Tuesday, March 3, 2015

ATMs and a Rising Number of Bank Tellers?

The first US bank to install an automatic teller machine (ATM) was a branch of Chemical Bank on Long Island in 1969. After relatively slow growth during the 1970s, there were about 100,000 ATMs across the US by 1990, a total that has now risen to about 400,000. So here's the question: During the rise of ATM machines in US banking, did the number of bank tellers rise or fall?

I would have guessed "fall," and I'm not alone. In a June 14, 2011, interview, President Obama used ATMs a an example of technology displacing labor. He said (I've added punctuation to the raw transcript):
There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don't go to a bank teller, or you go to the airport and you're using a kiosk instead of checking in at the gate. 
However, James Bessen collected the actual data on ATMs and bank tellers from an array of scattered sources. Overall, the story is that as the ATM machines arrived, the number of bank tellers held steady and even rose slightly. Bessen discusses the interaction between technology and employment in "Toil and Technology," in the March 2015 issue of Finance & Development. Here is Bessen's figure showing the rise in ATM machines and the number of tellers employed.


Why did the number of bank tellers rise even as ATMs became prevalent? Bessen highlights two changes. One major change wass the spread of opening more bank branches. Bessen points out that you could now open a branch with fewer bank tellers than before; in addition, I'd add that many states were relaxing their rules and allowing banks to open more branches both within and between states during the 1980s and 1990s in particular. The other major change was that the job of a teller changed. Banks began to offer more services, and tellers evolved from being people who put checks in one drawer and handed out cash from another drawer to people who solved a variety of financial problems for customers.

The broader point, of course, is that just looking at how technology can substitute for a certain job is only one part of the analysis. Other parts include how regulations that affect that industry and area of employment are changing, and how new technology may cause jobs to evolve and shift in a way that benefits workers. Bessen argues that the main problem is not the "end of work," but instead the problem is that many workers have a difficult time obtaining the skills they need so that their work can complement the new waves of technology as they arrive. As a result, we observe a combination of stagnant wages for many workers who have been unable to update their skills as needed, combined with much higher wages for those who have the new skills (which contributes to wage inequality), all combined with employers who complain that not enough employees already have the skills the employer wants. As Besson writes:

New information technologies do pose a problem for the economy. To date, however, that problem is not massive technological unemployment. It is a problem of stagnant wages for ordinary workers and skill shortages for employers. Workers are being displaced to jobs requiring new skills rather than being replaced entirely. This problem, nevertheless, is quite real: technology has heightened economic inequality. ... The information technology revolution may well be accelerating. Artificial intelligence software will give computers dramatic new capabilities over the coming years, potentially taking over job tasks in hundreds of occupations. But that progress is not cause for despair about the “end of work.” Instead, it is all the more reason to focus on policies that will help large numbers of workers acquire the knowledge and skills necessary to work with this new technology.

Monday, March 2, 2015

Six Reasons Why Economists Should Say Less About "Competition"

A short essay of mine titled "The Blurry Line Between Competition and Cooperation," was published a month ago at the Library of Economics and Liberty website.  I argued that the rule-based competition in economic markets is inextricably intermingled with of cooperative behavior. Paul H. Rubin takes a stronger positino in his 2013 Presidential Address to the Southern Economic Association titled "Emporîophobia (Fear of Markets): Cooperation or Competition?" It is published last year in the April 2014 issue of the  Southern Economic Journal (80:4, pp. 875-889). Many readers will have access to the Southern Economic journal through a library or personal subscription, but an version of the paper is also available on SSRN here.

Rubin's argument is that both competition and cooperation are used in a metaphorical sense when discussing markets. He makes a case that if economists are choosing between these metaphors, cooperation is not only a metaphor with more positive connotations when explaining or defending markets to noneconomists, but also that "competition" itself is a poor metaphor for describing economic actions and decisions, and how the economy works. In one section of the paper, he offers six reasons why economists in the name of accuracy should stop referring to competition. Here is a sampling.

"First, there is no economic act that is itself competitive." 

Rubin writes: "In their economic lives, people produce goods and services and exchange these goods and services for others. Both the production of goods and the exchange of goods for other goods are
cooperative acts. There is no competition in these actions. The motive for some acts may be
competitive, but the actions themselves are cooperative. ... Unless an agent is willing to
engage in illegal actions (for example, burning a competitor's factory) or willing to go outside
the market (e.g., complaining to the Federal Trade Commission about a competitor), any
competitive act is actually performed through cooperative behavior. "


"Second, theprototypical economy, the purely competitive economy, involves no competition."

Perfect competition as taught in the textbooks is made up of "price-takers" selling identical products, who can sell their complete output at a market price that they cannot affect. Indeed, one correspondent to my earlier piece pointed out that farmers, who are often viewed as in a real-world situation similar to the textbook version of perfect competition, often do not view themselves as competing with their neighbors, and instead often stand ready to share the risks and fixed costs of farming by helping neighbors where possible.

"Third, in other market structures acts may sometimes be viewed as competitive, but not always."

What about market structures that are not perfect competition? Rubin writes: "There may be competition to become the monopolist, but tlais is either competition through being a better cooperator or political competition, for example, by lobbying for exclusive licenses. ... Again, motives may be competitive but the actions themselves are cooperative."

"Fourth, principles of cooperation (through specialization and division of labor) are at least as important to economists as competition."

"Adam Smith is the father of competitive analysis. But he is also the father of
cooperative analysis. Specialization is the mother of cooperation. The pin factory is a masterful
analysis of cooperation. Somehow we economists have made the competitive analysis in Smith
the basis for our discipline and have made cooperation into something of a stepchild."

"Fifth, competition is a tool, not the end purpose of the economy."

"The purpose of an economy is to generate consumer surplus, which occurs through cooperative acts such as transactions and exchanges. Competition is a powerful tool for improving the functioning of
transactions by making sure that in each case the transactors are the best possible partners and
that transactions take place on the best possible terms. That is the purpose of competition. In other
words, the competition that occurs in an economy is competition for the right to cooperate. The
gain comes from the cooperation, not from the competition. Of course, competition is essential,
since it leads to the optimum terms for cooperation and selects the best parties to cooperate, but
nonetheless competition is a tool whose function is to facilitate cooperation. Society is willing to
tolerate markets because of their cooperative benefits, not because they are competitive."

"Sixth, competition is ubiquitous in human interactions, and so competition is not a way of
distinguishing market economies from other economies."

"Economies based on custom also have competition. For example, more successful hunters in a hunter-gatherer economy reap benefits, including access to women. In an exploitive economy success may be measured by exploiting the population and rising through the oppressive hierarchy. This is much more "competitive" than the path to success in a market economy. The unique feature of an economy organized through markets is that the competition that exists is competition for the right to cooperate, but it is the cooperation that is the defining feature of the market economy."

Ultimately, Rubin's argument is that "emporîophobia," his term for "fear of markets," would be reduced if economists put the language of cooperation front and center in their vocabularies.  Here's Rubin's example of how economists might talk about Wal-Mart:
If we focus on competition rather than cooperation, then we think of winners and losers. We feel sorry for the losers and may view the winners as cheaters. At the least, there is a tendency to favor underdogs and the losers from competition may be viewed as underdogs. We may also believe that a world with winners and losers is in some sense unfair. By our emphasis on competition, economists must take some blame for this error. But if we think about cooperation, then the losers are those who are less successful at cooperating, Wal-Mart succeeds not because it has beat up its rivals and driven them out of business. It succeeds because it has done a better job of cooperating with consumers, by offering them stuff they want at the lowest possible prices. Of course, economists
know this, but since non-economists begin with the competition model, economists must be defensive and try to dissuade citizens of their prior beliefs. If the default way of thinking was cooperation, then the critics of markets would be on the defensive.
I'm not fully persuaded by Rubin's argument, in large part because I agree with a clause in the preceding paragraph that "non-economists begin with the competition model." As long as this is true, economists who speak too purified a language of cooperation are in real danger of sounding out-of-touch. Also, economists must then immediately confront the problem that bargaining positions in the economy are not always the same, and the "cooperation" of a minimum-wage worker taking what feels like the only available part-time job before the monthly rent becomes due doesn't look quite the same as the "cooperation" of a chief executive officer receiving a large annual bonus.

But precisely because "non-economists begin with the competition model," it is useful for economists to be concrete and specific about the very specific sense in which they use the term "competition." After all, having many firms "competing" to offer a mixture of prices and qualities that consumers prefer is quite a bit different from having firms "competing" to defraud customers. And in many economic contexts, the form of competition of which free-market economist speak approvingly quickly shades into cooperative behaviors.

Saturday, February 28, 2015

Buy Back Shares or Invest?

Much of this week I've been posting figures and snippets of analysis from the 2015 Economic Report of the President, written by the Council of Economic Advisers. Here's one more. Companies that have additional cash in hand after paying their expenses and dividends have several choices: among the choices, they can use the funds for investing to increase output or improve efficiency, or they can use the funds to buy back the company's own shares. Here's the pattern between these two choices over time. (Firms can also get funds for investment from other sources, like issuing bonds, so the two lines in the figure below don't need to sum to 100%.)


And here's the explanation from the Council of Economic Advisers:
Nonfinancial corporations spent a lower-than-average share of their internal funds (also known as cash flow) on investment during 2011 to 2013 (see Figure 2-25). Instead, these corporations used a good part of those funds to buy back shares from their stockholders. Share buybacks are similar to dividends insofar as they are a way for corporations to return value to shareholders. They differ, however, with regard to permanence: whereas dividend changes tend to persist, share buybacks are one-time events. (When firms raise investment funds by issuing new equity, the nonfinancial sector aggregate of share buybacks in the figures can be negative, as was common in the 1950s and 1960s.) The decline in the invested share of internal funds from 2011 to 2013, together with the rise in share buybacks, suggests that firms had more internal funds than they thought they could profitably invest. As can be seen in Figure 2-25, the investment outlook appears to have improved in 2014, and the investment share of internal funds has rebounded to near its historical average. Share buybacks, however, remain high.
I'll only add that one of the major conundrums for the U.S. economy during the slow recovery since the Great Recession has been the issue of "Sluggish U.S. Investment" (June 27, 2014). Many firms were earning high profits, but as they saw it, the most productive option for using a substantial share those profits during the last few years apparently was not to invest in the higher efficiency and output.

Friday, February 27, 2015

Putting U.S. Labor Force Participation in Context

It's fairly well-known that US labor force participation--that is, the share of U.S. adults who are classified either employed or unemployed--has been dropping. But it's not always recognized how the U.S differs from other high-income economies in this trend, or how

The 2015 Economic Report of the President, released last week by the White House Council of Economic Advisers, offers some striking evidence on these points. The top figures shows labor force participation rates for "prime-age males," who fall into the 25-54 age category. The nice thing about looking at this group is that countries may differ considerably in their patterns of the extent to which students attend school into their early 20s, or the extent to which people retire in their late 50s and early 60s. Looking at the "prime-age" group leaves these ages out of the picture.

For men, the U.S. was middle-of-the-pack in labor force participation rates of prime-age males in 1990, and now vies with Italy for the lowest level. For women, the U.S. was near the top-of-the-pack prime-age labor force participation in 1990, but since then has been surpassed by France, Canada, Germany, and the United Kingdom, and is now about even with Japan--which has not been  historically known as a country with high labor force participation for women.



The Council of Economic Advisers sums up the cross-country patterns in this way:
Since the financial crisis, U.S. prime-age male participation has declined by about 2.5 percentage points, while the United Kingdom has seen a small uptick and most large European economies were generally stable. Of 24 OECD countries that reported prime-age male participation data between 1990 and 2013, the United States fell from 16th to 22nd. The story is somewhat similar among prime-age females. ...  In 1990, the United States ranked 7th out of 24 current OECD countries reporting prime-age female labor force participation, about 8 percentage points higher than the average of that sample. But since the late 1990s, women’s labor force participation plateaued and even started to drift down in the United States while continuing to rise in other high-income countries, as shown in Figure 1-10. As a result, in 2013 the United States ranked 19th out of those same 24 countries, falling 6 percentage points behind the United Kingdom and 3 percentage points below the sample average. 
These patterns of decline in US male and female labor force participation go back in time. The share of the male population above the age of 16 in the labor force has been falling for decades. The share of the female population above the age of 16 in the labor force rose steadily in the second half of the 20th century, but levelled out around 2000 and has been falling since.

When combining the cross-country data, the time series data, and the depth of the Great Recession, the report argues that the decline in labor force particpation rates in recent years is pretty well explaiued. The CEA writes:
Between 2007 and 2012 the decline in participation is fully (and at some points more than fully) explained by the aging of the population and standard business-cycle effects. Beginning in 2012, however, the labor force participation rate decline began to exceed what was predicted from aging and cyclical factors. Since late 2013, the labor force participation rate has stabilized and the portion of the decline that was unexplained shrank, albeit slowly, between the second and fourth quarters of 2014 ...

What explains the "residual" factor in the figure below? Part of it is probably due to a gradually lower rate of labor force participation within US age groups (like the evidence on prime-age workers given above), while another part is surely due to the fact that the Great Recession was so severe that it "led to a greater-than-normal cyclical relationship between unemployment and participation."


Whatever the reasons, as the U.S. economy looks ahead to the next few decades, figuring out ways so that the decline in labor force participation can be stabilized and reverse is an important goal of public policy.


Thursday, February 26, 2015

A Decline in On-the-Job Training

A certain amount of job training happens through the basic experience of showing up for work everyday. But in some cases, more specific training is called for, which can either be sponsored or provided by an employer, or by the worker. Here's some evidence from the recently released 2015 Economic Report of the President, by the Council of Economic Advisers, showing a decline in employer-provided and on-the-job training in recent decades. This data is collected only irregularly, when the Census Bureau decides to include the "module" that includes this particular set of questions. But with the most recent data in 2008, it seems pretty unlikely that employer-provided and on-the-job training have risen in the aftermath of the Great Recession.

The economic theory of job training is built on a distinction between company-specific skills, which are of much greater use to a specific employer, and general-purpose skills, which can be used with a variety of employers. In an economy where people can move fairly easily between jobs, employers will be willing to pay for company-specific training--that is, training that is mainly relevant to learning about what is done at that particular company, and would be of less use at other companies. If employers know that employees are likely to remain with the firm for a substantial time, then employers become more willing to pay for general-purpose training, because it is more likely to pay off for the firm. Otherwise, people will have to pay for general-purpose training, which could be used at other companies. In some cases, workers may "pay" for their general purpose training by taking a job that offers lower wages, but offers a systematic training program.

Thus, types of skills, who pays for them, and how they are paid for can be sliced various ways. But just looking at the overall pattern, a decline in employer-sponsored and on-the-job training suggest that workers who wish to keep building their skills are getting less support from their employers.


Wednesday, February 25, 2015

U.S. R&D in (Troubling) Context

Everyone knows that the economic future belongs to those who put technology and innovation to work. One part of the formula for economic success for a high-income economy is active research and development, which then offers spillovers that are typically greater for the national economy than for the world economy as a whole. I've posted here about the arguments for raising R&D spending substantially, and here with a global overview of R&D spending. Dan Steinbock offers some additional perspective in  "American Innovation Under Structural Erosion and Global Pressures,"
a February 2015 report written for the Information Technology and Innovation Foundation.

Here's a picture of the global R&D effort. The horizontal axis shows R&D spending as a share of GDP for various economies. The vertical axis shows scientists and engineers per million people (thus adjusting for population size). The size of the circle for each country is relative to the total number of scientists and engineers: thus, China and India have fewer scientists and engineers per capita, but because of their large populations, the size of their circles is relatively large. The color of the circle shows the region of the world, as given by the key in the upper left of the figure.


Clearly, the U.S. position in global R&D remains fairly strong. But the US lags behind Germany and Japan, among others, in the share of its economy going to R&D. The size of the yellow circles--Japan, South Korea, Taiwan, Singapore, China, Australia, and India--shows that the region with the largest absolute number of scientists and engineers is now the Asia-Pacific area. The U.S. has had a tradition of leading or being close to the lead in most areas of technology. As technological capacities expand around the rest of the world, the U.S. needs to strengthen its ties to the work being done elsewhere, increase the U.S. R&D effort, or both.

Steinbock lays out a number of trends in U.S. R&D. Here are a few that caught my eye. First, the ratio of R&D spending to GDP hasn't moved much in the US since the 1960s, hovering around 2.5% of GDP. However, federal support for R&D has been falling by this measure over time, while the nonfederal share has been rising.



Here's a figure showing federal R&D spending as a share of total federal spending (the red line). For four decades, while pretty much every politician talks up the virtues and importance of R&D spending, the share of the federal budget going in that direction has been sliding gradually lower--including in the last few years. Clearly, when it comes to political clout, researchers are slowly losing the battle. 


Where is the US doing its R&D? A greater share is being done within businesses, and funded by businesses. A lesser share is being done within academic, government, and non-profit labs. 

Of cousre, it's highly desireable to have a vibrant R&D effort in the private sector. But it's important to recognize that businesses have a tendency to emphasize the "D" of development, which promises a relatively rapid economic payoff, rather than the "R" of research, where the payoffs for that specific firm are often less clear.  The fear is that the US R&D effort is disproportionately heavy on, say, new phone apps and web dating services, not on tackling basic research in, say, biomedical areas and life sciences, materials science, nanotechnology, and energy production and storage. 



Tuesday, February 24, 2015

China's Economy in Two Pictures

A little while back, I was discussing with a student about how or in what ways the U.S. economy would be affected by economic events in China. For a child of the 20th century, like me, the entire discussion was a little surreal. For the first nine-tenths of the 20th century, it would have been irrelevant to the point of ridiculousness even to ask how China's economy would affect the United States. But here in the 21st century, that question will take increasing importance.

Comparing the size of economies that have different currencies and very different standards of living is an inexact business, but the overall size of China's economy is at least second in the world now, and heading for largest. The 2015 Economic Report of the President, just released by the White House Council of Economic Advisers, offers a bit of discussion about how China's economic growth is proceeding.

First of all, China's rate of economic growth has slowed a bit, down to a "mere" 7.5% per year. This s down from the boom years of the mid-2000s, but it's similar to China's rate of growth in the 1990s. A quick reminder: at a 7.5% rate of growth, the size of China's economy doubles in a decade.

Along with the slower rate of growth, the other big concern about China's economy is whether it is experiencing its own version of a credit bubble. Here's a figure showing the credit flowing to nonfinancial corporations and households (that is, government debt is not included, and borrowing by the financial sector isn't included). Notice that the vertical axis here is the size of GDP--and the size of China's GDP is roughly similar to that of the United States or that of the euro area. China's economy has seen a remarkable burst of credit in the last six or seven years. Indeed, China stands out from all other emerging economies for its combination of high debt/GDP ratios and a very rapid rise in debt in recent years.

What level of concern is appropriate for this combination of growth slowdown (albeit still to a fairly rapid pace) and credit boom in China? Here's what the Council of Economic Advisers has to say:

China’s economy grew 7.3 percent during the four quarters ended in the fourth quarter of 2014, down from an annualized rate of 9.2 percent in the eight quarters ended in the fourth quarter of 2011 (Figure 2-9). Both the IMF and the World Bank have downgraded their projections for Chinese growth in 2015 to a rate below 7.5 percent, which until recently was thought to be the Chinese authorities’ target rate.
China may face stresses in adapting to a slower rate of expansion. In May, President Xi Jinping reportedly suggested that the Chinese “… must boost our confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded.” One concern is the growth in credit to nonfinancial corporations and households, much of which has been channeled through the so-called shadow banking sector (which undertakes risky bank-like functions, but outside the government-regulated part of the financial sector). As shown in Figure 2-10, credit growth in China since 2008 has increased faster than in many developed countries. An initial surge in 2009 was seen as an aggressive response to the global financial crisis, in line with expansionary policies around the world. The renewed boom in credit since 2012, however, has raised worries about the rapid expansion of the unregulated shadow banking sector and a bubble in real estate prices. The government has responded with a number of policy measures to limit lending activities outside of the traditional banking sector. Property price gains have moderated, however, and prices began to fall in 2014, even in larger, wealthier cities where in the past demand has typically outstripped supply. There is growing concern about overbuilding because contraction in the construction sector would further depress aggregate growth and could cause financial instability.
A further economic slowdown in China would have ramifications for the global economy and, in particular, for low- and middle-income countries. Trade between China and other emerging BRICS economies (Brazil, Russia, India, and South Africa) has expanded since 2000. China is now the top export destination for 15 African countries, 13 Asian economies, and 3 Latin American countries. If demand in China slows, exports to China would decline, broadly dampening emerging-economy growth. Since mid-2011, the other BRICS countries have suffered declining terms of trade (the relative price of a country’s exports compared with its imports). This decline is accounted for in large part by falling prices of commodities and raw materials, to which China’s slowdown is a major contributor.