Wednesday, May 01, 2019

What Is the Economy For?

With choice of work hours, we would still need planning to fine-tune the economy in order to avoid inflation, unemployment, and other economic disruption. Keynesian planning became popular in response to the unemployment of the Great Depression. Monetary planning became popular in response to the inflation of the 1970s. If there were a mass movement to shorter hours, new methods of planning would be needed to respond to slower growth.

In one example of the sort of planning we would need, the Canadian economist, Peter Victor, has created a computer model that lets him study how the Canadian economy would react to slower growth or to no growth. The results of running the model differ dramatically as he changes the values for macroeconomic variables such as the savings rate, the rates of public and private investment, and the length of the work week. In one run, the end of growth brings economic instability, high unemployment, and rising poverty. In another run with different values for these variables, the end of growth brings economic stability, reduces both poverty and unemployment by half, and reduces the ratio of debt to GDP by 75%. The second scenario has a higher savings rate, a lower rate of private investment, and a higher rate of public investment, and it avoids unemployment by reducing work hours.
There are very few macroeconomic studies of this sort, and more would be needed to help us develop policies to accommodate wide­spread work-time choice and the slower growth it could bring.
But the key difference in macroeconomic planning would be this: Today, we try to create economic growth rapid enough to give people standard 40-hour jobs. With work-time choice, we would try to create growth rapid enough to give people the number of work hours that they actually want.
Today, the economy must grow rapidly, whether or not people want more products, purely to create more 40-hour jobs. With work-time choice, people would work enough to buy the products they want, and then they could stop.
Our economic debate usually focuses solely on inflation and unemployment, technical questions that only economists can deal with. We also need to ask the underlying human question: What is the economy for?
Obviously, the purpose of the economy is to produce things that people actually want.
Everyone realizes this when they talk about work that we do for ourselves. For example, we do the job of patching the roof because we want to keep the rain from coming in, and when we have accomplished this goal, we stop. We do not keep tearing up the roof and patching it again in order to “create jobs” for ourselves.
But when it comes to the formal economy, we become totally mystified, and we believe that there is a benefit to “creating jobs.” We do not work to produce the things that we want to consume. Instead, we believe we must produce and consume more things to create more work.
If we thought about the human purpose of the economy, we would realize that in the formal economy, as in production for our own use, we should produce what we want to consume and then stop.
Economists have expert knowledge that helps them deal with inflation, unemployment and other economic problems, but ordinary people are the ones who should decide how much they want to consume. The technical questions about inflation and unemployment, which only economists can answer, should be subordinate to the human question about what balance of work and free time gives you the most satisfying life. People should be able to answer this human question for themselves, by making decisions about their own work hours based on their own desire for more income and more free time.

Monday, April 29, 2019

Shorter Work Hours and Worktime Choice

In the past, American work hours became shorter as the standard work week was reduced. It still makes sense for us to shorten standard work hours, to catch up with Europe’s shorter hours, but in today’s society, there are a number of reasons why it is even more important to focus on the choice of work hours.
Choice of work hours accommodates recent changes in the family. Until a few decades ago, most families were supported by one breadwinner. Today, families are much more di­verse. Some people are still the only wage earners for their families, and they may need to work longer hours to get by. Other families are made up of two working professionals without children, who can easily afford to work shorter hours.
Choice of work hours has political advantages. Conservatives would argue against a shorter standard work week by saying that people want to work and earn more, but it would be hard for them to argue against letting people make this choice for themselves. Shortening the standard work week also creates conflicts between employers and employees by raising the cost of labor (which is why the 35-hour work week has become so controversial in France), but choice of work hours does not create this conflict (which is why this choice has not become controversial in Germany and the Netherlands).
Choice of work hours would reduce inequality of income, because people with higher hourly earnings are more likely to work shorter hours. Ultimately, it could change our definition of success: We would consider people successful if they not only had a higher income than average but also had more free time than average.
Most important, choice of work hours would let people make a deliberate choice of their standard of living. Each person would have to decide whether it is more important to consume more or to have more free time, and this choice would make people think much harder about their purchases. Instead of buying a McMansion and an SUV, you could buy a smaller house and car and work (say) one day less each week. If you have fixed work hours and a fixed salary, you might as well buy the biggest house and the biggest car you can afford; but if you have a choice of work hours, you will consider that consuming less would allow you to work less.
Choice of standard of living has become important now that we have moved from a scarcity economy to a surplus economy.
In theory, choice of work hours has always made sense. Eco­nomic theory has always said that people should have a free choice among different products, so they can choose the combination of products that gives them the most satisfaction. This theory implies that people should be able to choose between consuming more and having more free time for exactly the same reason: They should be able to choose the combination of consumption and free time that gives them the most satisfaction.
In practice, this choice was not very important in the past. Until the mid twentieth century, most people consumed not much more than the essentials, so they could not go very far in choosing more free time rather than more income. As a result, most economists overlooked the issue historically.
In today’s American economy, though, most people consume more than the essentials and could get by with less income and more free time. The choice between more free time and more income is now critical to determining what sort of lives people lead. This choice is needed to let people live in the way they prefer.

Wednesday, March 27, 2019

UBI or Shorter Work Time?

High-profile people in the tech industry have called for a Universal Basic Income (UBI) to support those who will be unemployed when new technology makes their jobs obsolete. It would be better to shorten work hours, so everybody can do part of the needed work. It is obviously better to let everyone have a good balance of work and free time, rather than having some people overworked and others idle.

UBI proponents seem to think our present situation is unique, but in reality, new technology has been making jobs obsolete continually since the beginning of the industrial revolution. In 1870, almost 50% of the American population was employed in agriculture, and today only 2% of our population is employed in agriculture. New agricultural technology eliminated the jobs of almost half of all Americans.

The American economy produced almost ten times as much for each hour worked in 2000 as it did in 1900 because new technology took over the work that people used to do.  Economists use the word "productivity" to refer to the amount produced during each hour worked, and we can see in this chart how rapidly productivity has grown as technology has improved.

There may be dramatic technological improvements that replace workers in the future, such as self-driving vehicles doing the jobs of drivers and voice recognition plus artificial intelligence doing the jobs of call-center workers, but they will not be any more dramatic than the agricultural technology that eliminated the jobs of half of all American workers beginning in 1970.

The difference is that agricultural workers who were replaced by machinery moved into manufacturing, and manufacturing workers who were replaced by machinery moved into services - but when service workers are replaced by artificial intelligence, what sector will they move to?

The important thing to remember is that the change will be gradual. There might be massive displacement when self-driving vehicles arrive, for example, but it is a science-fiction fantasy to think that all the jobs across the economy will suddenly disappear.

As productivity continues to gradually improve occurs, the best way to provide jobs for displaced employees is to gradually shorten work hours, to spread the needed work among everyone.
In fact, American work hours declined as productivity increased from the beginning of the industrial revolution until World War II, but as the following chart shows, work hours stopped decreasing after World War II.
Shorter work time to share the needed work, which is the most obvious response to new technology that displaces workers, has somehow moved to our conceptual blind spot. We hear far-fetched proposals for universal basic income, imagining a fully automated world that won't come for generations, and we ignore the possibility of gradually shortening work hours as productivity gradually increases, which was the norm for much of American history.

Ultimately, the time may come when technology has gone so far and work hours have become so short that we will have to provide universal basic income for those who are unemployable.  But we are no where near that time now. Americans now work the longest hours of any industrial nation; we overtook Japan in 2001.

It is plausible that these overworked Americans will back proposals that shorten work hours for everyone - including themselves.  It is not plausible that they will back proposals for a UBI that lets some people live without working at all while they continue to be overworked.


Wednesday, February 27, 2019

If a Tree Falls ....

There is an old philosophical question: If a tree falls in the forest and no one is there to hear it, does it make a noise?

The subjective idealists said no. A noise is a perception, an experience in someone's mind. If there is no experience, there is no noise.

Aristotle said yes. A noise is a "potency," the physical event that has the power to create that perception. If the physical event occurs, then there is a noise. Today, of course, we know that the physical event is a vibration of the air (or of water), which our eardrums detect and our brains convert to a subjective perception of noise.

This question has always been presented as an insoluble puzzle, but the answer should be obvious: It depends on your definition of noise.

If we define noise as a subjective perception, then the falling tree that no one hears does not make a noise. If we define noise as vibrations in the air that have the power to cause this subjective perception, then the falling tree that no one hears does make noise.

Sunday, January 20, 2019

Taxing Tech for Affordable Housing

A recent opinion piece in the New York Times recommends taxing tech companies to fund affordable housing. It claims that, when tech employees drive up housing prices and displace people from their homes, it is an external cost similar to pollution, which economic theory says we should tax.

The comparison is not apt.  Pollution is pure external cost with no external benefit, so we tax pollution in order to reduce pollution. Well paying tech jobs have external costs, such as displacement of people who cannot afford higher rents. but they also have external benefits: if people have well paying jobs, they are less likely to commit crimes, and their children are more likely to do well in school, and of course, the well paying jobs also generate more tax revenues, which can be used to pay for a wide variety of social benefits.

No one says that a tax on well paying jobs should have the goal of reducing the number of well paying jobs, as a tax on pollution has the goal of reducing pollution - showing that we believe the benefits of having those well paying jobs outweigh their costs.

There are two reasons that tech jobs moving into an area leaves many people unable to afford housing: high levels of inequality and restrictions on building enough housing. In the short run, there is some value to building affordable housing to help these people, but in the long run, we need to deal with these two underlying causes.

Inequality

In the 1950s and 1960s, as the economy grew, Americans' incomes went up at about the same rate for all economic groups; everyone got a share of the nation's prosperity. Since the 1970s, incomes have gone up very rapidly for those with the highest incomes, and slowly for those with moderate incomes. Since 2000, the rich have continued to get richer while median income has not gone up at all.  In the 1960s, American had about as much economic inequality as other developed nations, but now the United States has the worst inequality of any developed nation.

There are many possible ways to reduce inequality, such as free tuition in public colleges, which was common in the 1960s but is rare or unheard of today, in order to give everyone an opportunity to join the middle class.

But the simplest method, and the most effective in the short term is to use the tax system to reduce inequality: raise taxes on the rich, reduce taxes for the middle class, in increase the Earned Income Tax Credit for those with low and moderate incomes.

In the 1950s, when prosperity was widespread, the top marginal income tax rate was 92%. And President Eisenhower, a Republican, was the one who signed the law raising taxes to that level.

If we use the tax system to reduce inequality, then everyone will benefit from those high paying tech jobs. The techies will benefit from the high paycheck, though they will have to pay more of it in taxes, and the teachers, waiters, and other people who provide services for the techies can benefit from higher Earned Income Tax Credits.

Restrictions on Developing Housing

There was a massive housing boom after World War II, with most of the housing built in the new suburbs that were opened for development by new freeways. In the 1950s alone, the number of new housing units built was equal to 63% of all the housing units that existed in the US before that time.

The laws of supply and demand worked as expected, and all that new supply of housing drove down the cost of housing. As the middle class moved to the new suburbs, the price of housing went down in real terms in older urban neighborhoods.  In a few cases, most famously in the South Bronx, the price of housing went down so far that whole neighborhoods were abandoned because the low rents could not cover the cost of taxes and maintenance.

There was also massive construction of federally funded public housing at the time, but the amount of affordable housing provided in this way was much smaller than the amount that appeared in the cities as a side effect of constructing vast amounts of private housing in the suburbs. And much of the public housing was a failure in social terms: crime rater were higher in the housing projects than in surrounding neighborhoods, and hundreds of public housing projects were demolished under the federal HOPE VI program because of their high crime rates.

Today, there is much less housing being built. Because of environmental concerns, there are laws restricting the development of new suburbs; we now know that the suburban housing boom and the new freeways that made it possible created major environmental problems: sprawl destroyed open space, created automobile-dependency, and contributed to global warming. And there are also zoning laws - supported by NIMBY pressure - restricting the development of housing in existing neighborhoods.

But we can promote a housing boom that is environmentally sustainable by building more public transportation and by passing state laws that override local NIMBY opposition and allow development of dense walkable neighborhoods around the stations. Most  important, we can streamline approval of urban housing by adopting Form-Based Codes to regulate development, instead of conventional zoning, with development by right for all proposals that follow the code.

Dealing with the Real Problems

There is a place for public housing for marginal groups that are not able to succeed in the mainstream economy.  But when people with full-time jobs - including teachers and other professionals - cannot afford housing, that is a sign of bigger problems in the economy as a whole. We should deal with these problems by reducing inequality and increasing the overall supply of housing so that anyone who works full time can afford market rate housing, rather than forcing people with full-time jobs live in affordable housing projects.

Read the New York Times opinion piece.

Thursday, December 06, 2018

Megaskyscrapers??

A recent article claimed that we could accommodate growing world population with less strain on resources by building "vertical cities":
A vertical city ... is an "arrangement of interconnected mega towers" that could support hundreds of thousands of people. These buildings could be as tall as 400 floors and contain housing, stores, hospitals, schools, farms, and outdoor spaces, all in one building or series of connected structures.
A quick reality check:

Going from sprawl, at about 2 people per acre, to the density of Paris, about 100 people per acre, saves a significant amount of land: close to 1/2 acre per person.

Going from the density of Paris to megaskyscraper density saves an insignificant amount of land - less than 1/100 acre per person.

Looking not only at the land the city uses directly but at all the resources people use, the average American has an ecological footprint of over 20 acres - representing all the resources he or she uses.
It requires less than 1/100 acre per person to live at Paris densities rather than in megaskyscrapers, a negligable portion of total ecological footprint.

It undoubtedly uses more resources to build these megaskyscrapers than to build the six to eight-story buildings common in Paris, since they must need very hefty steel skeletons. They probably also require more heating and cooling, since they are more exposed to the elements. The extra resource use may well be greater than the small savings of energy used for transportation and of other resources.

Someone should calculate the total ecological footprints of a city build of megaskyscrapers and a city built at Paris densities, both using the best possible technologies to conserve resources. They would be close, but the megaskyscrapers would probably have a greater footprint.

Yes, sprawl wastes a lot of resources, but let's not go from one ridiculous extreme to the other. Which gives a better and more human-scale quality of life: Paris densities or megaskyscrapers?
The answer is obviously Paris - and it is wrong to imply that megaskyscrapers would save a significant amount of land compared with the midrise urban densities of Paris.

Sunday, November 25, 2018

The Shape of History

A recent op-ed in the New York Times had drawings illustrating various philosophers' views of the shape of history.  In response, I created the following drawing and explanation of my view of the shape of history.
New technologies give people more power over nature, and there is progress with setbacks along the way. The best graphic representation of this is a series of waves that generally tend upward and jump upward when there are major changes in technology.
  • 100,000 to 50,000 BC: Humans invented more complex tools, such as the spear and needle. Population increased slowly, and humans spread through the world by 10,000 BC. Setbacks were caused by changing natural conditions.
  • 10,000 BC: Agriculture began and gradually spread. Initially population increased rapidly. There were permanent settlements and, thousands of years later, complex civilizations. Setbacks included the collapse of the Roman and Mayan empires.
  • The industrial revolution: New technologies let population and output increase rapidly in the West and, after World War II, in most of the developing nations. Setback occurred because technology became powerfully destructive as well as productive. Aerial bombing and the atomic bomb caused immense destruction during World War II. If we do not control global warming, it could cause even more damage.
  • The future: New technologies will be even more powerful. There could be rapid progress, but there could also be weapons more destructive than nuclear bombs and environmental problems worse than global warming. The graphic shows the waves going up and down more sharply to indicate the potential for huge setbacks, but what will actually happen depends on whether we can control destructive technologies. 
See the New York Times op-ed here.