Terrible GDP numbers

So the BEA Q2 release was worse than expected, at 1.3%, and the revisions were horrific. Q1 was just 0.4% now, and there were downward revisions back through 2008. The consumer is frozen.

Where are the jobs?

Interesting post by Walter Russell Mead on 'where are the jobs', here: http://tinyurl.com/3vw7swx. He argues that a lot of new jobs will come from "value added intermediation"- people who will help you navigate the complexities of booking a vacation or financial advice, or getting into college. I'm not so sure. It sounds like "fixers" in developing countries who help you through the bureaucracy , for a fee. There will certainly be some more demand for concierge-like services like this, but it would have to be high-end and expensive. Otherwise much could still be do by automating ( eg turbotax again), or searching forums for the answer to questions, as we often do now for tech support.

Friday on the brink

It seems the world is filling up with negative news. The US is risking technical default next week and a higher chance of a rating downgrade. In Europe, Italy and Spain 10year yields are up again and there is no resolution of the chronic euro fiscal crisis. China is facing up to limitations in its own vast investment-led approach, as anger builds over the high-speed train crash near Wenzhou.

I almost feel numbed, detached from constant crises. It's been four years now since the current crisis started building in 2007. Before that, there was the Internet crash and the Enron problems in the equity market. Before that, the Asia crisis, the Russia crisis, the 1994 bond market shakeout. Before that.... Tulip mania, the South Sea bubble. I am disillusioned that we never seem to really get that much better in policy terms.

We get the first Q2 GDP estimate this morning, and let's hope it's not a downside surprise.

Burning down the house

One thing is sure - the days of easy government expansion and borrowing are coming to an end. Italy's 10-year auction this morning hit 5.77%.

And the US is struggling with the debt limit and limited political tolerance for any more spending.

The Fires of Productivity

So one of the biggest things on my mind is the ferocious improvements in productivity in many sectors of the economy. Technological change is destroying jobs at a ferocious rate. Of course, that has happened since the Luddites rioted against new textile looms in the early 19th century, and probably before that, deep into the middle ages.

But the process is happening faster than ever, and perhaps faster than slower social customs and people can adapt to. One theme at the Jackson Hole Federal Reserve conference last year was whether the economy was becoming hollowed out by a decline in middle-skilled jobs such as basic accountancy, sales, and office work. Low-income face-to-face service jobs are still needed, like the store where I bought my sandwich for lunch. And there is demand for high-skilled people- employment for people with a college degree is just 4.4% in the most recent BLS release, compared to the headline unemployment rate of 9.2%.

But routine accountancy can be automated or outsourced. Turbotax can replace the routine tax advisor, Travel agents are mostly a memory. People like Thomas Friedman argue that if your job can be automated, before long it will.

Step back and look at the longer-term shifts which have revolutionized what people do. We feed ourselves in the US with less than 1% of the workforce employed in agriculture. People flooded off the farms and into the factories a century ago

Increasingly, we only need a tiny proportion of the workforce to manufacture goods as well. The head of GE, Jeffrey Immelt, was talking the other day about one of his factories in the Carolinas which makes jet engines. It was a cathedral of productivity, employing only 300 or so people. http://www.ft.com/intl/cms/s/0/1d467a7c-b883-11e0-8206-00144feabdc0.html#axzz1TQNwbp4Y

American companies are increasingly competitive with Chinese manufacturers again, as wages rise in China and productivity remains around 10% of comparable US levels. They need far fewer people. Manufacturing is going the way of agriculture.

Many services are now beginning to see the same thing. Retail is adapting to the internet - Borders closed down just last week.

The next big thing usually employs more people than ever before. Technological advance always destroys jobs, but usually creates better, newer ones in expanding sectors. ATM machines put bank clerks out of work in the 1980s. Cellphones creates tens of thousands of new jobs in the 1990s and 2000s. It is hard to know where such job will come in advance.

But the big growth companies right now, like Facebook and Twitter, employ hundreds of people. It is not like Henry Ford building the River Rouge plant and employing tens of thousands. And If improved technology actually cut medical administration costs, for example, an an entire sector of the US economy could quickly shed millions of jobs.

Maybe we are starting to see a more profound change in the nature of work and the nature of added value.

Debt ceiling pathology

It isn't much of an advertisement for Congress. Checks and balances has turned into just checks - in the sense both of blockages and endless writing of more checks.

And it is important to remember that interest rates on the debt are currently eye-wateringly low, near zero at the front end of the curve. If rates go back to their historical averages, then the hit could easily be $200 bn a year or more. This debate is actually happening in an unusually benign bond market with unusually low payments on the stock of debt.

Discretionary spending on things like the FAA or food safety or even the usual pork is just a sideshow, of course. Everything really comes down to medicare and medicaid. If you don't solve those, arithmetically you can't solve the wider budget problem.

The US would actually be in good shape if it could only control the growth rate of healthcare spending. Some of the growth in medical spending is demographic, because of more elderly people in the population. But more is just waste. And neither party has a good plan to deal with it. The Republican Cantor plan caps government spending on Medicare...but there is no sign that private insurance companies have been successful at containing costs. The pilot plans and independent board in the Democratic plan are toothless.

It does mean, though, that shouting over the debt limit and the size of government distracts from the real issue. How can medical cost growth be contained? Solve that and the rest looks after itself. The drama on the debt limit just distracts from the need to make decisions on the longer-term things that matter.

Playing with default

Congress is still in deadlock over the debt ceiling, and it is increasingly likely that one or more of the rating agencies will downgrade the US. The risk-free rate itself will no longer be risk-free. And there is probably a 5-10% chance of a technical default. Yet the 10-year rate is still close to 3%.

It feels a bit like sitting on a volcano. You just hope it's not going to explode for a while yet.

About motivation and purpose

I was saying just below that purpose is an important part of what motivates people, and an important part of what they want in life. it turns out this is becoming steadily more important.
Dan Pink argues in his recent book Drive: The Surprising Truth About What Motivates Us that the old motivation model of carrots and sticks, i.e. extrinsic rewards, works for traditional, routine tasks. But recent research shows simple if-then rewards are actually counterproductive for anything which requires a degree of creativity or judgement. That covers just about any job in the economy which can't be automated or outsourced to south Asia.
Instead, intrinsic motivation is much more important to getting the best out of people, or maximizing corporate performance. Engagement is needed, rather than just compliance. And to get at kind of engagement you need three things - autonomy in the job, mastery of a set of skills, and a sense of purpose. You have to see the larger reasons for what you are doing.
Seen in this light, purpose isn't just something which is a luxury or nice to have. It's fundamental to creative tasks, and most jobs in the new economy. It's one of the basics of adding value.

What is it for?

And there is an even bigger problem with relying on evolutionary change in the economy. Evolution has no purpose. It does not look forward or plan in any way. It is blind.

But most people need a sense of purpose to be happy, at least beyond satisfaction of basic needs. This is one of the biggest problems in the labor market, in job satisfaction, in motivation, in the economy as a whole. Most people feel the need for purpose in what they do - something beyond doing tax law, say, or selling t-shirts at the Gap, or finding alpha in a a hedge fund. Those aims satisfy the need for feelings of competence or mastery, to be sure. And they may be necessary, both to society (well, some of them at least) and to people who need to make a living. But it may also lead to a society which is materially plentiful but full of anomie.

Evolutionary change is very good for finding better ways to move pears from California to the NorthEast along the interstate highway system. But it is not so good at satisfying purpose.

Who is it for?

One problem with seeing the economy as evolving - generating variability and selecting the most successful outcomes - is that evolution is not necessarily at all good for the individuals subject to it. Richard Dawkin's famous book,The Selfish Gene: 30th Anniversary Edition--with a new Introduction by the Author, laid out thirty years ago how it made more sense to think of genes propagating themselves over time, regardless of the happiness of the individuals who carried them. In the same way, to say evolution of the economy is a highly efficient search algorithm to find the best ways to adapt to a changing environment says nothing at all about the happiness or welfare about the individuals in the economy. And that is what we care about.

At the bottom of a coffee mug

Economic evolution has brought us not just the coffee shop, but Pike Place Roast and Stumptown Espresso and Bouchon Bakery. But those are not the only things we need.

Need is an interesting thing.

The coffee shop question (2)

I started this blog with questions written in a New York coffee shop.

One way now to rephrase the basic question is :
How do we make economic evolution work for us, rather than against us?

Back to questions

Away from tragedy and back to questions. One major issue in responding to changes in the economy is how much control or foresight we can have over it in reality. And in this respect the issue of evolution increasingly has to be confronted.
Since the 1990s, there has been a wave of research which argues that modern economies evolve. This is more than a metaphor or analogy, this approach says. It is precisely the same process as in the natural world.
It started with a new renaissance in evolutionary theory, much of it centered around Stuart Kaufmann and the Santa Fe Institute. They investigated evolution as a mathematical algorithm , including its ability to handle complexity and rapid change.
And in this light it turns out evolution - in essence generation of variation, selection, and reproduction - is a startlingly efficient way to deal with daunting complexity and unpredictable change. If there is a better solution to a problem, dumb evolution is likely to find it, given time, and better than far more complex, forward-looking algorithms.
In essence a simple algorithm generates all the dazzling diversity and ingenuity of nature, after all. The simple process searches for outcomes more effectively than anything else.
This awareness of the efficiency of evolution carries over into economic life too, as argued by Eric Beinhocker in his book Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Not in the simplistic sense that darkened the 19th century, red in tooth and claw, but in the sense of just how much extraordinary diversity the economic process can develop, and how effectively it can search out solutions to problems without much conscious intent.
This is very different from seeing the economy as a simple market equilibrium, in the dimmer sort of 20th century economics. Instead, it sees the economy as a process of generating alternatives and choosing the best among them. Beinhocker points out the dazzling variety of goods on sale in a major center like New York City, for example - as many as ten billion different stock-keeping units, or SKUs. The complexity and variety is astonishing, as is the ability to react to change.
So in this perspective we have now hit, perhaps by accident, on a set of processes in a market economy which means evolution in the full sense kicks in, rather than the whims of potentates or planners. It is extremely efficient in solving complex problems. It generates thousands of alternatives. It chooses between them. It builds on the successes.
More recent books take up the theme, like Tim Harford's Adapt: Why Success Always Starts with Failure. He shows how variation, selection (including actually recognizing failure, which is often hard) and then repetition of the successes explains many contemporary problems and their solution.
The failure of the Soviet Union, for example, wasn't so much a a failure of planning in his view. If the world never changed, then planning may have been an effective way to proceed. It worked very well for thirty years, at least if you do not count human misery and waste along with the pig iron production statistics.
The problem was that the system was incapable of experimentation and variation and diversity - and so could not cope with change. The whole point of central planning was to have one way to do things. There was no variation and no selection. The Russian economy literally became inbred. Static efficiency was catastrophically inefficient in a dynamic sense. Evolution is much better at dealing with unpredictable changes in the environment than planners.
So where does all this leave us? I find these approaches persuasive, much more so than much of market equilibrium economics, which is a stale handmedown of 19th century physics. But does it leave much room for conscious agency or human choice? How can we affect our own lives?
Much depends on the nature of selection. The criteria of fitness often change in nature.