James Pethokoukis

Politics and policy from inside Washington

Not winning the future: more on Obama’s strange ATM comments

Jun 22, 2011 12:30 UTC

My pal Russell Roberts of George Mason University speaks Economic Truth to Political Power as he dismantles Obama’s weird comments that ATM machines and automation kill jobs (via the Wall Street Journal):

Replace workers with machines in the name of lower costs. Profits rise. Repeat. It’s a wonder unemployment is only 9.1%. Shouldn’t the economy put people ahead of profits?

Well, it does. The savings from higher productivity don’t just go to the owners of the textile factory or the mega hen house who now have lower costs of doing business. Lower costs don’t always mean higher profits. Or not for long. Those lower costs lead to lower prices as businesses compete with each other to appeal to consumers.

The result is a higher standard of living for consumers. The average worker has to work fewer and fewer hours to earn enough money to buy a dozen eggs or a pair of shoes or a flat-screen TV or a new car that’s safer and gets better mileage than the cars of yesteryear. That higher standard of living comes from technology. It isn’t just the rich who get cheaper TVs and cars, plus the convenience of using an ATM at midnight.

Somehow, new jobs get created to replace the old ones. Despite losing millions of jobs to technology and to trade, even in a recession we have more total jobs than we did when the steel and auto and telephone and food industries had a lot more workers and a lot fewer machines.

Why do new jobs get created? When it gets cheaper to make food and clothing, there are more resources and people available to create new products that didn’t exist before. Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls. So many job descriptions exist today that didn’t even exist 15 or 20 years ago. That’s only possible when technology makes workers more productive.

Indeed, American needs to focus more on increasing productivity through innovation. And then means better tax, regulatory, education and immigration policy. And as this chart from McKinsey shows, we are headed in the wrong direction in many areas:

The economics of small classroom size

Mar 28, 2011 18:11 UTC

A charter school boss runs the numbers (via the WaPo):

At Harlem Success Academy Charter School, where we’ve gotten some of the best results in New York City, some classes are comparatively large because we believe our money is better spent elsewhere. In fifth grade, for example, every student gets a laptop and a Kindle with immediate access to an essentially unlimited supply of e-books. Every classroom has a Smart Board, a modern blackboard that is a touch-screen computer with high-speed Internet access. Every teacher has a laptop, video camera, access to a catalogue of lesson plans and videotaped lessons.

Outfitting a classroom this way costs about $40,000, or $13,500 amortized over three years. That’s how much New York charter schools receive per pupil annually, so we can afford this by just increasing class size by a single student. .. In other words, a 19th-century school can be transformed into a well-managed 21st-century school by adding just two students per classroom. Reducing class size is expensive because most costs vary with class size. Decrease a class from 25 to 24 students and you need to hire 4 percent more teachers as well as build and maintain 4 percent more buildings.

Obsession with class size is causing many public schools to look like relics. We spend so much to employ lots of teachers that there isn’t enough left to help these teachers be effective. According to the city’s education department, New York public schools spend on average less than 3 percent of their budgets on instructional supplies and equipment (1 percent), textbooks (0.6 percent), library books and librarians (0.5 percent), and computer support (0.5 percent). Basic supplies are rationed in absurd ways: A school will pay $5 million in salaries to teachers who end up wasting time writing on blackboards because the school has run out of paper that costs a penny a page. (Don’t believe me? Ask a teacher.)

Also, class sizes would not need to be as small if teachers were better trained in classroom management skills. Here is a bit from a must-read NYTimes magazine piece on the topic:

By figuring out what makes the great teachers great, and passing that on to the mass of teachers in the middle, he said, “we could ensure that the average classroom tomorrow was seeing the types of gains that the top quarter of our classrooms see today.” He has made a guess about the effect that change would have. “We could close the gap between the United States and Japan on these international tests within two years.”

The false choice of higher taxes and less spending

May 11, 2010 17:41 UTC

Over at NRO, Kevin Williamson tries to figure out how to reduce the US budget deficit:

I am not, in general, in favor of tax increases, but I think that Chait is correct that conservatives would do better to support a budget plan that combines real spending cuts with tax increases than to support a budget that does nothing to reduce spending but leaves taxes where they are or reduces them. The point being, from my point of view: Reducing government spending is paramount, and it is a much more important agenda item than tax cuts that will only defer the financial reckoning that our spending inevitably entails.

Closing the gap from revenues that equal 15 percent of GDP and spending that equals 25 percent of GDP still looks pretty hard to me. To repeat yesterday’s thought-experiment, say we construct a point-by-point trade-off, equalizing spending and revenue at 20 percent of GDP. I don’t see Republicans supporting a 33 percent tax increase or Democrats supporting a 20 percent spending cut. Lots of readers have made clever suggestions about how we get there, but none of them seem convincing to me. The trade-offs would have to be pretty significant, like collecting that 20 percent of GDP via a flat tax and enacting deep entitlement reform.
Me: First of all, let’s keep in mind that all the scary long-term deficit forecasts assume long-term US growth will be about a third slower than its historical average.  Smart tax policy, along with other pro-growth initiatives, could keep the US economy humming along.  Second, the higher-tax/less-spending austerity policy formulation has a poor track record. It brings weak growth and grumpy voters. More likely countries try to grow or inflate their way out of trouble.

Historical average is meaningless, sorry. One can’t assume the past will repeat itself in these matters. America was industrialized only up to the Mississippi as little as 100 years ago, and the growth that ensued up to the Korean War was based on building up the west and the industry to support that build up. After that followed a lull in economic growth as there was no more easy organic growth. It wasn’t until Nixon relieved the USD from the gold standard and then the policies of Reaganomics that growth approached the numbers from the days of yore – and those numbers were skewed by the growth of debt! In my opinion a fully developed economy like America should really only expect 1% growth + population growth (in America’s case a total of 2%.) For most of the rest of developed nations, that means 0-1%. Forcing up those numbers into 2-4% range in effect really only creates bubbles because the support isn’t there for those growth valuations. And so we’ve seen in the last 15 years… well, really since ’86-87, but I’ll limit to the dot-com build up to be fair

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Economic guru: US faces its worst two decades in history

Mar 29, 2010 14:04 UTC

Get ready for the Long Recession.

Well, at least a long period of time where it is going to seem like the US economy is kind of sickly. That is the conclusion of productivity guru Robert Gordon in a new paper. He says US living standards now face their slowest two-decade growth rate “since the inauguration of George Washington.” More:

The statistical trend for growth in total economy [labor productivity] ranged from 2.75 percent in early 1962 down to 1.25 percent in late 1979 and recovered to 2.45 percent in 2002. Our results on productivity trends identify a problem in the interpretation of the 2008-09 recession and conclude that at present statistical trends cannot be extended past 2007.

For the longer stretch of history back to 1891, the paper provides numerous corrections to the growth of labor quality and to capital quantity and quality, leading to significant rearrangements of the growth pattern of MFP, generally lowering the unadjusted MFP growth rates during 1928-50 and raising them after 1950. Nevertheless, by far the most rapid MFP growth in U. S. history occurred in 1928-50, a phenomenon that I have previously dubbed the “one big wave.”

The paper approaches the task of forecasting 20 years into the future by extracting relevant precedents from the growth in labor productivity and in MFP over the last seven years, the last 20 years, and the last 116 years. Its conclusion is that over the next 20 years (2007-2027) growth in real potential GDP will be 2.4 percent (the same as in 2000-07), growth in total economy labor productivity will be 1.7 percent, and growth in the more familiar concept of NFPB sector labor productivity will be 2.05 percent. The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington.

Me: There is no more basic political and economic issue than a nation’s standard of living. If  Gordon is right, this will dominate US politics as another sign of American decline.


Or Plan B we could just throw the Democrats out of office (which even the “Greatest Generation” wouldn’t do), rip Obama’s poisoned laws out of the ground, and get our economy back to a nice happy 4.5% unemployment rate.

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How to get a strong dollar

Oct 8, 2009 16:56 UTC

The enlightening David Malpass in the WSJ:

Measured in euros (a more stable ruler than the ever-weakening dollar), U.S. real per capita GDP is down 25% since 2000, while Germany’s is up 4% and tops ours. The solution is a strong U.S. jobs and wealth program. It has to include stable money, a flatter, more competitive tax structure, spending restraint, and common-sense bank regulation so small business lending can restart. Treasury has to rapidly lengthen the maturity of the national debt and take steps to protect the Fed from market losses on its long-term debt holdings.

Me: Absolutely. Don’t worry about the dollar per se, just put in place policies that keep inflation low and productivity high. While Team Obama likes the weak dollar (though Congress is getting worried), the chances of a sharp dollar tumble are rising and will force it to reduce the deficit soon than it would prefer.

Can Obama spend US back into prosperity?

Sep 22, 2009 18:07 UTC

Presidents, particularly Democrats it seems, love to try and attach catchy titles to their agendas. FDR’s New Deal and JFK’s New Frontier made for powerful branding. Bill Clinton’s New Covenant, not so much.

Barack Obama seems to be going with “New Foundation,” the title of a big-think economy speech from last spring. As the President said back then with biblical flair: “We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity.”

As a follow up, the White House’s National Economic Council, headed by Lawrence Summers, just released a new white paper that fleshes out how the administration plans to create that “new foundation.” In a post on the official White House blog, Summers says the government needs to take an active role in strengthening America’s “economic ecology.”

But let’s examine the diagnosis before we turn to the prescribed treatment. The most important statistic for analyzing a nation’s economic strength is worker productivity. And since 1995, U.S. worker productivity has increased at a terrific annual rate of about 2.6 percent.

But is that somehow a phony number, a mere derivative of the equity and housing bubbles? The White House doesn’t seem to think so. As economic adviser Jared Bernstein told me recently, “There is nothing that’s changed in the basic underlying productivity and strength of the American workforce and the American economy. [Productivity] remains in that kind of post –’95, elevated, 2 ½ percent range.”

In other words, Obama actually inherited an economy with a pretty solid foundation, though clearly one with some cracks. And don’t forget that despite the financial crisis, the World Economic Forum still recently ranked the American economy as the second-most competitive in the world, far in front of major competitors such as Germany and France.

The key, then, is to build on America’s existing strong foundation of innovation-driven productivity. Summer’s NEC makes a variety of recommendation such as increased government investment in education, infrastructure and basic research. And as long as that spending is limited to the “building blocks” of economic growth as opposed to picking winners, Uncle Sam might actually do some good here.
Unfortunately, the White House has been picking winners in a sort of an ad hoc industrial policy. Maybe the banks were too big too fail, but GM and Chrysler?

And why should the tax code continue to favor the housing sector? Is building bigger homes and vacation getaways the best use of American capital? Yet there is little evidence the White House plans on changing that sector’s privileged position.

And the President continue to favor the idea of high-speed rail, a favorite of unions and green activists, despite numerous studies questioning the economic benefit of such a system in the vast, spread-out United States.

The administration also seems to be making a bet that higher taxes on small businesses, investment and higher incomes will have limited or no negative effect on the nation’s entrepreneurial climate.

Finally, any productivity guru will tell you that perhaps the most important thing a country can do to boost innovation and economic efficiency is keeping markets open. Or to use the favorite phrase of Diana Farrell, former director of the McKinsey Global Institute and now a Summer’s deputy at the NEC, “creating maximum competitive intensity.” Obama’s tire tariff doesn’t seem to qualify as a pro-innovation measure by that standard.

So by all means, repair some bridges and spend more bucks at federal labs. But innovation and productivity involve a whole lot more.



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Is this what a U.S. third party would look like?

Aug 18, 2009 13:46 UTC

Thinker extraordinaire Joel Kotkin gives an outline:

Given this sad political picture, the best hope now is to build an alternative perspective that focuses on the basic economic issues. This would not be the media celebrated movement of moderates–Democrats-lite and Republicans-lite–who seek kumbaya through compromise. It would, instead, require a radical third tendency–neither strictly left or right–that would draw on long-term American priorities and values.

These new radicals would focus on basic issues like improving infrastructure, and primary education and bolstering the nation’s productive economy. Their inspiration would come from a long tradition of federal successes–from the Homestead Act and the WPA to the Interstate Highway and the space program. They would view the financial crisis not as an imperative for protecting the well-connected but for financial reform, decentralization and innovation.

Such an approach would address what the British author Austin Williams calls our ”poverty of ambition.” Americans historically have rejected a future constrained by entrenched hierarchies. Most, I believe, would support spending money and paying taxes, if it was spent to achieve big things that would lead to a greater, more widespread prosperity and opportunity.

Just imagine if the upward of $1 trillion spent guaranteeing Goldman Sachs and Citigroup executives giant paydays had instead gone into roads, bridges, subways, buses, port development, skills training, energy transmission lines and basic scientific research. And imagine if instead of protecting Citigroup and Bank of America, we encouraged stronger local banks and solvent financial entrepreneurs to fill the breach left behind by gross failures.

Me: I think this sort of approach would have tremendous appeal. The $800 billion stimulus plan will go down as a tremendous missed opportunity. The most important thing here is the focus on the “productive economy.” If America doesn’t have that, nothing else works.


The 2 party system leads to endless “compromises” where both sides get everything they want-all take, no give. A true 3rd party would need to battle the entrenched political class and that is one tough goal. It would need to include: term limits, balanced budgets, entitlement reform (elimination of current pyramid / ponzis like Social Security)smalller government, referendums, business experience for executive positions and a moratorium on “blame America” nonsense.

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