US Economy Roundup


Various bits and pieces of data as the week draws to a close. The main news of the day is probably the slight drop in consumer sentiment. At the same time producer prices, excluding food and energy, are not only tame, but hovering nervously round the !% inflation mark. August retail sales didn't rise as much as expected, but the big news of this week is undoubtedy the continuing high level of new unemployment signings. In fact the Labor Department report said 422,000 people filed for benefits in the week ended Sept. 6, that's considerably over the 'magic' 400,000, and way beyond the 350,000 or so Brad reckons the US needs just to stand still. Now while we have to wait a little bit to see how this develops, it has to be a very preoccupying situation for the US.

I was sufficiently puzzled by all this as to go over to the BLS site and check out the details. I found, going back to the August numbers, that employment in the information sector fell by 16,000 over the month. In fact since the peak in March 2001, the number of jobs in this sector has declined by 459,000, or about 12 percent. At the same time computer systems design lost 8,000 workers during August and, since peaking in March 2001, employment in this industry has declined by 232,000. I was puzzled why the sum of manufacturing job loss and service job loss was more than the net job loss, and I found, logically enough, that two areas gained employment. There was a gain of 25,000 jobs in health care and social assistance in August, which was about in line with its average monthly employment increase over the prior 12 months. Construction employment also went upwards over the month, and since February, the industry has added an average of 20,000 jobs per month. (This rise in construction would have nothing to do with the low interest rates and mortgaging boom, now would it?) Apart from the rise indebtedness in housing, can anyone notice anything else interesting about these numbers? (Hint, there are more old people).

I also went over to the BEA to look at services in the trade balance and found that the surplus on services decreased to $14.4 billion in the first quarter from $16.1 billion in the fourth of last year. Services receipts decreased to $74.6 billion from $75.3 billion. Large declines in travel and passenger fares, reflecting concerns about the war in Iraq and the SARS virus, were partly offset by increases in "other" private services (such as business, professional, and technical services, insurance services, and financial services) and in royalties and license fees. At the same time services payments increased to $60.2 billion from $59.2 billion. Declines in travel and passenger fares, largely reflecting concerns about the war in Iraq and the SARS virus, were more than offset by increases in all other services categories combined.

Bottom line: looking this over across the board, it looks like the US has sprung a leak and it needs fixing. I think the point is not so much where we are now, as where we might be going. How do you protect high-value jobs in the US from becoming cheaper high-value jobs outside? Saying no to globalisation? That sort of about-turn on the part of the US would look even more silly than the current Iraq one. I think we need to understand Roach's point and start to think think about how to correct global imbalances without sending everything to hell on the way.

Spectral Imaging


A spectre, it was once said, is haunting Europe. Fastforwarding a little, perhaps it would be more appropriate to say that at the present time there is a spectre haunting the entire OECD. But this spectre - surprise, surprise - is not, at least this time round , a demographic one. It is for all that a no less revolutionary one. The spectre I have in mind has little in common with the obsessions and broodings of the expression's Teutonic creator: except, that is, insofar as the reflections of the former on the demise and plight of the Indian handloom weaver might now justly be deflected towards those who every day seem more likely to become their modern-day equivalent, the run-of-the-mill IT sofware professionals who work in America's great 'valley of opportunity'.

The 'efficient cause' of this current reflection: well Friday's latest round of US employment statistics, with the glaring presence of a total of 67,000 service jobs lost in August, begin to give us the clue, and perhaps Ben Bernanke has given us the name - the job-loss recovery. Now that the US economy is losing jobs in the agricultural and industrial areas would neither be new nor shocking. These sectors - at least in the information age - are assumed to be in decline across the OECD world. That the world's most advanced economy is a net loser of jobs in manufacturing industry is entirely comprehensible - anti-China xenophobia notwithstanding. But, at least according to normal economic theory, what should accompany the historic decline of the industrial and agricultural sectors should be a growth in activity in the relatively higher-value services sector. And it is precisely here that the problem is to be found. As the late Walt Whitman Rostow said: it's all about sectors.


Interestingly enough, recent research by the New York Fed has highlighted the way the characteristics of the job creation process in the recovery phase may be changing, and this may well indicate a long term structural trend, which deserves more analysis in its own right. This may be important since we may well find with the benefit of hindsight that the US has been on this path for longer than we imagine. But today I am going to limit myself to 'efficient' not 'final' causes.

As you will all have probably noted by now, the US press is full of almost daily articles on the 'employment drift' off-shore. And when it isn't wasting it's amunition firing off at the distinctly non-impressionable Chinese, it lets off a salvo in the direction of India. The two cases are in fact quite distinct, since the majority of activity being sourced in China is manufacturing (although this may, as I am noting in the blog, lead to longer term technological issues) while the case in point with India is the displacement of services. (BTW don't miss the irony in all the fuss over the rinban valuation, the Indian rupee is actually floating and going up, from 49 to 45 to the dollar in recent months: see how 'they've all gone quiet over there'). Recognition for identifying this 'services' issue really deserves to be given to Morgan Stanley's Stephen Roach, who has long been flagging the question in connection with the deflation debate and the lack of resilience in US service prices. There is no immunity platform underneath services, as we are now finding out. (Incidentally India is by no means the only provider in the game - a recent Forrester report mentions the Philipinnes, Russia, the Baltic countries, Mexico and Costa Rica - and I personally can add Bulgaria to this list on the basis of my own research). The critical 'intitial condition' which precipitated what may well now be the present point of no-return may well have been the internet boom and the Y2K problem, both of which placed an overload on US (and other OECD) IT capacity and lead to the need to find alternative supply sources. As Forrester's Stephanie Moore says: " for them, Y2K and the Internet was their Trojan horse..........They got into the companies and did a good job." Now the dynamics work the other way round, and the same offshore providers who benefited from the supply shortage of the mid-1990s are providing the cost savings and efficiency that U.S. companies need and can't find at home in the 'slow recovery' of the early 2000's. And the leak hasn't just sprung in IT. According to press reports, companies like San Diego-based Chembridge and New Jersey-based Pharmacopeia show the trend may have started seeping into biotechnology. Chembridge, which does chemistry work for drug companies, employs more than 300 chemists in Russia, another locale where doctoral degree-level professionals are paid a fraction of what they would receive in the United States. Pharmacopeia, the parent company of San Diego-based Accelrys, has information technology operations in Bangalore, India.


(Can I sneak a personal detail here, I am, as I keep mentioning, working a project on Bulgarian immigration in collaboration with anthropologists from the university of Sofia. Staff there earn around 150 euros a month, here in Barcelona university researchers get at least 10 times that amount. Last week I was in Valencia with a young Bulgarian research student - who at this point is even working on a voluntary basis, amor del arte, as they say. But the interesting point is that as an ethnographer he works much better than I do. The quality of information he was able to extract was much better than I could have gotten alone. The trouble is all the material is in Bulgarian. No problem, he said, we can send it back home and they will do the translations, real cheap. Not only this, anyone who has ever done qualitative reasearch knows that the real drag is typing-up the transcripts, well he said, we could also have that done there. The only important difference in attitude that I noticed was that the high cost of buying books makes it difficult to be on the sharp-end of knowledge. However an afternoon of in-service-training over at my place means that he is now reading Strogatz-Watts-Cavalli Sforza and has learnt to move much better in the internet (where most of this is free). You see, I said, the important principal here is play. Ah, 'homo ludens' he replied. You know Huizinga, I said surprised. Yassen is 23, the same age as my own son, who sure as hell doesn't know Huizinga, yet. I doubt many of my colleagues at work do either. Bottom line: the intellectual distance between the relatively poor and the relatively rich economies is not as great as it seems, and the distance is much more easily closed in the information age than it was in the industrial one. Forgive my self-indulgence).

This services outsourcing trend is not only evident in the private sector. The US government-funded San Diego Workforce Partnership, which ironically provides training to local residents and helps them find work, reputedly hired computer engineers in India to finish a data management project. In fact they paid more than $200,000 to Karna Global Technologies for engineers in India to re-write one of the organization's computer programs. Larry Fitch, chief executive of the Workforce Partnership, was quoted as saying that the organization generally hires domestic companies, but Karna was hired when the original contractor from Orange County suddenly folded.

What started off in many cases as a low-end routine-based operation, may in fact now be moving upwards. Intel for example which has invested $2.3 billion in its Malaysian operations, and which has always included some R&D in this work, now plans to build a new $80 million R&D facility there. Or try Yahoo, who have denied reports of a new R&D facility in Bangalore by insisting that the 150-person R&D facility has been around since 1996 and that the recent "news" merely refers to a reinauguration of the existing facility. A view which is not shared by India's Rediff.co which in reporting the same story quotes Yahoo's chief executive in India Venkat Panchapakesan as saying that the R&D facility will indeed hire more people soon. "We will have about 150 professionals at the center by the end of 2004. These will be new jobs created to outsource our global requirements". In fact the relative importance of the phenomenon in India can be appreciated by the fact that Rediff have a special page dedicated to the question of business services outsourcing.


How to make sense of all this, that is the question. The first point that comes to mind is that history, apparently, is not kind to its beneficiaries: it is, one might rather say, bitter sweet. The root of the 'evil' here is not money, but globalisation. Now don't get me wrong, this is not just another one of those standard anti-globalisation tirades. I am a globaliser at heart. But then I am also interested in the economic welfare of all the population of this fine planet. What seems clear to me is that, while there are many pros and cons on either side, the developed world did have something of a natural advantage when it came to the globalisation of industrial products. The third world also needed industrial globalisation, since it needed both capital and technology. But, at the same time, this was an area in which, by moving up the value chain, the 'incumbents' could always keep ahead of the pack. In the knowledge economy, as we can now see, things may not be so simple.

One of the reasons why this may be the case is the question of set-up costs. The cathedral of the industrial age was the factory, and the factory implied a high fixed-costs entrance fee. Today the situation is very different. According to economic historian Joel Mokyr:

"the 'factory' as a system is in retreat not only as a physical central location of activity, but also as a time-organising institution in which work begins and ends at given times and the lines bewteen labour and leisure are firmly drawn. Instead, work is dispersed over space as well as time, allowing workers to calibrate their trade-offs to reflect their preferences.............For services, a similar phenomenon is increasingly visible on the horizon. The twentieth century witnessed the virtual demise of the household-sized mom-and-pop corner stores, replaced by large scale department and speciality stores. The trend towards e-tailing may well encounter some teething problems, but if it continues, little in the industry besides warehouses and shipping cannot be outsourced to independent agents or assigned to employees working from their homes. The same holds true for banks, law firms, insurance companies, and higher education."
(The Gifts of Athena, pages 153/157: the whole of chapter 4 Technology and the Factory system is thoroughly recommended).

Two problems then, kept the developing countries at a distance during the industrial age, the cost of entry (and the lack of capital), and the absence of the adequately trained work-teams. In the knowledge economy things are a little different. Look, for example at Google and the low tech use of PC's in parrallel, or the rise of blogging, or home-made video clips, or the uses of grid-computing. Entry costs are not what they used to be, and a little strategic capital goes a long way. Also the labour force difference is nowhere near what it was. Maybe there is still a difference between the Indian IT or accountancy graduate and the US one, but it is nothing like the difference you can find in the comparative wages. The difference is also more transparent, and hence more easily closed, than it was in the days of machine manufacture. There is tacit knowledge, but it may well be less, and it may be more easily learnt. It seems a three to five year stay in Silicon valley on a temporary contract may work wonders in this context.

Which brings me to my principal point. On 10 Sptember in Cancun the next session of the Doha round will begin. High on the agenda will be what is known as the General Agreement on Trade in Services (GATS), and central to this negotiation will be the question of of what is known as mode 4 sevices delivery: the temporary movement of natural persons (mode 1 is the delivery of the service from one country to another, cross-border supply, mode 2 is the use by a company in one country of a service in another, consumption abroad, mode 3 is the setting up of a branch or subsidiary to deliver the service, commercial presence). Already (3 September) modalities have been established to prioritise the special treatment of LDC's in these negotiations. These modalities were welcomed by Dr Toufiq Ali, Ambassador of Bangladesh, speaking on behalf of the 30 LDC Members of the WTO, at the Special Session of the Council for Trade in Services.
There are numerous estimates that indicate that the potential benefit of free trade in services may be several times that of free trade in goods..........the most important means of supplying services is through the export of services supplied by less skilled persons...........a temporary visa scheme that amounts to no more than 3 per cent of the OECD labour force would yield economic benefits for both developed and developing countries equivalent to almost US$150-200 billion.



Now the numbers referred to here were developed by Alan Winters of the University of Sussex (see 3 and 4 below), and they constitute in themselves a fairly dramatic example of how one tiny little meme can go a very very long way. In fact the call for liberalising the movement of natural persons has been taken up this week by the World Bank in its Global Economic Outlook and is also under active consideration at the OECD (see 5 below). So in some ways the 'more developed countries' (ie the OECD) are actually hoist on their own petard here. Unwilling for cultural reasons to accept third world immigrants on a legal basis to address the growing demographic shortfall, they have collectively indicated a willingness to accept temporary migrant labour. From the third world point of view this may well be a preferable alternative. Here it is necessary, I feel, to distinguish two classes of migrant worker, the skilled and the unskilled. In the case of the unskilled, the situation is not very different than that - in muanufacturing - of the direct cross-border import of the finished product. The service is simply provided in-situ by the citizen of a foreign state.

As Alan Winters puts it:

Unlike with the mass migration of less skilled workers, fears for cultural identity, problems of assimilation and the drain on the public purse are hardly relevant to TMNP. The biggest concern it raises is its competitive challenge to local less skilled workers. This is neither more nor less than the challenge posed to such workers by imports of labour intensive goods from developing countries, which has been overcome by the weight of economic gain that trade could deliver and by policies to ease adjustment among local less skilled workers in developed countries. Applied with the same sensitivity and the same sorts of policies as trade policy reform in goods has received in the past, the temporary movement of less skilled workers between countries would offer the chance to reap some very large gains from trade.
LINK

The arrival of these workers inevitably exerts downward pressure on wages in the unskilled sector (a point that is normally made forcefully by US economist George Borjas before the US Congress whenever a hearing on immigration provides him with the opportunity so to do). But these same cost reductions make things cheaper for the majority of middle-income consumers by facilitating the provision of any number of otherwise unthinkable services (like the proverbial taking the dog for a walk). They also, in a growing economy facilitate the possibility of low inflation rapid growth. From the third world point of view, they reduce pressure in the local labour market and they help the balance of payments due to the remmitances home of the migrant workers (which again are a reality, as I know only too well from my own research: it is estimated that during the first years around one third of wages earned are sent home). BTW, again both the inflow of low-skilled worker, and the outflow of mode 1 outsourcing will contibute to the generally deflationary environment inside the US as the 'sevices immunity' gradually factor falls apart.

At the other end of the scale are the skilled temporary workers, and it is here I think, more than anywhere, that our difficulties in accepting the arrival of those from other countries have lead us - in the west - to shoot ourselves in the foot (Again a disclaimer. I am not especially upset by this, the world is an unjust and unequal place, and anything which helps to 'even the odds' is fine by me. What I am pointing to is the fact that this is the unintended consequence of a selfish act). For temporary high-skill contracts are the perfect, learning-by-doing, training scenario. If this were the old Russia you would probably have to pay a great deal of money to bribe your way out having learnt what you had learnt, and we 'send them back' (xenophobism has always seemed a perverse phenomenon to me). So really here we are in the middle of one of those typical non-linear, up-side/down-side swings produced by what many consider to be the most 'effective monetary policy in history'. And meanwhile - with our central bankers carefully targeting short-term inflation rates as the 'clavis universalis' for economic policy - we have been through an enormous assest boom-bust cycle, a cycle which seems to have carried as one of its side effects the 'freeing' of parts of the third world from their one-sided dependence on us. For as we went up in the cycle we sucked them in, during the ride we trained them up, and now on the way down we have told them to pack their bags and leave for home. Advice which they have meticulously followed to the letter whilst taking part of the business back with them!

That this lesson has not entirely gone unlearnt is shown by the conclusions drawn by Armind Virmani of the Indian Council for Research on International Economic Relations in yasterday's Indian Financial Express

The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design our position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in 'free trade in services' under mode 1, against the emerging threat from the new protectionists in the rich countries, the 'unions of white collar workers'.

This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for 'temporary migration' of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.
LINK

Fiscal Endgame


The world bank in it's Global Economic Outlook raised an interesting question last week:

the scope for substantial further macroeconomic stimulus is rapidly dissipating. Fiscal deficits threaten to become part of the problem instead of part of the solution, especially since a quick reversal of the deficit is not anticipated. The U.S. general government budget position (including Social Security), for example, shifted dramatically from a surplus of 2.3 percent of GDP in 2000 to a deficit of 3.2 percent as of the first quarter of 2003. The Congressional Budget Office projects that the budget position is unlikely to return to surplus until 2012. In Europe, several large countries have breached the 3-percent-of-GDP fiscal deficit limits embedded in the Maastricht criteria for the common currency. And Japan has limited fiscal scope, given persistent deficits in the 6–7 percent range.
LINK

There has been a good deal of discussion going the rounds about the difficulties of conducting monetary policy as interest rates approach zero, there has been a good deal less about the possibilities of sustaining fiscal deficits ad-infinitum. In fairness, much of the discussion in the US context has focused on the relation between the looming long term deficits, and the expediency of increasing short term deficit spending. The point is that at some stage the short-run becomes the long-run. Most of the debate to date has assumed that around-the-corner growth can put the numbers back in the black. But what if this 'anticipated' growth just doesn't materialise? What if the 'weak' spot means not recession, but extremely low growth. The consequence of this would mean deficits stretching out as far as the horizon. So it is at least worth asking the question: how far is far here?

At what point would we run out of fiscal leverage as well as monetary leverage. And if we did, what is the policy remedy? And why is this question worth asking? Simply because in the ex-US OECD we have a novel factor, serious population ageing. For GDP to grow either (a) more hours have to be worked or (b) the hours worked need to generate more value. Well at least some of the OECD countries are going to have great difficulty with (a), and (b) is going to get more and more difficult if serious 'global rebalancing' takes place. Simply put: if globalised labour markets become increasingly efficient, and if human capital levels in the developing world begin to seriously close the gap with those in the deveoped one, then (b) also becomes problematic. Doing the sums it's not difficult to see that paying down the debt becomes a bigger and bigger problem. Oh, I know. The easy government solution would be to stoke-up inflation: well try telling that to Japan (oops, that's just what they're doing, but look at the success they're having). So when Morgan Stanley's Eric Chaney tells us:

The Stability Pact is not a good law, because we now have full evidence of our old suspicion, that it is pro-cyclical -- in bad times, the Pact forces governments to raise taxes. If the law is not good, it has to be changed. Over the last two years, every single party has expressed views about what should be changed. These views did not always converge, but this is Europe: Nothing can change without negotiations. It is now time for the European Union to start the re-negotiation of the Pact, and the sooner, the better.
LINK

we should be aware that this is just fine, but that it is a reform which will come with a sell-by date, one day or another. Now I am not the first person to have had this thought:

The Limits of Credit: Could Aging Nations Lose the Fiscal Policy Lever?

In Moody's Sovereign Risk Unit, we spend a great deal of time studying and debating the very issues that are before us today. What we are really discussing is whether the industrialized countries can afford the pensions already promised by their respective governments? In some ways, you might find my answer somewhat surprising.

We expect almost every industrialized nation to "default" on its pension promises. What do I mean? We have concluded that it is impossible for almost every major developed nation to meet presently promised public sector pensions, including promised health care for seniors, without further changes in future benefits. In others words, future governments will probably renege on future pension and senior health care commitments as embedded in law today..........


We have looked at many of the most important academic studies, which analyze future pension burdens and their potential impact on government debt. For many of the most highly advanced industrialized countries, the conclusion one must almost inevitably come to is that the public sector debt level needed to fund existing promises over the long-term would raise serious solvency issues if these pension systems are not reformed. On balance, many continental European countries and Japan could not sustain the increased debt burdens implied by their existing pension systems when these future obligations are added to already existing public sector debt.


Pre-World War II experience gives some important insights into dimensioning the problem facing the industrialized world as the baby boom generation retires. Either pensions are paid as promised, implying huge future debt burdens, or the promises are decreased and/or contributions raised significantly, thereby implying much lower debt burdens. If the pensions are not reformed in most Western European countries and Japan, then future governments face the prospect of dealing with debt burdens reminiscent of those faced by post World War Germany, the UK and France. If we assume that such debt burdens will occur in the future, then we have to examine how governments might deal with them, once again by examining the historical record. As a rating agency, we are concerned with determining at what point would such affected governments be forced to default on their debt obligations? It is clear that the consequences of such a financial default would be very different from a "default" on a pension promise.

Once a sustainable recovery has begun, the hope is that the government will also be in a better position to readjust the country's pensions to make them more actuarially sound. The risk this approach presents is that if the economy doesn't respond to the fiscal stimulus and doesn't soon start growing on a sustainable basis, then the country runs the risk of having the worst of all worlds -- a massive public sector debt just as its demographics start becoming quite negative.
Source: Vicent Truglia, Moody's Investor Service, 2000
LINK

If the Manufacturing Leakages Hit Services.........



OK, maybe I've been hitting Roach a bit too hard recently, so here's an area in which he really is in a class of his own:

There can be no mistaking the extraordinary external leakages now evident in the US economy. Even in the face of rebounding domestic consumption, incremental product is being sourced offshore at the cost of disenfranchising domestic supply -- both labor and capital -- from the US macro equation.

The role of the Internet is particularly critical in reshaping the service sector dynamic in this cycle. It gives a critical new twist to the outsourcing story. Services have long been dubbed non-tradables because of a high profusion of knowledge-based content that can only be delivered on site. Now, however, courtesy of real-time e-based connectivity, a multitude of increasingly high-value added services can be transferred anywhere around the world instantaneously. That’s increasingly true of the output of software programmers, design and engineering teams, accountants, back-office processing functions, data centers, network infrastructure and management services, and a broad array of business consulting functions. Reflecting this trend, India’s IT-enabled services sector has become one of the fastest growing major industries in the world. One study estimates this segment of the Indian economy will increase by ten-fold between now and 2007 -- rising from US$1.5 billion in 2001-02 to $17 billion by 2008 (see NASSCOM’s The IT Industry in India: Strategic Review 2002).

Manufacturing leakages are one thing, but if they also hit services, it’s a different matter altogether for the US economy. Currently, the services sector accounts for fully 80% of total private employment in the US -- about six times the 13.5% share in manufacturing. To the extent that outsourcing options are now shifting increasingly into services, the jobless bias of the US economy can only increase. Moreover, this development could well be exacerbated by businesses’ persistent lack of pricing leverage in this post-bubble era. That puts unrelenting pressure on continued cost-cutting as the principal means to boost margins and deliver earnings. And that puts a premium on the outsourcing-driven efficiency solutions that lie at the heart of America’s jobless recovery.

All this underscores one of the great ironies of the current cyclical recovery in the US economy. Notwithstanding the temporary impacts of powerful stimuli from tax cuts and home mortgage refinancing activity, America is lacking in sustenance from the job creation and income generation that typically drive the internal dynamics of its business cycle.
Source: Morgan Stanley Global Economic Forum
LINK

On the New Productivity Paradox


Well, the latest round of revised productivity numbers certainly puts the productivity question firmly back on the agenda, and the surprise jump in job losses in August only adds to the connundrum. Interestingly Stephen Roach has a strange take on this today: US workers are both working more and less hours. The are implicity working more because 24/7 connectivity means you now carry your work round with you (does Edward never sleep?), but they are working less since repeated crashes and outages lower the available working time:

I just blew another productivity opportunity. I spent the first 45 minutes of my workday fighting the mindless edicts of the technology gods. I always remind myself not to take it personally. After all, I am only one of America’s some 83 million IT-dependent knowledge workers. I guess that’s just the point: To the extent others feel the same pain, there may well be good reason to raise serious questions about America’s widely celebrated white-collar productivity miracle................

According to the BLS, the average workweek in the financial activities sector was 35.4 hours in July 2003 - essentially unchanged from the level a decade earlier (35.6 hours in July 1993). I find that most difficult to fathom. Over the past decade, the IT-enabled knowledge worker has seen a radical transformation of work schedules. Courtesy of miniaturized and portable information appliances, together with near-ubiquitous connectivity, workdays have been extended as never before. Yet in this increasingly "24 x 7" mindset, the official data speak of unbelievably short and unchanged work weeks. What a disconnect! To me, this smacks of a classic measurement problem.

I fully realize all this is heresy. But I fear that in our rush to rationalize the wisdom of our ways, we have lost sight of the pitfalls of the Information Age.

Now come on Steven which is it? Because clearly it can't be both, or at least if it is both, then these two factors probably balance out and the argument about measurement problems has less force. The truth is, I suspect, Steven's card-carrying 'skepticism'. As he says it is heresy, he is an information age non-believer. Brad - against whom one could never ever hold this - had an interesting post recently about Robert Gordon - about whom one certainly could - and an article of his in the FT on productivity. Browsing over to Gordon's homepage I discovered that the article is based on a longer piece of research that he has recently published as an NBER working paper. Since the productivity phenomenon is really one of the most striking things about the recent US performance, and since this paper is by and large non-technical (ie I think it could in the main be read by the average economically literate blog enthusiast) it may be worth looking quite closely at the argument and the conclusions. Two other papers of interest are: Yang and Brynjolffsson, "Intangible Assets and Growth Accounting: Evidence from Computer Investments", which is cited extensively in Gordon's paper but is fairly technical ( here ), and Bart Van Ark's "Is there a productivity puzzle?" which is a comparison of the EU and the US and is pretty readable since it is in the form of a presentation ( here ). Incidentally Gordon, who previously attracted some notoriety - and in a sense became seen as a key representative of the new economy cynics - by asking whether the internet and computational revolution measured up to the big technological revolutions of the 19th century, appears to be answering his own question: "In short, the 'marriage' of computer hardware with software and communications hardware in the 1990s was as important to the development of the computer as was the development of paved roads and then superhighways to the full exploitation of the internal combustion engine." However having ventured so boldly forth he does try to redeem his former self at the end, by pointing out that he considers the ICT-internet fushion a 'first rate' but not a 'mega' invention since it has, apparently, a one time only component.

In the paper Gordon presents five 'puzzles'. Here I will focus only on two: the problem of the cyclical component in productivity, and the question of the post-2000 acceleration. His conclusion on the first point is - following Yang and Brynjolffsson - that little of the 1995 - 2000 improvement was cyclical, since it is more than likely the result of a massive long term investment in 'intangible human capital' which was being measured as a cost earlier, but which was not showing up as a benefit. Post 1995 this 'asset' has been increasingly revealing its worth, and, as the figures show, it continues to do so. If we go back to Roach's skepticism for a moment, it is worth noting that according to the BLS the US services sector lost 67,000 jobs in August alone. Yet sevices output continues to grow significantly. The question really is - and this is a complete unknown - how much more of this is there still in the pipeline? Because if there is a lot, and I suspect that there may be, and if we continue to have 'lukewarm growth', then this is going to have serious implications for the deflation problem in the US. Put simply, this rise in intangible human capital is the result of learning by doing. This learning by doing has two components: you get to do the things your were doing better, and you find new things to do. It is a dynamic process, and this brings us to Gordon's conclusion on the second puzzle. His conclusion is that the 1995 Netscape-ICT 'alchemical wedding' had a one-time-only component, hence we may be near the end of the ride. His examples for this are trivial, as incidentally were his skeptical comments about word-processor improvements in his earlier 'does the internet measure up' piece. For an example of one of the potential new productivity enhancing innovations on the horizon you could take something like grid computing (see my earlier post here ). Many many more possibilities could be mentioned, but that's what they are, possibilities. The whole point about this learning-by-doing creative-machine which we've set in motion is that we won't know till we get there. However what we could notice is that imminent-intimate fushion of Robert Gordon (who has an excellent 'productivity analysing' mind) and Ray Kurzweil (whose imagination and insight as a practising technologist are invaluable) to create a new breed of 'spiritual economists' might be just what we're in need of right now. Trouble is I'm not sure whether we should load Robert's mind into Ray's computer, or up-load Rays hard disk contents into Robert's body.

(Puzzle 1) Whatever happened to the cyclical effect? Skeptics were justified on the basis of data through the end of 1999 in their claim that part of the post-1995 productivity growth revival reflected the normal cyclical correlation between productivity and output growth. In contrast data through mid-2003 reveal only a negligible cyclical effect for 1995- 99 but rather a temporary "bubble" in 2002 that repeats similar temporary blips in three previous business cycles.


(Puzzle 2) Why did productivity growth accelerate after 2000 when the ICT investment boom was collapsing? The most persuasive argument points to "hidden" intangible investments in the late 1990s that required labor input but were not counted in measured output; after 2000 the delayed benefits of intangible investments boosted output, while much of the labor input that created them was laid off. In short, productivity growth was understated in the late 1990s but overstated since then.

Our verdict on Puzzle 1 is that little of the initial 1995-2000 productivity growth revival was cyclical, and almost all of it it represented a fundamental shift in the trend. However, the 2001-2002 "bubble" contains a temporary element that has occurred in the early stages of the recovery in previous business cycles and deserves to be called "cyclical" because of its periodic repetition. The 2001-2003 economic recovery has been substantially more "jobless" than the 1991-92 recovery that gave rise to that label, and productivity in the first few quarters after the four quarter "bubble" period has been considerably healthier than in 1993-94 relative to a much more robust trend. The U. S. economy is on track to achieving a rate of productivity growth over the decade 1995-2005 of almost three percent per year, raising deep questions about why this has occurred and why these causes have not been equally relevant in Europe.


The period 2000-2003 has been marked by a sharp downturn in ICT investment, particularly in computer hardware but also in software and communications equipment, and a rapid decline in employment. Output can grow despite a continuing decline in labor hours, because the benefits of the previous hidden investment in improved business processes and better trained employees are transmitted to production, while the workers that produced the hidden output in the late 1990s (programmers, consultants, trainers) have been laid off and are walking the streets. In a sense the U. S. economy of 2000-2003 has been getting a "free ride" from the 1995-2000 wave of investment in hidden capital.


At least one obvious question is raised...........and this is whyintangible capital did not produce a productivity growth upsurge during previous periods when the share of spending on computer hardware was growing rapidly, particularly 1972-87, the interval that led Robert Solow to utter his famous quip that later became known as the Solow "computer paradox," that "we see the computer age everywhere except in the productivity statistics". One possible answer is that the 1972-87 increase in the share of computer spending in GDP was slow and gradual, while the post-1995 upsurge was sudden and hence created a greater imbalance between measured and unmeasured ICT investment. A second possibility is that the nature of ICT innovation in the 1990s was more disruptive and required a more substantial investment in intangible capital than did earlier waves of computer innovation.


Just as complementary investments in roads and suburbs were necessary to provide the full benefits of motorcars and motor transport, so complementary innovations in software and communication technology were necessary to provide the full potential benefits of the personal computer. Windows 95 and 98 provided an intuitive interface that instantly replaced DOS, with its command lines and DOS-based programs with their arcane codes. While the replacement of DOS programs with Windows-based programs may have been little more than an annoyance for experienced DOS users in the business world, they made it possible for business firms to reduce training expenses, and also for the personal computer to penetrate the household.

But the "killer application" that powered the post-1995 productivity revival was the marriage of computer hardware and Windows-type software to communications technology that made possible the WWW. Equally important were developments in hardware power and software that made it trivial to send documents as e-mail attachments, thus eliminating the need to print out many preliminary documents and spreadsheets and to send the printed versions via fax or courier service. Cheap communications caused a revolution in business practice...........In short, the "marriage" of computer hardware with software and communications hardware in the 1990s was as important to the development of the computer as was the development of paved roads and then superhighways to the full exploitation of the internal combustion engine.


One way of assessing the likely productivity impact of near-term ICT innovation is to ask whether such innovations can break through the inherent impediments to the replacement of human beings by computers.


The further acceleration of productivity growth in 2000-03 has laid the cyclical argument to rest insofar as it applies to the 1995-99 period. But another cyclical phenomenon has emerged more recently, the "early-recovery productivity bubble" that pushed up productivity growth in 2002 to incredible levels. This phenomenon is cyclical in the sense that it is periodic; similar "bubbles" occurred in 1975-76, 1982-83, and 1991-92, and in each case were followed by two or more years of productivity growth below trend. Data on productivity growth rates during 2000-03 are pushed up by the bubble phenomenon, as are estimated Hodrick-Prescott productivity trends that respond relatively rapidly to the evolution of the actual data.

Puzzle 2 was suggested by the paradox that productivity growth accelerated after the year 2000 despite the collapse in the ICT investment boom, suggesting that standard studies of growth accounting may exaggerate the causal role of ICT in achieving the first 1995-99 phase of the productivity revival. Three factors support the case for exaggeration. First, the growth accounting methodology unrealistically assumes that the full productivity benefits of ICT hardware and software are achieved at the instant of production, with no allowance for reorganization or training effects. Second, independent evidence for the retail trade sector finds that all of the rapid productivity growth in the 1990s was achieved by new establishments and none by old establishments, even though ICT investment has been made in both. Third, and most important, the boom in measured ICT investment in the late 1990s was accompanied by a boom of perhaps equal size in unmeasured or "hidden" improvements in intangible and human capital, as suggested by Yang and Brynjolfsson. The numerator of productivity omitted the creation of the intangible capital but the denominator included the labor input, artificially holding down the magnitude of the productivity growth revival. Then after 2000 productivity growth was exaggerated, because output was supported by intangible capital input that had been created before 2000, but the labor input that had created the intangible capital had declined, as programmers, consultants, and trainers were laid off. The cyclical analysis of the 2002 productivity growth "bubble" and the intangible capital argument both suggest that observed productivity growth in 2002-2003 may represent a high water mark and cannot be expected to continue.

That major source of productivity growth, capital-deepening investment, cannot occur forever without a continuous flow of innovations, and so the post-2000 crash in ICT investment raises the question as to whether the wave of innovation in the 1990s had a one-time-only component, and whether a new wave of innovations will emerge over the next few years to create a repetition of the investment boom. We classify innovations as "mega," "first-rate", "second-rate," and beyond and argue that the marriage of computer and communications hardware with software in the 1990s was a first-rate invention, but that it had a one-time-only component because the web could only be invented once, because part of the boom consisted of demand from dot.com firms which promptly went bust, because of the mismatch between hardware and software innovation, because of the timing of Y2K, and because of the overbuilding of telecom infrastructure. The main areas of ICT investment in the near future are innovations that look distinctly second-rate, the further move toward mobility with internet-enabled mobile phones and wi-fi enabled laptops that will allow e-mail, web access, Word, Excel, and Powerpoint to be accessed more conveniently, but the functions to be accessed will be the same as five years ago.

Deficits: Part of the Problem or Part of the Solution?


The World Bank Global Economic Prospects 2004 is now available. Of particular note is the spotlight put on China and India, who are significanty out-performing the rest of the world in economic growth this year, their economies are expected to grow at up to 8 percent and 6 percent respectively this year. Today I will post a few extracts. Here's one on the deficit situation:

But the scope for substantial further macroeconomic stimulus is rapidly dissipating. Fiscal deficits threaten to become part of the problem instead of part of the solution, especially since a quick reversal of the deficit is not anticipated. The U.S. general government budget position (including Social Security), for example, shifted dramatically from a surplus of 2.3 percent of GDP in 2000 to a deficit of 3.2 percent as of the first quarter of 2003. The Congressional Budget Office projects that the budget position is unlikely to return to surplus until 2012. In Europe, several large countries have breached the 3-percent-of-GDP fiscal deficit limits embedded in the Maastricht criteria for the common currency. And Japan has limited fiscal scope, given persistent deficits in the 6–7 percent range. Interest rates have been brought down sharply in the United States as well as in Japan, where they stand at an effective rate of zero. Following the recent 50-basis point cut in rates, Europe still has modest headroom for monetary easing should the European Central Bank choose to relax its inflation target. In fact, downward price trends in the United States and Europe have triggered concerns of possible deflation.
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Job-Loss Recoveries



Brad has an extremely useful piece about the current recovery. It seems Okun's law doesn't work too well these days:

We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns.

Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry.............The fact that falling hours have been accompanied by rapidly-rising productivity is what has given us not a jobless recovery but a massive job-loss recovery. The normal pattern we would expect from the past two years' output growth would be that employment and hours would have been nearly flat. Why the different pattern this time? We think that it is because firms are no longer "hoarding labor" when times are slack because the industries losing jobs no longer expect employment to bounce back. This means that we no longer have any confidence that we understand the cyclical pattern of productivity growth--which means that we have little ability to translate the (high) productivity growth numbers we see into information about what the underlying long-run trend growth rate of the economy is.
Source: Semi Daily Journal
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To elaborate on why this might be Brad picks up a piece from Erica Groshen and Simon Potter of the New York Federal Reserve Bank:

The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.

Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.

A preponderance of structural--as opposed to cyclical--adjustments during the most recent recession would help to explain why employment has languished during the re-covery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded. Employers incur risks in creating new jobs, and require additional time to establish and fill positions....

The difference from the pattern of the early 1980s is quite stark: now, the industries cluster heavily in the two structural quadrants. Most of the industries that lost jobs during the recession—for example, communications, electronic equipment, and securities and commodities brokers—are still losing jobs. Balancing the structural losses of these industries, however, are the structural gains of others. For example, nondepository financial institutions, an industry grouping that includes mortgage brokers, added jobs during both the recession and the recovery. The trend revealed in Chart 4 is one in which jobs are relocated from some industries to others, not reclaimed by the same industries that had lost them earlier. The chart provides persuasive evidence that structural change predominated in the most recent recession...
Source:Has Structural Change Contributed to a Jobless Recovery?: Erica Groshen and Simon Potter NY Federal Reserve
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Now the interesting, really interesting, thing in all this is what is happening on the structurl side. It is here were we will find that much longed for 'new sector' which can square the numbers and fulfill Brad's long-term dream. Unfortunately the only sector I can see (and you need to go over to Brad's place and look at the diagram for this) is what they call non-depository financial institutions, which seems to be heavily oriented towards mortgage brokers. This could lead us to the only sector with positive structural growth during this downturn was one whose principal business activity was facilitating that US citizens get into even greater debt. I'm not convinced that this is the recipe for the future we're all looking for.

Escaping From Global Deflation


There is nothing especially fresh in the link you will find below. In fact I'm looking around for material on deflation and I came across this piece from Rogoff back in July. However it does have the virtue that he tries to address the problem of general deflation, recognises that collective devaluation won't work, and suggests a strategy of collaboration between the three principal central banks to implement generalised monetary easing. He also notes the balance sheet consequences for the government of the central bank buying treasury bonds, stating that focussing on the consolidated government balance sheet (rather than taking each part separately) " explains why it is nonsense for the public to worry excessively when the Bank of Japan suffers capital losses on its holdings of long-term government bonds. The Bank's loss is the Ministry of Finance's gain, and both are ultimately owned in full by the Japanese taxpayer".

He does however rather let the cat out of the bag when he deals with the dangers of precipitating major inflation: "inflation might temporarily spike, but as soon as it does, interest rates will shoot up above zero, the BOJ will be out of its liquidity trap, and will once again be able to use standard monetary policy tools". This assumption that the central bank will rapidly adjust rates once the economy emerges from deflation is precisely what makes it difficult to convince market participants of the reliability - working backwards from looking forwards - of central bank 'irresponsibility', and hence what makes it so hard to get out of the liquidity trap right now in Japan.

So how to get out of global deflation in the unlikely scenario that it happens? For Japan—where despite recent developments, the IMF reports warning that deflation could easily still worsen remain valid—many observers believe that only way out of its deflation is through yen depreciation. At some level this must be right. Whatever route the Bank of Japan ultimately takes to conquer deflationary expectations—whether it be buying stocks, JGBs, or foreign exchange—the yen will likely fall sharply. Such action may be seen as manipulating the exchange rate in beggar-thy-neighbor fashion. After five years of deflation, however, the rest of the world—and certainly the IMF—should not complain too much about such a policy.

But if all the major regions were mired in deflation, they cannot all simultaneously depreciate their exchange rates, so this door out is closed. Would this be fatal? No, it should not be. A clear communication strategy that all three major central banks are deeply committed to restoring positive inflation, would go a long ways towards putting a floor under deflation expectations. It is not necessary to adopt any narrowly-construed version of inflation targeting—indeed escaping from deflation is sufficiently tricky it would be very hard to deliver on a target. But central banks can and should specify their long-term (five- to ten-year) inflation objectives. Aggressive quantitative easing worked in the 1930s, when those countries that abandoned the shackles of the gold standard and inflated their economies were largely far more successful than those that clung to gold. If all three major central banks acted in concert, there would not have to be dramatic exchange rate movements, although admittedly the yen might still depreciate since Japan is now in the deepest hole.

I admit that the central banks of the world would have a hard time calibrating their escape from deflation. Quantitative easing does eventually lead to inflation, but the relationship is not nearly as smooth or reliable as economists such as Milton Friedman once believed. Modern central banks rightly prefer to work with interest rates. Of course, as interest rates approach zero, this method begins to fail. Printing piles of currency will surely end deflation: the problem is how to avoid overshooting and ending up locked in high inflation. Should people in Japan worry that an overly aggressive exit from deflation will lead to the kind of horrific inflation levels that Japan suffered after the War? I don't see it, especially given the large output gap. Inflation might temporarily spike, but as soon as it does, interest rates will shoot up above zero, the BOJ will be out of its liquidity trap, and will once again be able to use standard monetary policy tools. Any inflation overshoot should be fairly temporary and relatively manageable. One has to acknowledge there are many risks to this strategy. However, there may be even greater risks to trying to live with deflation indefinitely.
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Rogoff on Global Disinflation

The Jackson Hole papers have now been posted . Among them is a highly relevant and interesting one by Ken Rogoff about global disinflation and globalisation. As Rogoff indicates the last decade has seen an enormous reduction in the level and volatility of inflation almost across the board. The million dollar question is why. Clearly improvement in cenral bank policies and fiscal strategies may form part of the picture, but they alone certainly can't do sufficient heavy lifting to provide an adequate explanation. Rogoff's solution: globalisation and deregulation have reduced the effect of monopoly pricing, leading to reduced inflationary pressure. I think Rogoff has something here, but I don't think this is the whole picture, not by a long stretch. In particular there is the dificulty in assessing the impact of price reductions and increased competition in the traded sector on prices and productivity in non-tradeables. Still, the evidence of a long wave tendency towards historically low levels of inflation (or, of course, deflation) is compelling indeed. (BTW if the hard work was being done here by improved monetary policy, then inflation targeting - using the same effective central bank devices - should prevent deflation. So if it doesn't...........).

In recent years, inflation around the world has dropped to levels that, only two decades ago, seemed frustratingly unattainable. If one takes into account technical biases in the construction of the CPI and central banks’ desire to maintain a small amount of padding to facilitate relative price adjustment and help avoid deflation, then disinflation in most industrialized countries has already run its full course. Even in the developing world, if current trends persist, inflation will be tamed (if not virtually eradicated) within a decade. What factors explain this extraordinary shift?


Has the inflation process changed fundamentally? This paper argues that any explanation of the recent episode of disinflation has to take a global perspective, and recognize the near universality of the phenomenon. The story in the advanced countries is well known and has been widely discussed: inflation averaged 9% in the first half of the 1980s, versus 2% since the beginning of this decade. But the performance of the developing countries is even more remarkable, with inflation falling from a 1980-84 average of 31% to an average of under 6% for 2000-03. From 1990-94, inflation in Latin America averaged over 230%, over 360% in the Transition economies, and roughly 40% in Africa. For 2003, all three regions are projected to have inflation around 10%.

The data are even more stunning when one looks at individual countries. In the 1970s, 1980s and 1990s, high inflation and hyperinflation countries abounded, especially in Latin America, Africa and the Transition economies. Argentina’s price level has increased a 100 trillion times since 1970, Brazil’s a quadrillion (thousand trillion), and the Democratic Republic of the Congo’s almost 10 quadrillion.2 Today, of the IMF’s 184 member states, only 11 are projected to have inflation over 20% in 2003, and only 6 over 30%. If one takes the 40% inflation threshold that some researchers have argued is particularly damaging to economic growth3, only Mynamar (40%) Angola (over 75%) and Zimbabwe (over 400%) seem reach or exceed this level in 2003..............

The global economy now appears immersed in a long wave of low inflation, but experience suggests that many factors, notably heightened conflict that reverses globalization, can bring it to an end.............


There is little controversy about the fact that improved central bank design has been a major factor in improved inflation outcomes, and I will not try to parse the different elements (greater independence, better communication strategies, improved techniques, etc.) here. My main focus is on whether other factors such as more prudent fiscal policies, higher productivity growth, deregulation, and increased globalization may have also contributed to make disinflation both less painful and more successful than would otherwise have been the case. Has the success of global monetary authorities in engineering lower inflation had anything to do with having the wind at their backs?


I shall argue that the most important and most universal factor supporting world-wide disinflation has been the mutually reinforcing mix of deregulation and globalization, and the consequent significant reduction in monopoly pricing power. This increased competitiveness lowers the gains a central bank can reap via unanticipated inflation because it reduces the gap between the economy’s monopolistically competitive equilibrium and the socially desirable competitive equilibrium..................


One view of the past fifty years is that the monetary authorities just got bamboozled by bad Keynesian theories in the 1960s and 70s. The great inflation of the 1970s and 1980s was the by-product of macroeconomic teaching malpractice. Once the world’s central bankers started coming to their senses in the 1980s, ending inflation was just a matter of communication and technique. Perhaps, but this interpretation probably gives too little credit to previous generations of policymakers, and too much credit to modern day monetary authorities, not to mention 1980s monetary theory. The global nature of modern disinflation suggests looking elsewhere..............

There are, of course, several examples of countries where inflation has been coming down despite rising deficits and debt ratios. India has been recording general government deficits of roughly 10% of GDP for almost half a dozen years now, yet inflation has declined. Recession-ridden post-1980s-bubble Japan, with sustained deficits of 6-7% of GDP and a debt/GDP ratio exceeding 150%, is actually experiencing deflation. More generally, as Reinhart, Rogoff, and Savastano (2003) document, many emerging market and developing country economies have seen a substantial buildup in market-based debt over the past fifteen years, due to various factors including financial liberalization (e.g., paying market interest on debt formally forced on banks at sub-market interest), lower tariffs and, in some cases, higher government budget deficits. Yet most of these economies have succeeded in lowering inflation.

Unexpected productivity growth at least temporarily reduces pressure on the central bank to inflate.........True, the productivity story works well for the United States since the latter half of the 1990s. However, in its simplest form, the productivity hypothesis falls far short as an explanation for global disinflation. In the case of Europe, for instance, the simple correlation goes the wrong way, with inflation falling through most of the period, yet trend productivity
growth declining as well. Indeed............amongst the largest European economies, productivity growth slowed substantially in the second half of the 1990s, continuing the trend decline in the largest continental economies. In the developing world, productivity – especially in traded goods – probably has been a factor in many cases, though it is hard to separate it from globalization.......


There is little question that in many economies, the mutually reinforcing effects of globalization, deregulation and widespread reduction of the role of government, have sharply increased competition, and lowered “quasi-rents” to monopolistic firms and unions. Blanchard and Philippon (2003), drawing on results from a broader OECD study of deregulation (Nicoletti et. al., 2000, 2001), argue that quasi-rents in the OECD have fallen steadily since the 1970s.

A reduction in monopoly pricing power per force leads to lower real prices, holding monetary policy constant. Monetary authorities can, of course, offset the nominal price level effects of this impulse by suitably adjusting monetary policy to stabilize inflation. As I elaborate below, however, they will generally choose to let some of the effects pass on to lower inflation......

Trade with emerging Asia has certainly put downward pressure on the real cost of goods, that is, workers in most countries can now buy more with a given income than prior to globalization. Although China alone accounts for 5% of world trade, emerging Asia combined accounts for almost 20%. The exact quantitative impact of Emerging Asia’s growing trade on global prices, however, is difficult to estimate, in part because there are large indirect effects in addition to the direct effects. For example, even though traded goods arguably only constitute at most 20-25% of US GDP (Obstfeld and Rogoff, 2000), sharp reductions in traded goods prices almost surely have spillover effects to other sectors. Many traded goods are intermediate goods (e.g., computers), and also there is some degree of substitution between various traded and non-traded goods.
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Jobs and the US 'Recovery'

Brad has a piece about initial unemployment claims in the US. According to Brad 357,000 seems to be " the weekly initial unemployment insurance claims number below which the unemployment rate is falling rather than rising", at least during the late 90's. So the magical 400,000 loses some of its magic. But maybe this also qualifies the expression 'jobless recovery' a little. The US may well be creating jobs almost as fast as it is destroying them, however it is the demographic factor (growing potential labour force) which means it is not creating enough jobs.

This technical distinction may also be important in another context: the China and India outsourcing debate. Playing fast and loose with language some are suggesting that US jobs are being lost to China. This is not, strictly speaking, true. New jobs are being created in China which might have been created in the US. As Brad suggests the solution to this is not protectionism and slower growth all round, but the strengthening of new, job creating, activities in the US.

On the political side, does anybody really want Indians and Chinese in 50 years' time - the 3bn educated citizens of what will then be industrialised economies and proud countries - to remember that western Europe and North America took whatever steps they could to slow Indian and Chinese economic growth in the first half of the 21st century?

The internet, the submarine fibre-optic cable and the communications satellite are cast in the role played last time by the iron-hulled, ocean-going steamship. Now it is not just atoms but bits that are traded across oceans in rapidly increasing volumes. Customer support, medical analysis, technical work, computer programming, form-filling and claims-processing - all these jobs can now move around the globe in the same way that farming and factory jobs could a century ago.

This global reallocation of jobs promises to be a powerful source of world economic growth over the next two generations. But, as happened a century ago, those workers who face new competition from people a hemisphere away are not happy about it. Large-scale international trade has hit the service sector and, as a result, foreign competition is no longer merely a phenomenon that affects blue-collar workers and gives white-collar workers the opportunity to buy manufactured goods more cheaply. The political system is beginning to respond: New York City no longer dares to digitise tickets and send them to Ghana for processing; New Jersey politicians want public sector contracts limited to US-based processing centres and in return the government of India wants to add a provision securing market access for service sector professionals to the Doha round of world trade talks.

The current wave of concern about service-sector outsourcing is overblown. It is more a reaction to macroeconomic distress than to a shift in the world distribution of employment; if the post-industrial core were closer to full employment, few would care. There are still seven US jobs in software and systems design for every four such jobs that existed when Netscape launched its initial public offering in 1995.

Trade, after all, does not destroy jobs but shifts them elsewhere. If central banks succeed in keeping the advanced post-industrial economies near full employment, for every job that moves out to an Indian call centre another job moves in. If Indians spend the harder currencies they earn on developed countries' exports, it will be a job making machine tools or new kinds of hybrid seeds, or managing the construction of an Indian factory. If Indians use the harder currencies they earn to invest in the developed world, it will be a job in construction. There are more and bigger winners from the demand created by a job's shift to an Indian call centre than there are losers.
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However, much as I agree with Brad in principle here, he does fudge things a little. Eddie put his finger on the problem yesterday with the distinction between the short and long term. In the long run - ceteris paribus - everyone can be much better off from the rise of India and China (of course, other things will not be equal, since there will be less of us working - proportionately - and we will be older, but we can hardly blame this on China and India). However, in the short run it is an empirical question whether moving a job to an Indian call centre will create more and bigger winners in the US. Brad is right that in the long run we will all be better off - at least in economic welfare terms (however, if what matters most to us is being better off than others, then we may not feel so well off). There is some analogy here with attitudes to the internet. Maybe short term Bertelsmann can survive and lose less money by staying off-line, but in the long run........The question is essentially one of 'adjustment costs', both cultural and financial. Coming from the UK I can assure you that the rise of the US as the number one global economy didn't always make things easy. The UK had its 'adjustment problems' as will the US. As with the 'free movement of capital' in the context of less developed countries, there is a danger of seeing things in black and white terms. Many problems have an empirical component and need nuancing (not all protectionism, in every case, is bad, nor, as Eddie has also pointed out, is it clear that protectionism causes deflation: inflation and stagnation may be the more likely outcome). Brad, as ever, places his faith in the central bankers to use monetary policy to maintain our economies 'near full employment': I wish I had his faith in their power.