A pair of MIT economists, Erik Brynjolfsson and Andrew McAfee, have written a new book suggesting that computers are finally getting smart enough to do jobs that only people could do in the past. Nothing new there. But they've joined a (still small) but growing number of observers who are afraid that the jobs being displaced are being displaced for good:

Faster, cheaper computers and increasingly clever software, the authors say, are giving machines capabilities that were once thought to be distinctively human, like understanding speech, translating from one language to another and recognizing patterns. So automation is rapidly moving beyond factories to jobs in call centers, marketing and sales—parts of the services sector, which provides most jobs in the economy.

During the last recession, the authors write, one in 12 people in sales lost their jobs, for example. And the downturn prompted many businesses to look harder at substituting technology for people, if possible. Since the end of the recession in June 2009, they note, corporate spending on equipment and software has increased by 26 percent, while payrolls have been flat.

…Productivity growth in the last decade, at more than 2.5 percent, they observe, is higher than the 1970s, 1980s and even edges out the 1990s. Still the economy, they write, did not add to its total job count, the first time that has happened over a decade since the Depression.

In the same way that investors get giddy when economic booms have lasted a long time (this time is different!), there's always a danger of getting too pessimistic when an economic downturn lasts a long time. Just because this recession is a deep one doesn't necessarily mean that it has brand new causes or that it's never going to end.

That said, take a look at the chart on the right. You've probably seen it dozens of times: It shows the percentage of people in the United States who are employed. Here's the important thing about it: It didn't peak in 2007 and then plummet during the Great Recession. It peaked in 2000, and it's been dropping ever since. Even the huge housing/credit bubble of the aughts was only able to hold it at bay slightly.

In other words, something happened around 2000 that pushed people out of the labor force. There are lots of possible culprits, so it's wise not to get too invested in a single explanation. Still, I'd say that 2000 is also about the time that computers seriously started to do human jobs. Just a little bit at first, and then more and more. This trend was masked a bit by the high fever we ran in 2003-07, but when the fever broke we compressed seven or eight years of decline into two.

My back-of-the-envelope guess has always been that job losses during the Great Recession have been about one-third structural and two-thirds cyclical. The cyclical part we could address with fiscal and monetary policy if our political leaders had the guts to do it. But I suspect that at least some of the explanation for the structural part is the growing sophistication of computers, and it's not clear what we can (or want to) do about that. Computers can't drive cars or trucks yet, but that day isn't far away. And when it comes, I still wonder what all those drivers are going to do.

If you read my epic post on NGDP targeting this morning, you'll recall that one of its virtues is that it automatically encourages higher inflation when the economy turns down and automatically encourages lower inflation when the economy is heating up. This is good for purely economic reasons, since low real interest rates help spur growth during recessions, but Steve Randy Waldman writes today that it has moral benefits too, including this one:

A second moral benefit is that under (successful) NGDP targeting, any depressions that occur will be inflationary depressions....If depressions occur even while the NGDP path is stabilized, then they will reflect some failure of supply or technology. Our aggregate investment choices will have proved misguided, or we will have encountered insuperable obstacles to carrying wealth forward in time. It is creditors, not debtors, whom we must hold accountable for patterns of aggregate investment. There always have been and always will be foolish or predatory borrowers willing to accept a loan that they will not repay. We rely upon discriminating creditors to ensure that funds and resources will be placed in hands that will use them well.

....I do not relish inflation for its own sake, or advocate punishing creditors because they are rich and the tall poppies must be cut. But if, despite NGDP stabilization, real GDP cannot be sustained, someone has to bear real losses. There are only two choices: current producers can be taxed in order to make creditors whole in real terms, or past claims can be devalued so that losses are borne at least in part by creditors. In my view, the latter is the only moral choice, and the only choice that creates incentives for investors to maximize real-economic return....

In theory — the theory being that the Fed is really, truly, rock-solid committed to NGDP level targeting and everyone knows it — creditors understand that they're going to pay the price for foolish loans. They might become insolvent, obviously. But even if they don't, they understand up front that if the economy tanks they're going to see the value of their loans erode because the Fed will temporarily engineer higher inflation. One way or another, they're going to pay the piper, and this will make them more careful in their lending practices.

Now, I'll confess that I have my doubts about that last sentence. Thinking Minskyishly, I suspect that creditors are just bound to act stupidly at the height of economic booms. If the fear of bankruptcy doesn't give them pause, a little bit of inflation won't either. As Steve says, they might deserve to take a hit more than, say, taxpayers or borrowers, but I doubt that the prospect of future inflation will change their behavior much.

No, the real virtue of NGDP targeting, if it works, is that it provides a good set of rules for countercyclical monetary policy, which should prevent economic booms from getting too far out of hand in the first place. But I think a bit of caution is still in order here. The Fed, along with other central banks, has been searching for a good monetary policy rule ever since the ancien régime collapsed in the post-Bretton Woods era, and so far the search for something truly automatic has been fruitless. NGDP targeting is the latest flavor of the day, and who knows? Maybe it really is the magic bullet. But while it might be a pretty good rule, something tells me that, like any rule, it will somehow be deemed inadequate during some future crisis. There is, after all, always the legitimate question of what the proper level target should be (it depends on population growth, technological growth, productivity growth, etc.) and there are measurement problems too, even for something as simple as NGDP. Finding some kind of mechanical monetary rule that automatically produces stable growth is sort of a Holy Grail among a certain set of economists, but we're probably not going to find one anytime soon.

In the meantime, though, it's possible that NGDP targeting is the best bet we have. It's certainly worth all the attention it's getting.

From Newt Gingrich, free associating on Herman Cain's road to the presidency:

I think one of the Republican weaknesses has been that we rely too much on consultants and too much on talking points. And we don’t rely enough on actually knowing things.

Seriously? Newt "Language: A Key Mechanism of Control" Gingrich is concerned that Republicans are relying a bit too much on mindless talking points these days? When did he have this Road to Damascus moment?

Somebody's oppo machine was busy over the weekend. Noam Levey reports in the LA Times today that although Mitt Romney's Massachussetts healthcare reform bars illegal immigrants from receiving insurance subsidies, and bars illegal immigrants from receiving Medicaid, it doesn't explicitly bar them from the absolute bottom rung of medical care:

The Massachusetts healthcare law that then-Gov. Mitt Romney signed in 2006 includes a program known as the Health Safety Net, which allows undocumented immigrants to get needed medical care along with others who lack insurance.

Uninsured, poor immigrants can walk into a health clinic or hospital in the state and get publicly subsidized care at virtually no cost to them, regardless of their immigration status.

Somebody in a rival campaign presumably thinks this is a useful campaign issue because the slavering masses of the tea party base won't be appeased until illegal immigrants are literally writhing in the streets while doctors walk by and pointedly ignore them. Allowing them access to even last-ditch health services is unacceptable, even if the pointy-heads insist that we're saving money in the long run because it keeps them out of emergency rooms.

That's my guess, anyway. In any case, this being the super slick Romney campaign, not the shambolic chaos that passes for one in Rick Perry's camp, a super slick answer was probably prepared months ago and deposited into Romney's real-time enterprise response database, where it could be plucked out at a moment's notice. Surprisingly, though, not really:

The Romney campaign referred questions to Tim Murphy, who served as Romney's state health and human services secretary. Murphy said the governor never intended the Health Safety Net to serve undocumented immigrants.

"Our view when we signed the law was that all benefits would be for people in the commonwealth who were here legally," Murphy said, noting that the regulations implementing the program were written after Romney left office in 2007.

That's it? That's their best shot? I predict that this will persuade exactly no one. The real answer, of course, is that back in 2006 Romney still had a small core of human decency left in his soul, and naturally didn't want even illegal immigrants dying on the streets of Boston for lack of an antibiotic. But he's not allowed to admit that anymore, so instead we get some nonsense about Romney being shocked, shocked at how the regs turned out. That's life in the modern Republican Party for you.

It's funny. Every once in a while I actually feel a little sorry for Romney for being forced to compete in this environment. What's a moderate technocrat to do, after all? But then I remember how enthusiastically he used this exact same xenophobic dynamic to bash Perry repeatedly over the in-state tuition issue, and suddenly I don't feel sorry for him even a little bit anymore. Lie down with dogs and you pick up some fleas.

Politico reports that the Obama administration, in the person of Jan Eberly, Treasury’s new assistant secretary for economic policy, is pushing back on the Republican notion that "regulatory uncertainty" is damaging the economy. It's sort of sad that she has to waste valuable neurons on this, when she could instead be doing actual useful work, but I guess that's politics for you.

Anyway, her case is here. And part of her case is that the American economy isn't actually suffering from any more uncertainty than the rest of the world, which suggests that American regulations can't really be having much of an impact. The chart below shows two measures of stock market volatility, one for the U.S. and one for Europe, and as you can see, they've moved pretty much in lockstep during the Obama era.

Which, to make a separate point, is an impressive demonstration of the fact that we live in a global economy, not just an American one. When stuff happens, it affects us all. Keep that in mind when American bankers and Treasury officials keep telling us that "we aren't very exposed" to a possible eurozone disaster. My guess is that we're pretty exposed after all, which is a good reason for all of us to hope that Europe gets its act together soon.

How should the Fed manage monetary policy? The hot topic these days is NGDP level targeting, an old idea that's become newly popular as the economy continues to splutter and current Fed policy seems less and less effective. So let's take a look at NGDP targeting and try to answer two questions:

  • Question #1: Why target NGDP levels? Why not something else?
  • Question #2: How do we target NGDP? Can the Fed really control it?

First, though, a technical definition. NGDP is nominal GDP. That is, it's the total output of goods and services without any correction for inflation. So if the Fed's target is, say, 5% growth per year, that could come from any combination of real GDP growth plus inflation. From a monetary perspective, you don't care. If real GDP doesn't grow at all, you want 5% inflation. If real GDP is on fire and growing 5%, you want no inflation. One way or another, though, you want spending — the number of dollars spent on goods and services — to grow on a stable, predictable path. With that, onward.

Warning! The following is both long and tentative, because I don't really know what I'm talking about. So I'm putting the rest below the fold. If you click "More," do it with the understanding that (a) some of it might be wrong and/or misguided due to a lack of understanding on my part of key concepts, and (b) you're just following along for the ride as I try to puzzle through some stuff in public. OK?

From Daniel Kahneman, in an op-ed written on my birthday:

You should not take assertive and confident people at their own evaluation unless you have independent reason to believe that they know what they are talking about.

Good advice. Also, as I'm sure Kahneman himself would acknowlege, advice that's unlikely to have any impact at all on the real world.

The whole piece is good, but I have to confess that I was stumped by the following story. It's about a test of leadership ability that he and other psychologists supervised back when he was in the Israeli army:

One test, called the leaderless group challenge, was conducted on an obstacle field. Eight candidates, strangers to one another, with all insignia of rank removed and only numbered tags to identify them, were instructed to lift a long log from the ground and haul it to a wall about six feet high. There, they were told that the entire group had to get to the other side of the wall without the log touching either the ground or the wall, and without anyone touching the wall. If any of these things happened, they were to acknowledge it and start again.

A common solution was for several men to reach the other side by crawling along the log as the other men held it up at an angle, like a giant fishing rod. Then one man would climb onto another’s shoulder and tip the log to the far side. The last two men would then have to jump up at the log, now suspended from the other side by those who had made it over, shinny their way along its length and then leap down safely once they crossed the wall. Failure was common at this point, which required starting over.

I would like someone to make a cartoon animation of this. My spatial skills suck, and I simply can't visualize this. Or, more accurately, I should say that the visualization I have in mind seems impossible. If I'm understanding it correctly, failure wouldn't be "common" at the end point, it would be universal.

Then again, maybe these groups typically had a few really strong people in them. But if it were me, I'd recommend taking off someone's helmet, putting it on the ground and jamming the pole into it. See? The log isn't touching the ground. And I'd take off someone's shirt and drape it over the top of the wall and then lean the log against it. See? The log isn't touching the wall. And then we'd all climb over.

And I'd get chewed out for being a smart ass. But at least we'd be safely on the other side of the wall.

Mitt Romney's campaign strategy is fairly simple. He can't afford to dive too far down the tea party rabbit hole because that would hurt his chances in the general election, but he still needs the tea party vote in the primaries. So instead of flat taxes and electrified fences, he tries to appease them with absurdly over-the-top criticisms of the Great Satan himself, Barack Obama. Here's how this worked today, in his reaction to Obama's announcement that all U.S. troops would withdraw from Iraq by the end of the year:

President Obama’s astonishing failure to secure an orderly transition in Iraq has unnecessarily put at risk the victories that were won through the blood and sacrifice of thousands of American men and women. The unavoidable question is whether this decision is the result of a naked political calculation or simply sheer ineptitude in negotiations with the Iraqi government. The American people deserve to hear the recommendations that were made by our military commanders in Iraq.

Well, the naked political calculation was that instead of withdrawing American troops by the end of 2009, as he originally said he'd do, he agreed to follow the timeline negotiated by....George W. Bush in 2008. And talks over troop immunity failed because the agreement negotiated by — yes, George W. Bush in 2008 — cut off immunity at the end of 2011 and the Iraqi legislature flatly refused to consider extending it. And finally, the opinion of the military commanders in Iraq is, I'm pretty sure, adamantine: no immunity, no troops. Admiral Mike Mullen made this clear a couple of months ago when he — not Obama — insisted that troops would stay in Iraq only if they were (a) given immunity from local prosecution and (b) the immunity agreement was approved by Iraq's parliament.

So Mitt is being a horse's ass here. Still, as a campaign strategy it's not bad. And his decision not to try to out-wingnut the wingnuts was vindicated by Michele Bachmann's statement, which said that not only should we have stayed in Iraq, but we should have "demanded that Iraq repay the full cost of liberating them given their rich oil revenues." Even Dick Cheney never went that far.

On the left, we have the miracle of foreshortening. It looks like Domino is investigating a rose about twice the size of her head, but the rose is actually a couple of feet in front of her. What she's really looking at is probably some invisible dust mote in the cat dimension. On the right, we have the miracle of bad framing. As usual, I focused on Inkblot's eyes and then forgot to reframe the shot, cutting him off at his knees. Or whatever passes for knees on a cat. Still, it's sort of a cool picture. It's amazing how a few blurry leaves in the foreground can make it look like Inkblot is in the middle of the Amazon rain forest, isn't it?

Dan Drezner imagines Obama giving a campaign speech about the difference between foreign and domestic policy:

As president, I have to address both domestic policy and foreign policy. Because of the way that the commander-in-chief role has evolved, I have far fewer political constraints on foreign policy action than domestic policy action. So let's think about this for a second. On the foreign stage, America's standing has returned from its post-Iraq low. Al Qaeda is now a shell of its former self. Liberalizing forces are making uneven but forward progress in North Africa. Muammar Gaddafi's regime is no longer, without one American casualty. The wars in Afghanistan and Iraq are winding down. Every country in the Pacific Rim without a Communist Party running things is trying to hug us closer.

Imagine what I could accomplish in domestic policy without the kind of obstructionism and filibustering that we're seeing in Congress — which happens to be even more unpopular than I am, by the way. I'm not talking about the GOP abjectly surrendering, just doing routine things like actually confirming my appointments. I've achieved significant foreign policy successes while still cooperating with our allies in NATO and Northeast Asia. Just imagine what I could get done if the Republicans were as willing to compromise as, say, France.

Roger that. In other foreign policy news, President Obama announced today that we'd be pulling all our troops out of Iraq by the end of the year:

According to a White House official, “this deal was cut by the Bush administration, the agreement was always that at end of the year we would leave, but the Iraqis wanted additional troops to stay. We said here are the conditions, including immunities. But the Iraqis because of a variety of reasons wanted the troops and didn’t want to give immunity.

“So that’s it. Now our troops go to zero,” the official added.

That last line is now mysteriously missing from the ABC News story, but it was in the initial version they emailed me. No immunity, no troops.

I wonder what Republicans are going to say about that? I'm sort of afraid to look. In a normal world, pretty much everyone would agree that if a host country won't cut some kind of immunity deal for military troops in what's still, after all, basically a warzone, then the troops have to come home. But we don't live in a normal world, so I imagine Republicans are going to turn this into some kind of massive appeasement/apology tour/lack of willpower outrage on Obama's part, frittering away the hard won gains of the Bush administration etc. etc. Or something. Let me know in comments.