Low Technology

Growth theory teaches us a few things.

• Growth through accumulation of capital is possible, but it has its limits.
• Differences in per capita income across regions are too large to result from differences in capital. It must be differences in technology.
• What people call high technology (e.g., cellphones) is transmitted easily across borders, and is unlikely to explain differences in per capita income across regions.
• This leaves what I call “low technology” — that doesn’t transmit easily — to be the source of differences in per capita income across regions.

But what is low technology? Take a look at this video to get an idea:

This is a professional portrayal of the metaphor I use in class every semester: what would someone from a remote area of a developing region do if they were (benevolently) kidnapped, blindfolded, transported to the center of a Wal-Mart … and then told to shop? Would they even know where to begin? If the answer is no, it’s because of differences in low technology.

Via Kottke.

Pitfall of the Invisible Balance Sheet

Lynne Kiesling relays a chat she has with Steve Horvitz. This is a point I’ve made in my macro classes for over a decade:

… The “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

People with a business background get this idea right away; eating your seed corn is a standard practice of bad management that everyone is told to avoid.

I would add that ignoring that balance sheet is also behind a lot of bad thinking about pollution. Pollution does do damage, but it’s to the balance sheet not the income statement (national income and product accounts) of a country. So, environmentalists have a legitimate claim that our economic gains are overstated, but the movement to “improve” GDP by subtracting this damage out is just bad accounting.

Pitfall of the Invisible Balance Sheet

Lynne Kiesling relays a chat she has with Steve Horvitz. This is a point I’ve made in my macro classes for over a decade:

… The “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

People with a business background get this idea right away; eating your seed corn is a standard practice of bad management that everyone is told to avoid.

I would add that ignoring that balance sheet is also behind a lot of bad thinking about pollution. Pollution does do damage, but it’s to the balance sheet not the income statement (national income and product accounts) of a country.

Why Is Macroeconomics So Hard? The Christina Romer Quote

Stephen Moore:

Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics."

Long-Term Unemployment: A Modigliani-Miller Approach

Mark Perry of Carpe Diem (Via Don Boudreaux of Café Hayek):

The first principle of economics is that we live in a world of scarcity, and the second principle of economics is that individuals have unlimited wants and desires. 

Therefore, the second principle of economics: unlimited wants and desires, rules out any long-term problems of unemployment. [emphasis original]

I like this: stark and unrealistic.

Stark is a good way to move the discussion forward, particularly if it yields something unrealistic: because this means that what is included in the stark viewpoint must be relaxed to get something realistic. And the points that are relaxed tell us something about the real world.

The academic finance version of this is the Modigliani-Miller theorem. In short, it states that under certain conditions, the value of a firm is indifferent to the way it is financed. This is unrealistic, so it must be a relaxation of those conditions that leads to finance creating value.

I view Perry’s point in the same way: if long-term unemployment is a problem, it must be because either the problem of scarcity has been mitigated, or the problem of wants has been mitigated.

But … the latter is precisely what governments strive to do. They don’t really get rid of wants, but they clearly spend a lot of time trying to suppress them.

Think about this in terms of something like broadening the taxation of  internet transactions. This won’t actually reduce wants, but it will keep people from expressing them quite as freely … you know … by buying stuff. And that will certainly reduce the propensity of employers to hire additional workers, and perhaps lead to more long-term unemployment.

Technorati Tags: long,term,unemployment,scarcity,wants

How Does a Collateralized Debt Obligation (CDO)Work?

CDO’s were blamed for a lot of the financial crisis in 2008, and the global recession that followed.

At SUU, our finance people don’t do a good job of explaining these instruments.

Here’s a good primer that serves two purposes: 1) it predates the crisis, and yet points out that even then people who should know better were pretending these things were snake oil when their investments didn’t work as planned, and 2) it has a short explanation of how they’re put together.

The Downgrade … A Week Later

So Fitch is not going to follow suit. There are 3 rating agencies, and institutional investors usually follow the majority. Since Moody’s is not going to downgrade at this juncture, S&P’s move … doesn’t count.

Greg Guttfield nailed it last week:

So, it's hard to judge this downgrade, because it's like getting a report card from a drunk teacher.

I mean - If these agencies were so smart, why didn't they do it sooner?

As Dana Vachon tweeted to me, Where were these "credit agencies" during the housing bubble?

My guess is, hot tubbing.

Can't blame them. Hot tubbing is fun.

Which means the downgrade was not a logical reaction, but a scolding meant to make everyone feel bad. [emphasis added]

Now, irrelevent ninnies like John Kerry are blaming the Tea Party.

But how can you blame them- when they got nothing they wanted?

The debt ceiling debate culminated in the highest debt ceiling bump ever. The spending cuts were like a fat guy forgoing the sprinkles on his half gallon of Chunky Monkey - and calling it a diet.

But I can see why the Tea Party is getting hammered on this.

No one represents them - for they are them.

Let me put it this way: the tea party is a principle, without a person.