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October 9, 2009

Economist's View - 7 new articles

T Pain Obama Auto-Tune

The "Big Brother Database"

We need to update our privacy rules for the digital age so that the "cyber warriors" know where the boundaries are, and we also need to ensure that the boundaries are respected:

Who's in Big Brother's Database?, by James Bamford, NYRB: On a remote edge of Utah's dry and arid high desert, where temperatures often zoom past 100 degrees, hard-hatted construction workers with top-secret clearances are preparing to build what may become America's equivalent of Jorge Luis Borges's "Library of Babel," a place where the collection of information is both infinite and at the same time monstrous, where the entire world's knowledge is stored, but not a single word is understood. At a million square feet, the mammoth $2 billion structure will be one-third larger than the US Capitol and will use the same amount of energy as every house in Salt Lake City combined.
Unlike Borges's "labyrinth of letters," this library expects few visitors. It's being built by the ultra-secret National Security Agency—which is primarily responsible for "signals intelligence," the collection and analysis of various forms of communication—to house trillions of phone calls, e-mail messages, and data trails: Web searches, parking receipts, bookstore visits, and other digital "pocket litter." Lacking adequate space and power at its city-sized Fort Meade, Maryland, headquarters, the NSA is also completing work on another data archive, this one in San Antonio, Texas, which will be nearly the size of the Alamodome. ...
Once vacuumed up and stored in these near-infinite "libraries," the data are then analyzed by powerful infoweapons, supercomputers running complex algorithmic programs, to determine who among us may be—or may one day become—a terrorist. In the NSA's world of automated surveillance on steroids, every bit has a history and every keystroke tells a story. ...[...continue reading...]...

"Skewed Rewards for Bankers"

Joseph Stiglitz remembers another Nobel:

Skewed rewards for bankers, Joseph Stiglitz, Project Syndicate: -- The recent death of Norman Borlaug provides an opportune moment to reflect on basic values and on our economic system. Borlaug received the Nobel Peace Prize for his work in bringing about the "green revolution," which saved hundreds of millions from hunger and changed the global economic landscape. ...

Africa's welcome new determination to fight the war on hunger should serve as a living testament to Borlaug. The fact that the green revolution never came to the world's poorest continent, where agricultural productivity is just one-third the level in Asia, suggests that there is ample room for improvement.

The green revolution may, of course, prove to be only a temporary respite. Soaring food prices before the global financial crisis provided a warning, as does the slowing rate of growth of agricultural productivity. ...

But Borlaug's death at 95 also is a reminder of how skewed our system of values has become. When Borlaug received news of the award, at four in the morning, he was already toiling in the Mexican fields, in his never-ending quest to improve agricultural productivity. He did it not for some huge financial compensation, but out of conviction and a passion for his work.

What a contrast between Borlaug and the Wall Street financial wizards that brought the world to the brink of ruin. They argued that they had to be richly compensated in order to be motivated. Without any other compass, the incentive structures they adopted did motivate them -- not to introduce new products to improve ordinary people' lives or to help them manage the risks they faced, but to put the global economy at risk by engaging in short-sighted and greedy behavior. Their innovations focused on circumventing accounting and financial regulations designed to ensure transparency, efficiency, and stability, and to prevent the exploitation of the less informed.

There is also a deeper point in this contrast: our societies tolerate inequalities because they are viewed to be ... the price we pay for having incentives that motivate people to act in ways that promote societal well-being. Neoclassical economic theory, which has dominated in the West for a century, holds that each individual's compensation reflects ... what he adds to society. By doing well, it is argued, people do good.

But Borlaug and our bankers refute that theory. If neoclassical theory were correct, Borlaug would have been among the wealthiest men in the world, while our bankers would have been lining up at soup kitchens.

Of course, there is a grain of truth in neoclassical theory... Nevertheless, the simplistic economics of the 18th and 19th centuries, when neoclassical theories arose, are wholly unsuited to 21st-century economies. In large corporations, it is often difficult to ascertain the contribution of any individual. Such corporations are rife with "agency" problems: while decision-makers (CEO's) are supposed to act on behalf of their shareholders, they have enormous discretion to advance their own interests -- and they often do.

Bank officers may have walked away with hundreds of millions of dollars, but everyone else in our society -- shareholders, bondholders, taxpayers, homeowners, workers -- suffered. Their investors are too often pension funds, which also face an agency problem...

Does anyone really believe that America's bank officers suddenly became so much more productive, relative to everyone else in society, that they deserve the huge compensation increases they have received in recent years? Does anyone really believe that America's CEO's are that much more productive than those in other countries, where compensation is more modest?

Worse, in America stock options became a preferred form of compensation... Not surprisingly, stock options create strong incentives for short-sighted and excessively risky behavior, as well as for "creative accounting," which executives throughout the economy perfected with off-balance-sheet shenanigans.

The skewed incentives distorted our economy and our society. We confused means with ends. .. But the worst effects were on our human capital, our most precious resource. Absurdly generous compensation in the financial sector induced some of our best minds to go into banking. Who knows how many Borlaugs there might have been among those enticed by the riches of Wall Street and the City of London? If we lost even one, our world was made immeasurably poorer.

Obama's Nobel

In case you want to talk about it:

Obama Says He's 'Surprised and Humbled' by Nobel Prize

Here's the response from the White House:

Remarks by the President on Winning the Nobel Peace Prize

Paul Krugman: The Uneducated American

The crisis in education is "about to get much worse":

The Uneducated American, by Paul Krugman, Commentary, NY Times: If you had to explain America's economic success with one word, that word would be "education." In the 19th century, America led the way in universal basic education. Then, as other nations followed suit, the "high school revolution" of the early 20th century took us to a whole new level. And in the years after World War II, America established a commanding position in higher education.
But that was then. The rise of American education was, overwhelmingly, the rise of public education — and for the past 30 years our political scene has been dominated by the view that any and all government spending is a waste of taxpayer dollars. Education, as one of the largest components of public spending, has inevitably suffered.
Until now, the results of educational neglect have been gradual — a slow-motion erosion of America's relative position. But things are about to get much worse, as the economic crisis — its effects exacerbated by the penny-wise, pound-foolish behavior that passes for "fiscal responsibility" in Washington — deals a severe blow to education across the board.
About that erosion:... Most people, I suspect, still have ... an image of America as ... unique in the extent to which higher learning is offered to the population at large. That image used to correspond to reality. But these days ... we have a college graduation rate that's slightly below the average across all advanced economies.
Even without ... the current crisis, there would be every reason to expect us to fall further in these rankings, if only because we make it so hard for those with limited financial means to stay in school [compared to] their counterparts in, say, France. ... But the crisis has placed huge additional stress on our creaking educational system.
According to the Bureau of Labor Statistics,... lost jobs ... in state and local education .... over the past five months [totalled] 143,000. That may not sound like much, but education ... should, and normally does, keep growing even during a recession. Markets may be troubled, but that's no reason to stop teaching our children. Yet that's exactly what we're doing.
There's no mystery about what's going on: education is mainly the responsibility of state and local governments, which are in dire fiscal straits. Adequate federal aid could have made a big difference. But ... back in February centrist senators insisted on stripping much of that aid from the ... stimulus bill.
As a result, education is on the chopping block. And laid-off teachers are only part of the story. Even more important is the way that we're shutting off opportunities.
For example,... generations [of] talented students from less affluent families have used [California's community] colleges as a stepping stone to the state's public universities. But in the face of the state's budget crisis those universities have been forced to slam the door on this year's potential transfer students. One result, almost surely, will be lifetime damage to many students' prospects — and a large, gratuitous waste of human potential.
So what should be done?
First of all, Congress needs to undo the sins of February, and approve another big round of aid to state governments. We don't have to call it a stimulus, but it would be a very effective way to create or save thousands of jobs. And it would, at the same time, be an investment in our future.
Beyond that, we need to wake up and realize that one of the keys to our nation's historic success is now a wasting asset. Education made America great; neglect of education can reverse the process.

"25% of US Jobs are Offshorable"

Alan Blinder says that the amount of offshoring that the US is likely to experience in the future can "be handled by the market system – with some help from government." This seems to back off a bit from his earlier estimates of the consequences:

On the measurability of offshorability, Alan S. Blinder, Vox EU: Although overshadowed by the financial crisis and the world recession right now, the debate over offshoring – that is, outsourcing work to foreign (often poorer) countries – seems poised to stage a comeback as a public policy concern in the not-too-distant future. Indeed, with so much protectionist talk and some protectionist action in the air, fear of offshoring may force its way back onto the policy agendas of the US and other rich countries sooner than we think.
It seems axiomatic that both the economically appropriate and the politically feasible policy responses to offshoring should differ depending on whether the share of the workforce holding offshorable jobs is, say, 2%, 25%, or 75%. In the 2% case, we should probably ignore offshoring as a detail of little consequence. In the 75% case, we should perhaps be seeking radical solutions to the manifold problems caused by massive job dislocations. But if a number nearer to 25% is more plausible, as argued here, the situation probably calls for certain marginal (and some not so marginal) policy adjustments – but certainly not panic. Thus it seems important to obtain a rough empirical handle on this number, slippery though the concept of offshorability may be.1
Several attempts have been made to estimate this fraction in recent years. Unfortunately, they ... present a distressingly wide range – from 11% to 38%. Can we do better?
Estimating offshorability using individual surveys
In a recent paper, Alan Krueger and I employed standard survey methods to assess the offshorability of each job in a random sample of US workers (Blinder and Krueger 2009). Moving to the individual, rather than the occupational, level is important because substantial heterogeneity exists within many occupation groups (Blinder 2009a). (For example, some accounting services are offshorable, while others are not.) In addition to improving accuracy, the other major purpose of our research was to see if we could develop a technique that could be used in standard labour force surveys, such as the Current Population Survey (CPS) in the US. We think we did.
Using a specially-designed telephone survey, which Princeton University's Survey Research Center put in the field in June and July 2008, we experimented with three different ways to measure offshorability. In the first, professional coders used the answers to standard CPS questions to rate the offshorability of each person's job. In the second, respondents essentially classified their own jobs by answering a single question about the need for face-to-face contact and/or physical presence on the job. (Both attributes indicate an inability to move the work offshore.) In the third, we used the answers to a series of questions on face-to-face contact, the ability to deliver one's work from a remote location, etc. to create our own index of the offshorability of each job.
Strikingly, and surprisingly, all three measures agreed on the overall macro number – roughly speaking, 25% of US jobs are offshorable. At the micro level, the three measures agreed on the classification (offshorable or not) of a specific person's job in 70% to 80% of all cases. In studying the detailed responses, we concluded – not surprisingly – that professional coders provided the most accurate assessments of offshorability. That is encouraging news because it implies that the Census Bureau in the US and similar agencies in other countries could easily start producing data on offshorability on a routine basis – probably without changing their survey instruments much, if at all.
In terms of major substantive results, we found that more educated workers appear to hold somewhat more offshorable jobs and that offshorability does not have many statistically significant effects on either wages or the probability of layoff. Perhaps most counter-intuitively, we found that routine work, in the sense defined by Autor et al. (2003), is no more offshorable than work that is not routine.
Policy implications
What might our estimate that roughly 25% of US jobs are, in principle, offshorable imply for public policy?
1. First, saying that 25% of all current US jobs are probably offshorable is not the same as predicting that all these jobs will, in fact, move offshore.
For example, even today, after decades of offshoring of manufacturing jobs, nearly 10% of American workers still work in the manufacturing sector. Virtually all of their jobs are offshorable in principle, but they have not actually gone offshore. So the requisite labour force adjustment will almost certainly be less than 25 percentage points. It will also take place gradually, over decades, as did the relative shrinkage of manufacturing employment between 1960 and today.
2. Second, the 25% estimate is roughly the same as the number of jobs – then almost exclusively in manufacturing – that were probably offshorable in the heyday of US manufacturing (around 1960).
The relative shrinkage of the manufacturing sector in the US (and elsewhere) from about 30-35% of total employment then to under 10% now was somewhat painful, especially in places where manufacturing was concentrated; it fostered some protectionist sentiment and some protectionist measures, and it induced a variety of other ill-considered policy responses. But, broadly speaking, the adjustment did not precipitate any major economic or social convulsions. This experience suggests that a similar-sized labour force adjustment can, once again, be handled by the market system – with some help from government.
3. Third, most of the policy responses that would best prepare the workforces of the rich countries for the coming wave of offshoring are conventional and not very controversial.
I refer to policies like more job retraining, bolstering the social safety net where it needs bolstering (mostly in the US rather than in Western Europe), and improving trade adjustment assistance and extending it to services. The unconventional – and therefore more controversial – policy responses may need to come in the primary and secondary educational system.
Primary and secondary schools, though well-designed to turn out factory workers for the industrial age, has not adapted very well to the information age and to the likelihood of large-scale offshoring in the service sector. I address how it might do so in Blinder (2009b). In a nutshell, I argue there that our schools will have to put more emphasis on communication skills, interpersonal contact, and creative thinking – and far less on rote memorization.
1 I define "offshorability" as the ability to perform one's work duties from abroad with little loss of quality. 2 For details on the three measures, see Blinder and Krueger (2009), pp. 13-22.
Autor, David H., Frank Levy, and Richard J. Murnane (2003), "The Skill Content of Recent Technological Change." Quarterly Journal of Economics, 118 (4, November): 1279–1333.
Bardhan, Ashok D., and Cynthia Kroll (2003), "The New Wave of Outsourcing." Fisher Center for Real Estate & Urban Economics Working Paper 1103, University of California, Berkeley, Fall.
Blinder, Alan S. (2009a), "How Many US Jobs Might Be Offshorable." World Economics, 10 (2, April-June): 41–78
Blinder, Alan S. (2009b), "Education for the Third Industrial Revolution," forthcoming in J. Hannaway and D. Goldhaber (eds.), Creating a New Teaching Profession, Urban Institute.
Blinder, Alan S. and Alan B. Krueger (2009). "Alternative Measures of Offshorability: A Survey Approach," NBER Working Paper 15287, August.
Jensen, J. Bradford, and Lori G. Kletzer (2006), "Tradable Services: Understanding the Scope and Impact of Services Offshoring." In Brookings Trade Forum 2005: Offshoring White-Collar Work, ed. Lael Brainard, and Susan M. Collins, 75–134. Washington, D.C.: Brookings Institution Press.
McKinsey Global Institute (2005), The Emerging Global Labour Market, June.
van Welsum, Desirée, and Graham Vickery (2005), "Potential Offshoring of ICT-intensive Using Occupations." DSTI Information Economy Working Paper 91, Organization for Economic Cooperation and Development (OECD), May.

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