Friday, March 22, 2019

What Did Gutenberg's Printing Press Actually Change?

There's an old slogan for journalists: "If your mother says she loves you, check it out." The point is not to be  too quick to accept what you think you already know.

In a similar spirit, I of course know that the introduction of a printing press with moveable type by to Europe in 1439 by Johannes Gutenberg is often called one of the most important inventions in world history. However, I'm grateful that Jeremiah Dittmar and Skipper Seabold have been checking it out. They have written "Gutenberg’s moving type propelled Europe towards the scientific revolution," for the LSE Business Review (March 19, 2019). It's a nice accessible version of the main findings from their  research paper, "New Media and Competition: Printing and Europe'sTransformation after Gutenberg" (Centre for Economic Perfomance Discussion Paper No 1600 January 2019). They write:

"Printing was not only a new technology: it also introduced new forms of competition into European society. Most directly, printing was one of the first industries in which production was organised by for-profit capitalist firms. These firms incurred large fixed costs and competed in highly concentrated local markets. Equally fundamentally – and reflecting this industrial organisation – printing transformed competition in the ‘market for ideas’. Famously, printing was at the heart of the Protestant Reformation, which breached the religious monopoly of the Catholic Church. But printing’s influence on competition among ideas and producers of ideas also propelled Europe towards the scientific revolution.While Gutenberg’s press is widely believed to be one of the most important technologies in history, there is very little evidence on how printing influenced the price of books, labour markets and the production of knowledge – and no research has considered how the economics of printing influenced the use of the technology."


Dittmar and Seabold aim to provide some of this evidence. For example, here's their data on how the price of 200 pages changed over time, measured in terms of daily wages. (Notice that the left-hand axis is a logarithmic graph.) The price of a book went from weeks of daily wages to much less than one day of daily wages. 



They write: "Following the introduction of printing, book prices fell steadily. The raw price of books fell by 2.4 per cent a year for over a hundred years after Gutenberg. Taking account of differences in content and the physical characteristics of books, such as formatting, illustrations and the use of multiple ink colours, prices fell by 1.7 per cent a year. ... [I]n places where there was an increase in competition among printers, prices fell swiftly and dramatically. We find that when an additional printing firm entered a given city market, book prices there fell by 25%. The price declines associated with shifting from monopoly to having multiple firms in a market was even larger. Price competition drove printers to compete on non-price dimensions, notably on product differentiation. This had implications for the spread of ideas."

Another part of this change was that books were produced for ordinary people in the language they spoke, not just in Latin. Another part was that wages for professors at universities rose relative to the average worker, and the curriculum of universities shifted toward the scientific subjects of the time like "anatomy, astronomy, medicine and natural philosophy," rather than theology and law.
The ability to print books affected religious debates as well, like the spread of Protestant ideas after Martin Luther circulated his 95 theses criticizing the Catholic Church in 1517.

Printing also affected the spread of technology and business.
Previous economic research has studied the extensive margin of technology diffusion, comparing the development of cities that did and did not have printing in the late 1400s ...  Printing provided a new channel for the diffusion of knowledge about business practices. The first mathematics texts printed in Europe were ‘commercial arithmetics’, which provided instruction for merchants. With printing, a business education literature emerged that lowered the costs of knowledge for merchants. The key innovations involved applied mathematics, accounting techniques and cashless payments systems.
The evidence on printing suggests that, indeed, these ideas were associated with significant differences in local economic dynamism and reflected the industrial structure of printing itself. Where competition in the specialist business education press increased, these books became suddenly more widely available and in the historical record, we observe more people making notable achievements in broadly bourgeois careers.
It is impossible to avoid wondering if economic historians in 50 or 100 years will be looking back on the spread of internet technology, and how it affected patterns of technology diffusion, human capital, and social beliefs--and how differing levels of competition in the market may affect these outcomes. 

Thursday, March 21, 2019

The Remarkable Renaissance in US Fossil Fuel Production

M. King Hubbert was a big-name geologist who worked much of his career for Shell oil. Back in the 1970s, when OPEC taught the US that the price of oil was set in global markets, discussions of US energy production often began with the "Hubbert curve," based on a 1956 paper in which Hubbert predicted with considerable accuracy that US oil production would peak around 1970. The  2019 Economic Report of the President devotes a chapter to energy policy, and offers a reminder what happened with Hubbert's curve.

The red line shows Hubbert's predicted oil production curve from 1956. The blue line shows actual US oil production in the lower 48 states. At the time of Hubbert's death in 1989, his forecast looked spot-on. Even by around 2010, his forecast looked pretty good. But for those of us who had built up a habit since the 1970s of looking at US oil production relative to Hubbert's prediction, the last decade has been a dramatic shock. .

Indeed, domestic US oil production now outstrips that of the previous world leaders: Saudi Arabia and Russia.

The surge in US fossil fuel production is about natural gas as well as oil. Here's a figure which combines output of all US fossil fuel production, measured by its energy content. You can see that it's (very) roughly constant from the 1980s up through about 2010, and then everything changes.



Many Americans are ambivalent about fossil fuel production. We demonstrate our affection for it by driving cars, riding in airplanes, and consuming products that are shipped over US transportation networks and produced with fossil fuels (for many of us, including electricity). People who live in  parts of the country that are active in fossil fuel production often like the jobs and the positive effects on the local economy. On the other side, many of us worry both about environmental costs of energy production and use, and how they might be reduced.

Big picture, the US economy has been using less energy to produce each $1 of GDP over time, as have other high-income economies like those of western Europe.
My guess is that the higher energy consumption per unit of output in the US economy is partly because the US is a big and sprawling country, so transportation costs are higher, but also that many European countries impose considerably higher taxes on energy use than the US, which tends to hold down consumption.

The US could certainly set a better example for other countries in making efforts to reduce carbon emissions. But that said, it's also worth noting that US emissions of carbon dioxide have been essentially flat for the last quarter-century. More broadly, North America is 18% of global carbon emissions, Europe is 12%, and the Asia-Pacific region is 48%.  Attempts to address global carbon emissions that don't have a heavy emphasis on the Asia Pacific region are missing the bulk of the problem.

Overall, it seems to me that the sudden growth  of the US energy sector has been a positive force. No, it doesn't mean that the US is exempt from global price movements in energy prices. As the US economy has started to ramp up energy exports, it will continue to be clear that energy prices are set in global markets. But the sharp drop in energy imports has helped to keep the US trade deficit lower than it would otherwise have been. The growing energy sector has been a source of US jobs and output. The shift from coal to natural gas as a source of energy has helped to hold down US carbon dioxide emissions. Moreover, domestically-produced US energy is happening in a country which has, by world standards, relatively tight environmental rules on such activities.

Wednesday, March 20, 2019

Wealth, Consumption, and Income: Patterns Since 1950

Many of us who watch the economy are slaves to what's changing in the relatively short-term, but it can be useful to anchor oneself in patterns over longer periods. Here's a graph from the 2019 Economic Report of the President which relates wealth and consumption to levels of disposable income over time.
The red line shows that total wealth has typically equal to about six years of total personal income in the US economy: a little lower in the 1970s, and  a little higher in recent years at the peak of the dot-com boom in the late 1990s, the housing boom around 2006, and the present.

The blue line shows that total consumption is typically equal to about .9 of total personal income, although it was up to about .95 before the Great Recession, and still looks a shade higher than was typical from the 1950s through the 1980s.

Total stock market wealth and total housing wealth were each typically roughly equal to disposable income from the 1950s up through the mid-1990s, although stock market wealth was higher in the 1960s and housing wealth was higher in the 1980s. Housing wealth is now at about that same long-run average, roughly equal to disposable income. However, stock market wealth has been nudging up toward being twice as high as total disposable income in the late 1990s, round 2007, and at present .

A figure like this one runs some danger of exaggerating the stability of the economy. Even small  movements in these lines over a year or a few years represent big changes for many households.

What jumps out at me is the rise in long-term stock market wealth relative to income since the late 1990s. That's what is driving total wealth above its long-run average. And it's probably part of what what is causing consumption levels relative to income to be higher as well. That relatively higher level of stock market wealth is propping up a lot of retirement accounts for both current and future retirees--including my own.

Reentry from Out of the Labor Market

Each year, the White House Council of Economic Advisers published the Economic Report of the President, which can be thought of as a loyalist's view of the current economic situation. For example, if you are interested in a rock-ribbed defense of the Tax Cuts and Jobs Act passed in December 2017 or of the deregulatory policies of the Trump administration looks like, then Chapters 1 and 2 of the 2019 report are for you. Of course, some people will read these chapters with the intention of citing the evidence in support of the Trump administration, while others will be planning to use the chapters for intellectual target practice. The report will prove useful for both purposes.

Here, I'll focus on some pieces of the 2019 Economic Report of the President that focus more on underlying economic patterns, rather than on policy advocacy.  For example, some interesting patterns have emerged in what it means to be "out of the labor market."

Economists have an ongoing problem when looking at unemployment. Some people don't have a job and are actively looking for one. They are counted as "unemployed." Some people don't have a job and aren't looking for one. They are not included in the officially "unemployed," but instead are "out of the labor force." In some cases, those who are not looking for a job are really not looking--like someone who has firmly entered retirement. But in other cases, some of those not looking for a job might still take one, if a job was on offer.

This issue came up a lot in the years after the Great Recession. The official unemployment rate topped out in October 2009 at 10%. But as the unemployment rate gradually declined, the "labor force participation" rate also fell--which means that the share of Americans who were out of the labor force and not looking for a job was rising.You can see this pattern in the blue line below.
There were some natural reasons for the labor force participation rate to start declining after about 2010. In particular, the leading edge of the "baby boom" generation, which started in 1945, turned 65 in 2010, so it had long been expected that labor force participation rates would start falling with their retirements.

Notice that the fall in labor force participation rates levelled off late in 2013. Lower unemployment rates since that time cannot be due to declining labor force participation. Or an alternative way to look at the labor market is to focus on employment-to-population--that is, just ignore the issue of whether those who lack jobs are looking for work (and thus "in the labor force") or not looking for work (and thus "out of the labor force"). At about the same time in 2013 when the drop in the labor force participation rate leveled out, the red line shows that the employment-to-population ratio started rising.

What especially interesting is that many of those taking jobs in the last few years were not being counted as among the "unemployed." Instead, they were in that category of "out of the labor force"--that is, without a job but not looking for work. However, as jobs became more available, they have proved willing to take jobs. Here's a graph showing the share of adults starting work who were previously "out of the labor force" rather than officially "unemployed."
A couple of things are striking about this figure.

1) Going back more than 25 years, it's consistently true that more than half of those starting work were not counted as "unemployed," but instead were "out of the labor force." In other words, the number of officially "unemployed" is not a great measure of the number of people actually willing to work, if a suitable job is available.

2) The ratio is at its  highest level since the start of this data in 1990. Presumably this is because when the official unemployment rate is so low (4% or less since March 2018), firms that want to hire are needing to go after those who the official labor market statistics treated as "not in the labor force."

Tuesday, March 19, 2019

Alternatives to the Four-Year College Track for Everyone Else

As the US goes through one of its periodic paroxysms over how the small minority of high school graduates who attend a selective four-year undergraduate college is chosen, it's worth taking a moment to remember everyone else.  US high schools graduate about 3.6 million students each year. That's a big group, with a wide array of abilities, preparation, and interests. For a substantial number of them, high school was not an especially rewarding academic experience, and no matter what they are told by their college-educated teachers and college-educated counselors, the idea of signing up for a few more years of academic courses is not very enticing.

Oren Cass has written a short essay about this group, "How the Other Half Learns: Reorienting an Education System That Fails Most Students" (Manhattan Institute, August 2018). Here are a couple  of points that caught my eye. 

One study looked back at the students who graduated from high school in 2003, and how the education system had treated them six years later. The data is obviously a few years old, but the overall patterns don't seem to have changed much. For example, about 70% of high school grads enrolled in college in 2003, and about 70% did so in 2016, too.  

Of the 70% who started off to college in 2003, about two-thirds went to a four-year school and one-third to a two years school. Six years later, by 2009, fewer than half of those who started off to college in 2003 had a degree. 

Cass calculates the proportions this way: 
Consider a cohort of 100 students arriving in the ninth grade:
  • Of the 100, 18 of them won’t graduate on time from high school 
  • Of the 82 who do graduate, 25 won’t enroll in higher education
  • Of the 57 who do enroll, 29 won’t earn even an associate’s degree after six years
  • Of the 28 who do graduate, 12 will land in jobs that do not require a degree 
  • Only 16 will successfully navigate the high school to college to career pipeline—the current aim of the education system.
Of course, these problems are fairly well-known. I've written here about "The Problem of College Completion Rates" (June 29, 2018), and about "Some Proposals for Improving Work, Wages and Skills for Americans" (February 19, 2019) like a dramatic expansion of community colleges. But my sense is that the issue here runs deeper. Cass offers one way of thinking about alternatives. 

Of course, this alternative track does require students to make some choices in about 11th grade, but frankly, that doesn't worry me too much. By 10th grade, a lot of students have a fairly good grip on where they stand academically. And if a student chooses a career and technical education track, but decides after a couple of years to give college a try, that's of course just fine. 

The bigger hurdle, it seems to me, is that the alternative vision requires a group of employers who are willing to restructure their organizations in a way that will enable a steady stream of 18-20 year-olds to enter a subsidized work program every year. Moreover, these employers need to treat these young workers not just as an unskilled pair of hands, but to think about what kinds of training and certification these young workers should be attaining during this time. Most US employers are not used to thinking of themselves in these roles. 

But it seems to me that a substantial share of the 3.6 million high school graduates each year might prefer something like Cass's "alternative pathway" to a four-year college degree. As the figure illustrates, society would not be investing less in these young adults--it would just be investing differently. Like a lot of people who ended up working in academia, I went off to college eager and enthusiastic about doing things like reading Adam Smith and Plato, and writing papers about topics like the international law ramifications of the UK-Icelandic cod fishery disputes of the 1970s. But I have noticed over time that not everyone shares my enthusiasms. The US needs alternative paths to good jobs at good wages that don't just involve telling all of the 3.6 million high school graduates  they need to keep going to school.  

Monday, March 18, 2019

Paul Cheshire: "Cities are the Most Welfare Enhancing Human Innovation In History"

Hites Ahir interviews Paul Cheshire in the March 2019 issue of his Housing Watch Newsletter (interview here, full newsletter here). Here are a few of Cheshire's comments that caught my eye:

The Economic Gains from Cities
"There are many types of agglomeration economies in consumption and we really know very little about them still but my assessment is that cities are the most welfare enhancing human innovation in history: they empowered the division of labour, the invention of money, trade and technical inventions like the wheel – let alone government, the arts or culture."
Why Land is Regaining Importance in Economic Analysis
"Classical economists devoted far more effort to trying to understand the returns to land than they did to labour or capital: it was both the most important asset and the most important factor of production. When Adam Smith was writing only about 12 percent of Europe’s population lived in cities and even in the most industrialised country, Britain, the value of agricultural land was about 3 times that of annual GDP. But as the value of other assets increased, interest in land diminished so that by about 1970 really only agricultural economists and a few urban economists were interested in it: and they did not talk to each other. But by 2010 residential property, mostly the land on which houses sat, was worth three times as much as British GDP. By the end of 2013 houses accounted for 61 percent of the UK’s net worth: up from 49 percent 20 years ago. Land, now urban land, is valuable, so there is renewed interest."
Urban Policy Often Misses the Problems of the Modern City
"Luckily cities are so resilient because urban policy is generally so bad! ... Policy has been dominated by physical and design ways of thinking: great for building those fantastic innovations of the 19th Century – sewers or water supply. But not useful for facilitating urban growth and offsetting for the costs of city size. We know cities keep on getting more productive the bigger they are but some costs – the price of space, congestion, for example – also increase with city size. So urban policy should offset for those costs. Instead it mainly increases them. Popular policies of densification and containment restrict the supply of space, increasing its price as cities grow so we forego socially valuable agglomeration economies. Another popular policy – height restrictions – reduces gains from ‘vertical’ agglomeration economies."

Friday, March 15, 2019

Some Peculiarities of Labor Markets: Is Antitrust an Answer?

Labor markets are in some ways fundamentally different from markets for goods and services. A job is a relationship, but in general, the worker needs the relationship to begin and to last more than the employer does/ John Bates Clark , probably the most eminent American economist of his time, put it this way in his 1907 book, Essentials of Economic Theory
"In the making of the wages contract the individual laborer is at a disadvantage. He has something which he must sell and which his employer is not obliged to take, since he [that is, the employer] can reject single men with impunity. ... A period of idleness may increase this disability to any extent. The vender of anything which must be sold at once is like a starving man pawning his coat—he must take whatever is offered."
In the last few years, an idea has emerged that the same government agencies that are supposed to be concerned about monopoly power--that is, when dominant firms in an industry can take advantage of the lack of competition to raise the prices paid by consumers--should also be concerned about "monopsony" power--that is, when dominant firms in an industry can take advantage of the lack of competition to reduce the wages paid to workers. Eric A. Posner, Glen Weyl and Suresh Naidu offer a useful overview of this line of thought in "Antitrust Remedies for Labor Market Power," published in the Harvard Law Review. (132 Harv. L. Rev. 536, December 2018). My own sense is that their discussion of the power imbalance in labor markets is fully persuasive, but it also seems to me that antitrust is at most a very partial and incomplete way of addressing these issues. 

Here's a nice explanation from Posner, Weyl, and Naidu of why workers have reason to feel vulnerable to the monopsony power of employers in labor markets (footnotes omitted):

But there is reason to believe that labor markets are more vulnerable to monopsony than products markets are to monopoly, thanks to a different literature in economics. This literature, for which Professors Lloyd Shapley and Alvin Roth were awarded the Nobel Prize, emphasizes the importance of matching for labor markets.The key point is that in labor markets, unlike in product markets, the preferences of both sides of the market affect whether a transaction is desirable. 
Compare buying a car in the product market and searching for a job. Both are important, high-stakes choices that are taken with care. However, there is a crucial difference. In a car sale, only the buyer cares about the identity, nature, and features of the product in question — the car. The seller cares nothing about the buyer or (in most cases) what the buyer plans do with the car. In employment, the employer cares about the identity and characteristics of the employee and the employee cares about the identity and characteristics of the employer. Complexity runs in both directions rather than in one. Employers search for employees who are not just qualified, but also who possess skills and personality that are a good match to the culture and needs of that employer. At the same time, employees are looking for an employer with a workplace and working conditions that are a good match for their needs, preferences, and family situation. Only when these two sets of preferences and requirements “match” will a hire be made. 
This two-sided differentiation is why low-skill workers may be as or even more vulnerable to monopsony than high-skill workers, despite possibly being less differentiated for employers. Low-skill workers may have less access to transportation, well-situated housing markets, child care options, and job information, and be more dependent on local, informal networks, all of which make jobs less substitutable and employers more differentiated. 
This dual set of relevant preferences means that labor markets are doubly differentiated by the idiosyncratic preferences of both employers and workers. In some sense this dual set of preferences “squares” the differentiation that exists in product markets, naturally making labor markets thinner than product markets. This relative thinness means that the cost of entering a transaction — in relation to the gains from trade — is on average greater in employment markets than in product markets because people are not as interchangeable as goods. 
These matching frictions both cause and reinforce the typically long-term nature of employment relationships compared to most product purchases, leading to significant lock-in within employment relationships. They are also reinforced by the more geographically constrained nature of labor markets. In our increasingly digital and globalized world, products are easily shipped around the country and world; people are not. While traveling is easier than in the past, and telecommuting has become more common, labor markets remain extremely local while most product markets are regional, national, or even global.Most jobs still require physical proximity to the employer, greatly narrowing the geographic scope of most labor markets, given that many workers are not willing to move away from family to take a job. Two-income families further complicate these issues because each spouse must find a job in the area in which the other can, further narrowing labor markets. Together these factors naturally make labor markets highly vulnerable to monopsony power, much more vulnerable than most product markets are to monopoly power.
To what extent might antitrust be a remedy for these kinds of issues? There are certainly situations where it seems appropriate. For example,  the authors discuss "the revelation that high-profile Silicon Valley tech firms, including Apple and Google, entered nopoaching agreements, in which they agreed not to hire each other’s employees. This type of horizontal agreement is a clear violation of the
Sherman Act. The firms settled with the government [in 2018], but the casual way in which such major firms, with sophisticated legal staffs, engaged in such a blatant violation of the law appears to have alarmed antitrust authorities. The government subsequently issued guidelines to human resources offices warning them that even implicit agreements not to poach competitors’ employees are illegal." 

Another set of examples involve the growth of "non-compete" agreements, in which a worker is required to sign an agreement to not to work for a competing firm for some period of time (for additional discussion, see "The Economics of Noncompete Agreements," April 19, 2016). It's also true that about 25% of the US workforce is now in jobs that require a government license, and these licenses often appear to be at least as much about limiting competition in a certain area of the labor market--for example, blocking movement across state lines-- as ensuring quality and information for consumers
One can also imagine that standard merger investigations might take labor market effects into account. For example, say that three hospitals in a local area propose a merger. The standard analysis would look at the reduction in competition that is likely to occur, along with the possibility of higher prices for consumers, and then balance that against whether the merger is likely to produce efficiency gains or synergies that would benefit consumers. This analysis might also take into account not just effects on consumers, but whether the monopsony power of the merged hospitals might push down labor wages in that local market.

But at least for me, it's not clear that there are a lot of standard merger cases, focused on product market competition and effects on consumers, where including the labor market effects would alter the outcome. Perhaps more to the point, conventional antitrust doesn't seem likely to do much at all about the deeper pecularities of labor markets, like the issues pointed out above of two-sided differentiation, moving costs, two-earner couples looking for a job in the same place, and so on.

Perhaps one answer is to expand our notion of how the competition authorities might address the issue of labor market power of large employers. The authors write in a somewhat speculative tone:
Our present business landscape exhibits a number of extremely powerful employers as a result of the neglect of mergers and other anticompetitive behavior in labor markets. While a more detailed examination would be needed to draw any firm conclusions, antitrust investigations into massive employers (such as Compass Group, Accenture, Amazon, Uber, and Walmart), as well as platform-based firms that receive vast flows of valuable data services without any compensation (such as Facebook and Google), seem warranted. It may be that some of these firms have achieved such powerful monopsonies that they should be broken up.
Again, the argument here is not that consumers would benefits from breaking up these firms, but that it should be considered on behalf of workers, with the belief that if these firms operated with more competitors, they would need to pay higher wages. I'm open to more evidence on this point, but I'm unpersuaded by the existing evidence. It seems to me that the more direct approach to addressing the generalized power imbalance against workers is to pursue various "active labor market policies" that provide assistance with job search, relocation, and retraining, as well as doing whatever we can to run a "high pressure" economy where unemployment rates are low, so that workers are both in demand and have some plausible alternative options if they want or need to switch employers.

Postscript: For a discussion of how an economist and a classics scholar came up with teh terminology of "monopsony" back in 1933, see Thornton, Robert, J. 2004. "Retrospectives: How Joan Robinson and B. L. Hallward Named Monopsony." Journal of Economic Perspectives, 18 (2): 257-261.)