Tuesday, January 7, 2014

What’s Wrong with America’s Right Now? Is It the Economy, or Is It Us?

The situation is much the same as the past 4 years. But it’s a little bizarre. Consider this chart:


This chart shows the important pattern I want to illustrate, but it is somewhat flawed. Since both series grow through time, a better chart would use the natural logs of both series (see the Excel file in the class folder on the G drive). When I do this, it’s far more important that the spaces between tick marks be the same size (.05 or about 5%) on each axis.

The main point in the chart above is that real GDP is up, while employment is not. That point can also be seen in the chart below.

But, by plotting natural logs of the data instead of the raw numbers, the slopes in the chart below can be interpreted as growth rates. And, it we look at the blue line in the two expansionary periods, the slope is about the same (a little flatter on the right, indicating the weakness of the recovery). Employment follows the same pattern: the expansions are about the same, with the current one a tad weaker. The blue line being generally steeper than the red line indicates that real GDP is growing faster than employment; this is another way of saying that productivity is increasing.


But this is just a description of the data: what in (a bit more serious) econometrics are called reduced forms. What we really want to be able to do is tell a story/theory about what causal mechanism is working here.

Analogies help sometimes.

So let’s think about preparing and eating a holiday meal with an extended family. The family gets a little bigger every year. But the quantity and quality of the food almost always grows faster than the family does. This year is no exception. But what’s different is that there are less people working in the kitchen.

This is a huge point that should not be missed: it’s always good to produce more with less effort. When discussing macro, people get weird and forget this. But we would not fail to notice this at a holiday meal.

Anyway, how is that the people in the kitchen are able to produce more food with less people. There’s a couple of possible reasons. One might be that they got up earlier and worked more hours. Another is that they have better equipment: like a new pressure cooker for vegetables this year. Another might be an advance in technology: for example, cooking meat sous-vide requires some extra equipment, but it’s also a relatively new technology for home use.

Now here’s an odd thing to think about: some of the people sitting in the living room are potentially productive — are they there because they’re avoiding the work in the kitchen, or are not needed in the kitchen, or not wanted in the kitchen? And if they’re not wanted in the kitchen … is it possible that this is because someone is a cleanliness ogre, and just doesn’t want some people near the food because they don’t wash their hands enough … or they drink a bit and get sloppy?

Lastly, we’d probably think the family was dysfunctional if the people in the kitchen doing the work got angry with the people who weren’t working … and told them they couldn’t have dessert because they didn’t help cook.

All of these things are causal/structural explanations of what is happening with the holiday meal. But, to an outside observer, what’s easiest to see is the reduced forms: there’s a few more people than last year, there’s a lot more food, and there’s less people making it. Note that those observations are consistent with a variety of causal/structural explanations.

Well, this is what this graph is telling us about the U.S. economy. I haven’t shown population going up, because it’s slower than real GDP, and steady. This is the size of the family. Real GDP is up too: this is the amount of food prepared. But there’s fewer people in the kitchen: this is the red line that hasn’t quite gotten back to its previous peak yet. Capital and technology have both grown over the last 10 years, but do we really think they’ve grown enough to push people out of jobs? Probably not. Instead, it seems like there’s fewer people in the kitchen because they all got up earlier and worked more hours: average hours worked by those with jobs is the highest it’s been in a few generations.As to workers, there’s a lot of talk about people avoiding work, but no one denies that there seems to have been a big jump in the number of people who aren’t needed or wanted too. But we lump all those together and act dysfunctionally when the people with work try to limit the share of GDP going to those who are not working. And in our zeal to tar most people who aren’t working because there are some bad apples in the mix … we’ve completely missed the amazing fact that somehow we’ve got more people in the living room watching football, and more food on the table at the same time. I’m not claiming that there’s wholly positive reasons for that, but I’m astounded at how twisted we are not to even acknowledge that getting more leisure and more goods is having your cake and eating it too. In all seriousnesss, what are we, idiots?

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