her.

Maybe there is a perverse kind of sense to it, from a personal rather than political standpoint.

Once she declares, she is ordinary, she is just another candidate. She has to debate and get in the cage with the rest of them. She would have to be prepared for that, and despite media claims, none of the other serious contenders are stupid, and beating them in debates will be hard. And then when she runs, and if she loses, as she probably will, then she’s done. The Palin phenomenon is over. I can see why she might want to put off that day. But if it is all about her ego, she should not be president anyway.

She cannot go on milking her celebrity status.

She has to use it or lose it.

(And, of course, this all may be part of some insanely brilliant strategy she is employing that I do not understand. If so, I will eat this blog post when, in the fullness of time, all has been made clear.)

I thought I recognized that name !

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Obama has announced his new appointment for economic adviser. It is a Princeton economist named Alan Kreuger. I am not an economist or an expert on economists but that name rang a faint bell. Then I saw that someone else had remembered him, too.

In a 1994 paper published in the American Economic Review, economists David Card and Alan Krueger (appointed today to chair Obama’s Council of Economic Advisers) made an amazing economic discovery: Demand curves for unskilled workers actually slope upward! Here’s a summary of their findings (emphasis added):
 
“On April 1, 1992 New Jersey’s minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in the minimum. Comparisons of the changes in wages, employment, and prices at stores in New Jersey relative to stores in Pennsylvania (where the minimum wage remained fixed at $4.25 per hour) yield simple estimates of the effect of the higher minimum wage. Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent.”

This was tremendous news, especially for Democrats. Raising the minimum wage did not increase unemployment as classical economics had said since the issue first arose.

Unfortunately, their study was soon ripped apart by other economists who used more objective methodology.

It was only a short time before the fantastic Card-Krueger findings were challenged and debunked by several subsequent studies:
 
1. In 1995 (and updated in 1996) The Employment Policies Institute released “The Crippling Flaws in the New Jersey Fast Food Study”and concluded that “The database used in the New Jersey fast food study is so bad that no credible conclusions can be drawn from the report.”
 
2. Also in 1995, economists David Neumark and David Wascher used actual payroll records (instead of survey data used by Card and Krueger) and published their results in an NBER paper with an amazing finding: Demand curves for unskilled labor really do slope downward, confirming 200 years of economic theory and mountains of empirical evidence (emphasis below added):

I would suggest reading the entire post which demolishes the study by Kreuger and Card. This is the new Chairman of the Council of Economic Advisers. More academics with no real world experience and this one is incompetent even as an academic. Spengler has a few words on the matter, as well.