Geography as destiny

I just read Enrico Moretti’s (2012) The New Geography of Jobs, having not done so before now because I’d read quite a lot of his papers. Anyway, now I have and it’s very good. It’s a nicely accessible survey of the literatures on trade/tech and jobs, and on the geographic aspect – the concentration of skilled people in cities and growing divergence. The evidence it cites is entirely US-centric but the drivers obviously apply elsewhere, even though their effects in other countries are not exacerbated by the  unattractive features of US society. So I would recommend this to anybody who would like a readable big-picture overview of what has been happening to jobs and incomes in recent decades. The major irritation is that the notes aren’t flagged in the text & you just have to root around at the back of the book to see if a given statement has a reference attached to it.

The conclusions are a little bleak in terms of policies to address the growing divergence between rich skilled places and the left-behinds.Being in the right place matters. There are spillovers between people, so even as a graduate you do better in terms of earnings the more other skilled people are around you, but non-graduate occupations also have higher earnings in high skill places.

Overcoming the gaps requires a Big Push, the book concludes (I like this allusion to Rosenstein-Rodin, although that literature doesn’t seem to be cited here). Only governments can do these, given the amount of co-ordination involved. Many interventions are just too small scale to have a hope. Looking at the Big Push of the Tennessee Valley Authority, Moretti and his colleagues concluded it was successful in raising productivity in the region but not wages, because the labour supply increased as workers moved in from elsewhere. However, a couple of pages later, he points out that the prominent successful clusters of today did not come about because of a Big Push. Most were organic developments, albeit aided of course by government investment in R&D or defence – see Margaret O’Mara’s book The Code on Silicon Valley which I described in the previous post.

So this is rather sobering. My hunch is that policies will need to rest on a better understanding of the relationships between human capital investments (a college degree is the key variable seemingly driving so many outcomes from earnings to voting pattern to subjectove well-being), social spillovers, intangible assets, amenities including nature and housing, and produced capital especially communications infrastructure. In other words, what assets are there available to people living in in a given place, and to what extent do these complement and substitute for each other?

Anyway, I enjoyed the book even if it left me feeling a bit glum.

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Angry Man

Angrynomics by Eric Lonergan and Mark Blyth is a rip-roaring read, and I wish I’d been in the pub with them as they discussed the state of the world and how to set it to rights. Not that I wholly agree with them, although disagreeing would obviously be half the fun. Normally I hate dialogue formats, as they’re usually constructed as a kind of semi-polite Punch and Judy show, presenting polarised views that are never intended to be reconciled. Lonergan and Blyth – it even sounds like a Victorian music hall act – agree on the basics so they riff of each other here in a more positive way.

Their basic thesis is that there are two kinds of anger abroad in the world: moral outrage (good) and tribal anger (bad), both reactions to the way the global economy has affected people since 1989.

Increased inequality is part of the story, genuine economic grievance in the rust belt and its equivalents, and another part is the cynical exploitation of tribalism or identitarianism by some politicians. So Lonergan and Blyth wear their left-of-centre hearts on their sleeves. The dialogues then describe and discuss the economic aspects of the political changes amply described in the now-extensive ‘decline of democracy’ literature – the micro, the macro/monetary, inequality (including, importantly, intergenerational), technological change – concluding with what to do now.

One huge gap evident right at the start is a passing parenthesis that the expression of anger is a largely male phenomenon. The book never picks this up; there is surely an important gender aspect to the way work has changed.

I disagree with dating the anger phenomenon to the collapse of communism in 1989, which removed a coherent (albeit flawed) ideology to oppose neoliberalism. Surely the hinge was the crisis of the 1970s, Thatcher and Reagan, and the early 1980s recession. That was the start of de-industrialisation, and the scarring of people’s economic prospects for the rest of their lives, and their children’s. These sea changes take time and there is never a single moment. As the book notes, too little has been reformed since 2008/9, but my view is that looking back with the hindsight of 2030, the combination of the Financial Crisis and the Covid depression will prove to be another hinge. (The book pre-dates the pandemic.)

As for the proposals, I think they get the role of competition all wrong, blaming excessive competition in tech and telecoms – whaaaaat??? – for the race to the bottom in employment practices. Amazon reports low profits because it reinvests so much revenue in continuing world domination, not because it has scrappy margins due to competitors snapping at its heels. I understand little about current monetary and alternative proposals, but as a diehard microeconomist find it hard to understand how administered negative prices in a market dominated by the state (ie central bank) can function well. Regulate the financial sector firmly – a big yes. The book has an interesting idea about government auctions of collective data rights – like spectrum auctions – which answers my profound objection to the proposal ‘create property rights in personal data and sell them’, namely that the value in data is collective, is due to aggregation.

Anyway, my copy has a combination of big ticks and scrawls of ‘nonsense!’ in the margins. A very satisfying read.

 

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Digital arrivals and deaths of despair

There’s definitely a digital theme in the new crop of books arriving at Enlightenment Towers – the left hand mini-pile here.

IMG_0292On my recent trip to Washington (for a fascinating National Academies/Royal Society discussion on international co-operation on AI, culminating in this public symposium) I read the pile on the right.

The Economics of Artificial Intelligence is a terrific collection, edited by Ajay Agarwal, Josh Gans and Avi Goldfarb. It has sections on AI as a general purpose technology, jobs and inequality, regulation and the implications of machine learning for economics. The cast list of contributors is stellar. It’s far from the last word but a must-read as a starting point.

61bIH+8Vs2L._AC_UL872_QL65_The Economics of Artificial Intelligence: An Agenda (National Bureau of Economic Research Conference Report)

Tom McLeish’s The Poetry and Music of Science is a persuasive comparison between creativity in the arts and in the sciences, exploring the parallels between the creative process in music, poetry, art and fiction and the discovery process in the natural sciences. Well, I was persuaded. 51wNUley1XL._SX351_BO1,204,203,200_

The Poetry and Music of Science: Comparing Creativity in Science and Art

Matthew Desmond’s Evicted is a distressing piece of reportorial sociology (Pullitzer-winning), detailing through a handful of specific individuals in Milwaukee the reality of the human crisis and housing crisis in America. The book describes the knot of poverty, drugs, ill-health, appalling housing conditions, impossible for any individual to escape. I was shocked on my recent trip to San Francisco to see the desperate condition of its large numbers of homeless people, literally worse than I have seen anywhere in the world. The conditions described in Evicted are intolerable. I recently heard Angus Deaton talk about his and Anne Case’s work on the ‘deaths of despair’ in the US (and some foreshadowing of a similar if less pronounced pattern in UK data). Given the extreme social inequality in the US, its political disintegration is not surprising. The new Deaton Review here in the UK into inequality may uncover ominous similarities, and it would be good to know how other OECD countries compare/contrast.

41qhBahSGLL._SX323_BO1,204,203,200_Evicted: Poverty and Profit in the American City

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Who benefits from research and innovation?

I’ve been pondering a report written by my friend and Industrial Strategy Commission colleague Richard Jones (with James Wilsdon), The Biomedical Bubble. The report calls for a rethinking of the high priority given to biomedical research in the allocation of research funding, and arguing for more attention to be paid to the “social, environmental, digital and behavioural determinants of health”. It also calls for health innovation to be considered in the context of industrial strategy – after all, in the NHS the UK has a unique potential market for healthcare innovations. It points out the there are fewer ill people in the places where most biomedical and pharmaceutical research is carried out, thanks the the UK’sregional imbalances. It also points out that, despite all the brilliant past discoveries, the sector’s productivity is declining:

“In the 1960s, by some measures a golden age of drug discovery, developing a successful
drug cost US$100 million on average. Since then, the number of new drugs developed per
billion (inflation adjusted) dollars has halved every nine years. Around 2000, the cost per
new drug passed the US$1 billion dollar milestone, and R&D productivity has since fallen
for another decade.”

All of this seems well worth debating, for all its provocation to the status quo – and this is a courageous argument given how warm and cuddly we all feel about new medicines. I firmly believe more attention should be paid to the whole system from basic research to final use that determines the distribution of the benefits of innovation, rather than – as we do now – treating the direction of research and innovation as somehow exogenous and worrying about the distributional consequences. This goes for digital, or finance, say, as well as pharma. What determines whether there are widely-shared benefits – or not?

Serendipitously, I happened to read a couple of related articles in the past few days, although both concerning the US. One was this BLS report on multi-factor productivity, which highlights pharma as a sectors making one of the biggest contributions to the US productivity slowdown (see figure 3). And this very interesting Aeon essay about the impact of financial incentives on US pharma research. It speaks to my interest in understanding the whole system effects of research in this domain. Given that this landscape in terms of both research and commerce is US-dominated, this surely makes the question of how the UK spends its own research money all the more relevant? As The Biomedical Bubble asks:

“[T]he importance of the biotechnology sector has been an article of faith for UK
governments for more than 20 years, even when any notion of industrial strategy in other
sectors was derided. So the failure of the UK to develop a thriving biotechnology sector
at anything like the scale anticipated should prompt reflection on our assumptions about
how technology transfer from the science base occurs. The most dominant of these is that
biomedical science would be brought to market through IP-based, venture capital funded
spin-outs. This approach has largely failed, and we are yet to find an alternative.”
For it seems the model is no longer serving the US all that well either – not economy-wide innovation and productivity, and not the American population, which has worth health outcomes at higher cost that any other developed economy. There are some challenging questions here, fundamentally: who benefits from research and innovation, how should the public good being funded by taxpayers be defined and assessed, and what funding and regulatory structures would actually ensure the gains are widely shared?
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Contradictions of capital

Below is my review of After Piketty edited by Boushey, Delong and Steinbaum, just posted in the Chronicle Review. (The entire Spring Books issue is well worth a look.)

I also recently received another collection, The Contradictions of Capital in the 21st Century: The Piketty Opportunity, edited by Pat Hudson and Keith Tribe. It includes essays by Ravi Kanbur, Joseph Stiglitz, Avner Offer, among others. I haven’t yet read this one, although its take is more clearly historical and global, whereas After Piketty‘s is more inter-disciplinary.41YEl+rJjaL

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Review of After Piketty: The Agenda for Economics and Inequality edited by Heather Boushey, J Bradford Delong and Marshall Steinbaum

The Chronicle Review

Contradictions of Capital: Taking on Thomas Piketty

By Diane Coyle

For all the influence economics is supposed to have on policy and the character of our societies, not many economics professors make any impression on public consciousness. Fewer still attain Thomas Piketty’s rock star status (well, minor rock star at any rate) following the publication in English of his Capital in the 21st Century[i] in 2014. Piketty captured and gave authoritative confirmation of something many people believed to be the case, given their own experience and observation: that inequality in western economies had increased to a great degree.

Many economists see Piketty’s dedicated effort – with colleagues Emmanuel Saez and the late Tony Atkinson – to put together the data on income and wealth over a long period of time as the main merit of his work. While there is some debate about the figures, this effort is a titanic contribution to knowledge, making possible further study of the trends and causes of inequality.

The essays in After Piketty have a different focus, however: an assessment of Piketty’s arguments about the dynamics of capitalist economies that generate the observed patterns of income and wealth inequality. Some of these perspectives concern the economics, others the links between economic and social or political forces.

Piketty’s empirical observation is that inequality in the western economies declined through the entire middle part of the 20th century, but from around 1980 it had started to increase again, to return to the levels of the Gilded Age. His theoretical argument is that there is an inherent dynamic in the process of economic growth tending to increase inequality, a dynamic halted and reversed in the 20th century by the two cataclysmic world wars, by the post-war welfare state and social market economies (especially in Europe) and by rapid post-war growth. The key point he makes is that when the growth rate slows, the rate of return on capital falls more slowly, increasing the ratio of capital to income and further widening the gap. This is the r>g formula fashionably adorning some t-shirts for a while.

For economists, there is nothing inexorable about this. As Paul Krugman points out in his essay in After Piketty, the theoretical argument depends (among other things) on it being easy enough to substitute machines for workers, and there is no definitive empirical evidence this is so. Devesh Raval points out a number of other problems. Among them, Piketty uses the term ‘capital’ as an abstraction, but the empirical claim that r>g elides physical capital used in production, housing capital, and the human capital resulting in high earnings for some people. Indeed, the share of top incomes coming from earnings (rather than rents and dividends) is a great contrast with the inequality of the early 20th century. Suresh Naidu underlines this point, calling Piketty’s argument “institution and politics free”: “When wealth is understood as police-backed paper claims over resources, rather than the resources themselves, the undemocratic nature of wealth inequality becomes much clearer.” A number of other essays in the volume round out the economists’ (sympathetic) critique of Piketty’s book.

The two subsequent sections cover extensions of Piketty. His collaborator Emmanuel Saez argues for continuing and extending the data collection effort. This is a significant point: phenomena for which the data are not readily available are invisible in political and policy discourse. In many ways Capital in the 21st Century was published much too late. The political consequences of great inequality were already playing out in the anger and division so visible now in politics in the United States and across Europe. Saez makes the point that although there has been significant data collection since the 1960s and 70s on individual incomes, largely through surveys, this statistical approach severs the connection between income distribution and macroeconomic outcomes. Economists in the late 20th century thinking about the economy in the aggregate largely stopped noticing the macro-level inequality trends. There is little reliable data on wealth (as opposed to incomes) at all, and research into wealth distribution and its evolution is correspondingly sparse (as Mariacristina de Nardi and her co-authors point out in their essay).

Filling some of the other research and policy gaps will be crucial for anyone who considers the extent of modern inequality to be problematic. One made visible by the British EU referendum and the US Presidential election is the spatial dimension. Economies have a geography, something economists have until recently been prone to overlook; financial capital is highly mobile geographically and – as Gareth Jones points out here, has also created ‘extra legal’ zones in tax havens where it can safely land. (In a fascinating book, Capital Without BordersHeather Boushey explores in After Piketty the implications for women’s economic and political autonomy of ‘patrimonial capitalism’, particularly given the gender bias of inheritance.

The book ends with some reflections from Piketty himself. He is disarmingly open to critiques of his work: “I would like to see Capital in the 21st Century as a work-in-progress of social science rather than a treatise about history or economics,” he writes. As he argues here, all the social science disciplines are needed for a complete picture. However, the critiques matter, at least to the extent that one thinks the current degree of inequality is unsustainable. Two other recent books point to contrasting possible futures. In his The Great Leveler[iii], Walter Scheidel paints a picture not unlike Piketty’s of an inexorable internal dynamic whereby societies become progressively more unequal, until this provokes a reset through war or revolution. In complete contrast, Tony Atkinson’s Inequality[iv], published the year before his death, presents a wholly pragmatic 15-point list of policy measures to limit and reduce inequality. Taking these together, it is hard to avoid the conclusion that if you do not adopt the Atkinson approach you get the Scheidel outcome. This was exactly the realization that led to the creation of the post-war social contract in the late 1940s.

The editors’ introduction in After Piketty zeros in on this contradiction at the heart of Piketty’s work and its reception: are there fundamental, intractable laws of capitalist dynamics, making garden-variety policy analysis of inequality ultimately futile? Or rather are there, “historically contingent and institutionally prescribed processes that shape growth and distribution?” Capital in the 21st Century does not resolve this; neither do the essays in After Piketty. Perhaps it is a purely academic question, but to the extent that any of us troubled by the new Gilded Age, we have to act as if the second is true regardless.

Diane Coyle is Professor of Economics at the University of Manchester & Co-Director of Policy@Manchester.

[i] Thomas Piketty, Capital in the 21st Century, Belknap Press, Harvard, Cambridge MA, 2014.

[ii] Brooke Harrington, Capital Without Borders: Wealth Managers and the One Percent, Harvard University Press, Cambridge MA, 2016.

[iii] Walter Scheidel, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, Princeton University Press, Princeton NJ, 2017.

[iv] Anthony Atkinson, Inequality: What Can Be Done?, Harvard University Press, Cambridge MA, 2015.

 

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