Arnold Kling  

Which Sector Should Lead?

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Tyler Cowen writes,


I think markets are failing to solve an economic calculation problem. The economy needs some new things to do but another bubble will not work, much of finance is frozen or contracting, and economic and political uncertainty is encouraging a scramble for liquidity and decisions to wait. We can see the information -- about what to do next, economically -- disintegrating before our eyes.

Where would an an omnisicient central planner or a well-functioning market direct resources?

Economic historian and Nobel Laureate Robert Fogel has pointed out that the share of food, clothing, and shelter (broadly defined to include consumer durables) in the economy has been declining secularly. He sees the long-term growth sectors as education, health care, and leisure. I think that Fogel's perspective should inform our central planner or well-functioning market.

1. It could be that we should be taking a lot more leisure. Perhaps people should be retiring earlier, in spite of the drop in stock market wealth.

2. I would not like to see more resources put into health care or education without first undertaking major deregulation. Unfortunately, the chances of a major move toward de-credentialization on the supply side and vouchers on the demand side are nil.

3. To me, the phrase "green jobs" means substituting labor for energy. If you want to raise the gas tax and cut payroll taxes in order to substitute labor for energy, now would the time to do it. On the other hand, when I think of centrally planned green jobs, I picture human rickshaws.

4. Incredibly to me, there are people who want to subsidize mortgages, as if we need to throw more resources at housing and housing finance.

5. The United States is still the tallest pygmy. The Eurozone is not doing well, nor is Asia. The OPEC nations must really be hurting. So I don't think that exports are going to be our leading sector.

6. "Infrastructure" is a codeword for shoring up the budgets of state and local governments using Federal dollars. And for pork.

In a better world, we would have deregulation in health care and education that would be sufficient to unleash entrepreneurial energy to improve performance in those areas. Absent that, I do not think that either the central planner or the market are going to find a leading sector.


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CATEGORIES: Macroeconomics



COMMENTS (11 to date)
fundamentalist writes:

"He [Fogel] sees the long-term growth sectors as education, health care, and leisure."

That's where the opportunity currently lies, given taxes and regulation as they are. What the US needs is more manufacturing jobs, but the current tax rates and regulatory environment make that almost impossible. Still, we have too many car makers and hombe builders. Those people need to get jobs in education, health care and the leisure industry, such as hotels and restaurants. The pay won't be as good, but those are the choices.

English Professor writes:

"Infrastructure" is a codeword for shoring up the budgets of state and local governments using Federal dollars. And for pork.

As usual, I'm confused. Although Arnold's comment is most likely an accurate description of what is really going on, over the last 2 or 3 years I have been reading lots of comments (frequently in the British press) about America's crumbling infrastructure. The oft repeated claim is that the interstate highway system is crumbling, and the majority of bridges are unsafe. But I have always suspected that these criticisms have contained considerable pro-central-government bias. The American system, it is implied, does not work well because most infrastructure projects are overseen by the States (rather than the Federal government). But the relevant question for the present is, what is the current state of US roads and bridges? And will new infrastructure spending improve them?

Maniel writes:

"Central planning" - sigh!

Some in government today are anxious to “restore stability” to home prices, but those prices respond to supply (houses for sale are plentiful) and demand (first-time buyers are still unable or unwilling to buy). Prices must be allowed to fall in order to bring supply and demand into balance – for a housing “recovery” to happen.

Whether the outgoing or incoming administrations choose to recognize it or not, the same dynamic must be allowed to work in the general market, namely, prices must be allowed to bring the supply of and the demand for labor, goods, and services into balance, in order for the general economy to recover.

None of the following government actions can save us from the law of supply and demand any more than they can from the law of gravity: more regulation; more direction of the economy for infrastructure development, health care, renewable energy, “green” automobiles, or anything else; more transfer of private debt or borrowing to increase our already crushing public debt burden; or more printing of money to devalue people’s savings. So what will bring the economy back to health? Protecting the free market, our one hope.

A note about infrastructure: it's whatever you or I say it is. It's the street in front of my house, the high-school across town, the Golden Gate Bridge, the Burlington Northern Railroad. If we're going to take money (and jobs) from businesses and people still working, I think those people should have a say in just what "infrastructure" they're going to pay for.

floccina writes:

BTW
Most education is free it is credentials that cost money. Even a Harvard education is free but a Harvard sheep skin will cost you big time.

8 writes:

Do what stock traders do. They don't always look for winners—they cut their losers. The biggest drain on the economy is government. Luckily, cutting government's role in the economy will also reduce health care and education spending. Three birds, one stone.

von Pepe writes:

Tyler: "I think markets are failing to solve an economic calculation problem...political uncertainty is encouraging a scramble..."

Sometimes I think I am in a paralell world: The number one 'price' for economic calculation is the interest rate which is being completely manipulated by the governemnt (market failure?). Political uncertainty is market failure?

What is the interest rate? A number? A price that reflects individuals' tastes and preferences between savings and consumption? How can the market even operate DESPITE the government control of the interest rate is my question for Tyler!

aaron writes:

Essentially, you can't substitute labor for energy. Work requires energy, most of the cost of food production is oil.

We can substitute nuclear, wind, and solar for fossil fuels. But that requires large capital investment.

floccina writes:

Essentially, you can't substitute labor for energy. Work requires energy, most of the cost of food production is oil.

http://www.sare.org/publications/energy/energy.pdf

FIFTEEN PERCENT OF AGRICULTURAL PRODUCTION COSTS are energy related, according to the U.S. Department of Agriculture (USDA) – and as energy prices rise, these costs claim an ever-bigger portion of farm budgets. The quickest, cheapest and cleanest way to lower these costs, as well as cut non-renewable energy consumption, is by improving energy efficiency.

Also you must exclude our base level of metabolismwent you talk about the energy cost of labor.

Greg Ransom writes:

Tyler seems to be revealing himself as an rather bad economist.

Markets don't solve calculation problems (a common illusion of the "idiot savants"). Markets attack coordination problems -- sometimes coordination problems generated by the market itself (helped along by the central bank, Federal regulators, and Wall Street looters.)

Markets are revealing a massive miscoordination problem across the time structure of the economy -- and a massive coordination problem caused by bad economic choices fostered by Federal regulations, information asymetries -- and exploited by Wall Street and corporate looters.

Markets are re-coordinating by taking resources out of such things as the mortgage and housing industries, and car industry -- and money and credit out of Wall Street.

Bill Woolsey writes:

The long run perspective regarding trends in domestic consumption from Fogel doesn't fit in with the statement about the world's tallest pigmy. That is a concern with short run problems in the rest of the world.

If we focus on short run problems here in the U.S., and we don't just say, produce what the government is going to buy, then..

I am certain that the Pigou effect works through consumption, and probably not high ticket items. Yeager once argued that falling real income reduces the demand for money, and given the supply, that will generate spending. This would be related to quantitative easing. I think this effect should be through consumption spending, but not high ticket items. I would also think that quantitative easing would have a similar impact. That is, people will have large balances in their checking accounts, or whatever other accounts are being targeted. The idea is that they will spend some of that on things they want.

So, the short run avenue of increased expenditure should be cheap consumer goods. And, investment to be able to produce such things.

Once recovery begins, then "psychology" will turn around. And everything should reverse rapidly. The notion that we are in an "equilibrium" based upon high risk premiums is implausible. I don't doubt that the recover peaks in equities and the like might be lower, that is, that risk premiums are higher, I don't see that "waiting for the bottom" is usefully seen as a realy high risk premium.

If those Chinese savers start to consume, then perhaps that is the proper long term allocation of resources as well.

Not only should the Chinese produce consumer goods for the Chinese, the Americans should export them to pay down foreign debts.

Think of it this way. The world saving "glut" found employment in the U.S., but a lot of that was a speculative bubble. Without that, real interest rates would have been even lower.

Rather than third world people producing consumer goods for the first world, so that resources in the first world can build more and more houses, what needs to happen is third world people produce consumer goods for themselves. And, perhaps, first world people produce some for them as well.

Greg writes:

My impression was that Tyler wasn't talking about sectors rather than individual opportunities across various sectors. It's an oblique way of talking about how stopped up the financial markets are and how small businesses, tech startups, and so on can't get capital. Anecdotally, I've heard this is certainly true in the VC world. Some PE firms also seem to be having a hard time doing worthwhile deals, to put it mildly.

I agree with your earlier comments that we need to let the bad banks fail quickly so that we can get on with things. Since that's not happening, perhaps it's not so much that the market is failing. It's that it's being prevented from working through things by an endless series of haphazard government bailouts. I think some market stabilization was in order in the financial sector, but in hindsight, shouldn't it have been express FDIC bankruptcies rather than the TARP? I'm basically just stealing your ideas here.

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