In Box

It is a delight of being an economist how many fascinating papers come through the in box. It is a deep frustration that I don't have the time to read them all.  Here are a few on my in-box today, courtesy of NBER, SSRN, and AEA email lists. Disclaimer: I've only read the abstracts so far. (If you can't get NBER working papers, Google usually finds ungated versions on authors' webpage or ssrn.)

1. The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections by Robert J. Gordon. http://papers.nber.org/papers/W19895

The United States achieved a 2.0 percent average annual growth rate of real GDP per capita between 1891 and 2007. This paper predicts that growth in the 25 to 40 years after 2007 will be much slower, particularly for the great majority of the population. Future growth will be 1.3 percent per annum for labor productivity in the total economy, 0.9 percent for output per capita, 0.4 percent for real income per capita of the bottom 99 percent of the income distribution, and 0.2 percent for the real disposable income of that group.

The primary cause of this growth slowdown is a set of four headwinds, all of them widely recognized and uncontroversial. Demographic shifts will reduce hours worked per capita, due not just to the retirement of the baby boom generation but also as a result of an exit from the labor force both of youth and prime-age adults. Educational attainment, a central driver of growth over the past century, stagnates at a plateau as the U.S. sinks lower in the world league tables of high school and college completion rates. Inequality continues to increase, resulting in real income growth for the bottom 99 percent of the income distribution that is fully half a point per year below the average growth of all incomes. A projected long-term increase in the ratio of debt to GDP at all levels of government will inevitably lead to more rapid growth in tax revenues and/or slower growth in transfer payments at some point within the next several decades.

There is no need to forecast any slowdown in the pace of future innovation for this gloomy forecast to come true, because that slowdown already occurred four decades ago. In the eight decades before 1972 labor productivity grew at an average rate 0.8 percent per year faster than in the four decades since 1972. While no forecast of a future slowdown of innovation is needed, skepticism is offered here, particularly about the techno-optimists who currently believe that we are at a point of inflection leading to faster technological change. The paper offers several historical examples showing that the future of technology can be forecast 50 or even 100 years in advance and assesses widely discussed innovations anticipated to occur over the next few decades, including medical research, small robots, 3-D printing, big data, driverless vehicles, and oil-gas fracking.

Ouch, I hope he's wrong. "Exit from the labor force both of youth and prime-age adults" sounds like a self-inflicted wound, as does "educational attainment,... the U.S. sinks lower in the world league..''

I'm still a techno-optimist. In my mind, Gutenberg sparked the scientific revolution. Knowledge is costly, and if you cannot communicate it there is no reason to get it. Communication costs just dropped to essentially zero. Hold on to your hats, unless self-inflicted wounds kill the golden goose.

2. An Optimizing Neuroeconomic Model of Discrete Choice by Michael Woodford http://papers.nber.org/papers/W19897

A model is proposed in which stochastic choice results from noise in cognitive processing rather than random variation in preferences. The mental process used to make a choice is nonetheless optimal, subject to a constraint on available information-processing capacity that is partially motivated by neurophysiological evidence. The optimal information-constrained model is found to offer a better fit to experimental data on choice frequencies and reaction times than either a purely mechanical process model of choice (the drift-diffusion model) or an optimizing model with fewer constraints on feasible choice processes (the rational inattention model).

Wow. It has long struck me that what is sometimes called "irrationality" or "psychology" is just a good set of rules of thumb for dealing with an information-rich environment. And that our standard model of information -- here is a pack of cards, we both know you picked one, I don't know which one you picked -- is just not up to the task. But I'm not a good enough mathematician or theorist to write down a useful model of information overload. I can't wait to see what Mike, a master theorist,  has come up with here.

3. High Discounts and High Unemployment by Robert E. Hall http://www.stanford.edu/~rehall/HDHU012414, http://www.nber.org/papers/w19871

In recessions, the stock market falls more than in proportion to corporate profi t. The discount rate implicit in the stock market rises. All types of investment fall, including employers' investment in job creation. According to the leading view of unemployment -- the Diamond-Mortensen-Pissarides model -- when the incentive for job creation falls, the labor market slackens and unemployment rises. Employers recover their investments in job creation by collecting a share of the surplus from the employment relationship. The value of that flow falls when the discount rate rises. Thus high discount rates imply high unemployment. This paper does not explain why the discount rate rises so much in recessions. Rather, it shows that the rise in unemployment makes perfect economic sense in an economy where the stock market falls substantially in recessions because the discount rises.

Well, I think I have a good model of why discount rates rise in recessions -- "By force of habit." For some time now, it's been on my back burner to unite that mechanism, or similar mechanisms from asset pricing that deliver high risk premiums in recessions, with a production side in order to generate a full business cycle model. That model will be driven by risk premiums, not by the riskless interest rate, a fundamental change in macroeconomics. It seems like Bob has a good part of that worked out!

4. Gorton, Gary, and Guillermo Ordoñez. 2014. "Collateral Crises." American Economic Review, 104(2): 343-78. https://www.aeaweb.org/articles.php?doi=10.1257/aer.104.2.343

Short-term collateralized debt, private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output. Financial fragility is endogenous; it builds up over time as information about counterparties decays. A crisis occurs when a (possibly small) shock causes agents to suddenly have incentives to produce information, leading to a decline in output. A social planner would produce more information than private agents but would not always want to eliminate fragility.

I have been a big fan of Gary's view, with various coauthors, that we suffered a "systemic run" when previously "informationally insensitive" securities -- nobody pays much attention to annual reports when entering a repo contract -- suddenly become "informationally sensitive," hence subject to asymmetric information-induced illiquidity. I can't wait to read through the detailed published version.

It's snowing hard in Chicago, and it would be great to curl up by a fire place, read these papers and write detailed blog posts on each one. Alas,  it's time to get back to my day job.