The Slack Wire

GDP skepticism from the Fed

Interesting article by Bart Hobijn and Charles Steindel of the New York Fed, on alternative measures of GDP growth.

They make adjustments for three familiar problems — the non-inclusion of household labor, the calculation of government output as equal to cost, and the treatment of R&D (and other “intangible capital”) spending as an intermediate rather than capital good. The first issue is self-explanatory; the second is equivalent, for purposes of measuring growth, to an assumption of constant productivity in government; and the third means that R&D expenditures are not counted in final output. Hobijn and Steindel adjust for these problems by adding R&D-type expenditures to GDP; assuming that about one-quarter of women’s wages represents the market value of foregone household labor (don’t ask me how they came up with that number, or how they decided that men’s household labor has no value); and assuming that government productivity grows at the same rate as for the nonfarm business sector.

Their results? For 1983-2003, the adjusted and published series correlate almost exactly (0.99) at an annual level. (This isn’t surprising given how the adjusted series is constructed.) But over time, the divergence is significant — the upward adjustments for government productivity and the faster growth of R&D expenditures compared with GDP outweigh the downward adjustment due to a rising proportion of women in the workforce. So annual growth over those two decades runs about 0.5 percentage points, or 15 percent, higher with the adjusted series than with the published one. That’s not a trivial difference.

This is obviously of interest to anyone working on constructing alternative measures of GDP. But to me it raises bigger conceptual questions (questions that Hobijn and Steindel don’t get into, of course, since being mainstream guys they’re chasing the mirage of “welfare”). If short-term fluctuations are robust to alternative measurements but long-term growth is not, shouldn’t quantitative economics focus on the former? Is there a firm conceptual basis for talking about long-term growth as something we can even measure at all? Or was Keynes right when he said,

To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth — a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus.

Max Weber says…

What is the meaning of science as a vocation…? Tolstoi has given the simplest answer, with the words: ‘Science is meaningless because it gives no answer, the only question important for us: “what shall we do and how shall we live?”‘ That science does not give an answer to this is indisputable. …

Today one usually speaks of science as ‘free from presuppositions.’ Is there such a thing? It depends upon what one understands thereby. All scientific work presupposes that the rules of logic and method are valid; these are the general foundations of our orientation in the world; and, at least for our special question, these presuppositions are the least problematic aspect of science. Science further presupposes that what is yielded by scientific work is important in the sense that it is ‘worth being known.’ In this, obviously, are contained all our problems. For this presupposition cannot be proved by scientific means.

–“Science as a Vocation.”

This is why, altho I’m not personally religious, I can’t accept atheism as a principled position. Scientific knowledge is immensely useful and aesthetically satisfying, but people can live without it. What we cannot exist without is knowledge of “what shall we do and how shall we live.” Religion at least purports to give an answer to this question, science can’t. So if the two are really irreconcilable, science will have to go — at least until someone else can speak to that question with authority.

I ran across this quote recently in Alain Supiot’s Homo Juridicus and it inspired me to reread the Weber piece. What a wonderful essay. I particularly like — because I like anything I can take as a personal rebuke — his observation that “the dilettante differs from the expert … only in that he lacks a firm and reliable work procedure.” And his insistence — a genuine rebuke, to professors who try to use the lectern as a political platform — that political speech can take place only “where criticism is possible.”

Change we can believe in

To be sure, Wall Street is not exactly as it was before the cataclysm of last year. Then, a dozen or so big banks formed the top tier. Now Goldman Sachs and JPMorgan Chase are clearly the strongest.”

In other news, the latest Employment Situation release from the BLS shows financial-sector earnings up over 4.9% year over year — the third highest (after professional service and fabricated metal products) of any industry reported. Compared with 1.7% for the private sector as a whole. Looks like it’s time for Geithner, Summers and co. to hang the “Mission Accomplished” banner out…

How to think about genes

Pre-scientific or magical thinking has several key features:

* The idea of a direct or intrinsic connection between things, i.e. that if two things influence each other or are associated in some way, they are bound by an occult link, are subject to the same invisible forces. One can instantly affect the other with nothing linking them.
* The idea that the visible characteristics of something are the expression of an invisible essence.
* The failure to distinguish between perceptions an reality, so that anything we see or imagine or experience is assumed to have an independent existence in the objective world.

Popular thinking about genetics has exactly these characteristics. Anything we can say about an organism, any description we give it, is reified as an objective trait of the organism. (As if the placement of an animal in Borges’ Library of Babel was a property of the animal.) These traits are then assumed to be present in the organism’s inner being, i.e. its genes. And the genes are then believed to produce and modify the trait by occult direct action, without any need for specific intermediate transmission mechanisms.

It’s just scholasticism. They said a person who behaved intelligently must have a property of intelligence. We say they must have a gene for it.

The alternative, scientific view insists that until we know the mechanism by which something happens, we don’t know anything about it at all. And there’s no expectation that the mechanism has any formal or inherent resemblance to the observed phenomenon.

The beginning of wisdom is that genes code for proteins. (Or for RNA.) The only thing a gene does is produce a particular protein. Nothing except the protein is the product of the gene, there’s no sense in which a gene is “for” anything else.

These proteins then participate in causal pathways. These pathways always involve the organism’s pre-existing physical state, the products of other genes, and the external environment, and almost always involve the organism’s behavior. Each protein may participate in many pathways, and at least as important, various pathways converge at points where they are interchangeable. Great proportions of this protein or that protein or this dietary change or that behavioral stimulus will all produce the exact same developmental response. And multiple points along the pathway may be sites of selective pressure – there is no sense in which the influence of the gene stops at the point we’ve chosen to identify as a “trait”.

There are many wonderful examples of what this means in practice in Mary Jane West-Eberhard’s Developmental Plasticity and Evolution. There she also makes the somewhat related point that organisms constantly lean on the self-organizing capacities of inorganic matter — another way the whole “code” metaphor is wrong.

A short dialogue on democracy

From Gerth and Mills’ From Max Weber:

Ludendorff: What do you mean by democracy?

Weber: In a democracy the people choose a leader in whom they trust. Then the chosen leader says ‘Now shut up and obey me.’
Ludendorff: I could like such a democracy.

By different means we arrive at the same end

James Hamilton has written a number of pieces going back 15 or 20 years (most recently here) on the importance of oil prices to recessions in the US and other rich countries. He claims that every recession in the past 30-40 years has been preceded by a spike in oil prices, and on casual observation seems to be true. Of course, this being economics, a fair amount of his energy is devoted to whether this relationship holds up econometrically, which is not all that interesting; and another fair amount is devoted to whether it would obtain in some kind of idealized rational-agent economy, which is not interesting at all. He does say plenty that is interesting, tho, including this: that the earlier shocks were a reduction of supply faced with more or less stable demand, but the more recent price accelerations were the result of rising demand and inelestic supply. Which suggests a point of contact with a quite different literature, the cyclical profit-squeeze analysis of business cycles. This is a Marxian approach to fluctuations, which starts from the observation that almost every downturn is preceded by a decline in the profit rate and then decomposes that decline using the same kind of accounting framework that people use to talk about long-term declines in profit rates. Most typically, changes in the profit share are broken down between the profit share of output, the rate of capacity utilization, and the output-capital ratio at full utilization (i.e. the rate of potential output to capital; this isn’t exactly the organic composition of capital, but it can be thought of in a somewhat similar way.) The relative importance of these components, secularly and especially cyclically, is in that order; thus this gets called the “cyclical profit squeeze” approach, since it’s the rising labor share late in the expansion that evidently triggers the downturn. (In that order in the US, that is; in East Asia, and presumably other rapidly industrializing regions, there has been a steep rise in the capital-output ratio, unlike in the US where it’s essentially flat over the postwar period.) Other writers decompose the profit rate differently but the basic approach is the same. What does this have to do with oil prices? The answer is that more recent iterations of the cyclical profit-squeeze approach have found something very interesting. In the 50s, 60s, and 70s the “labor squeeze” took the straightforward form of an acceleration of real wages late in an expansion. But in recent cycles, real wages have been essentially flat over the cycle – and yet the labor share has continued to rise in expansions. How is that possible? Because late in expansions, the prices of wage goods (i.e. the CPI) rise significantly faster than the price of output (i.e. the GDP deflator.) In other words, even though workers’ real incomes don’t rise much in a boom, the share of output needed to provide them with those same incomes does rise, meaning less is left over for profits. In other words, in a boom an increasing share of income goes to stuff we consume, but don’t produce – including imported oil, obviously, but also things like rent of land. So these two very different approachs seem to lead to the same place, namely, a cyclical dynamic based on the increasing share of output going to factors in inelastic supply (or non-produced means of production) as growth exceeds a certain rate, or goes on for an extended period. In more recent cycles, profits are being squeezed by land rather than by labor, but maybe the underlying dynamic is the same. And if you think what chokes off growth in a boom is ultimately the claims of owners of non-produced factors, that suggests we might want to revive the classics, and think about a functional distribution between not two claimants – labor and capital – but between three – labor, capital and land. It’s a question, one suspects, that will only become more pressing in the coming century as “land” in the broad sense – land itself, oil, water, and other environmental inputs – become an increasing important constraint on growth.

Why “The Slack Wire”?

The phrase is from Adam Smith, who early in The Theory of Moral Sentiments describes how “the mob, when they are gazing at a dancer on the slack wire, naturally writhe and twist and balance their own bodies, as they see him do, and as they feel that they themselves must do if in his situation.” Any situation that you observe, or even hear described, he goes on to say, will bring forth “what [you] imagine to be the sentiments of the sufferer.” And why not? — don’t we only even experience our own lives by observing them, or describing them, as if from the outside?

The point, anyway, is that sympathy with others is an immediate, automatic, universal human response. One might go even farther and say our self, as we experience it, isn’t limited to our own isolated biological existence but encompasses some more or less broad set of those who are us.

This is a basic prior for my thinking about economics, and for my thinking about about politics. And economics and politics are what I expect this blog to be about.

Plus, slack wire implies, correctly, that what’s here is the opposite of taut: loose, underdeveloped, sloppy. And finally, it affirms my membership in the Cobain-Linklater-Copeland tribe (I even published something in the Baffler!) who’ve never quite got our footing since the 90s ended and we had to get real jobs.

So, the Slack Wire. Voila.


Except, goddamnit, what Smith says is “slack rope.” Not wire. And that is not evocative at all. So OK, for my purposes, I read it in some early edition where he did say wire. Prove me wrong.