Everybody wants progress; nobody wants change

Alain Bertaud once told me, ruefully, that he was part of a failed effort at the World Bank to end the implicit subsidy for car trips created by the Bank’s offer of free employee parking. This proposal generated complaints, but that does not mean that it was a bad idea. If Steve Jobs had followed a strategy of avoiding all complaints, my MacBook Pro would still have an optical disk drive. Examples like these suggest a general lesson about cooperation in large groups:

Everyone wants progress.
Nobody wants change.

I will learn some of the details of the reorganization that the World Bank has been through once I am on site, but I take it as a good sign that the Bank is the type of organization that is generating complaints. It would have been a deal-breaker for me if I had been asked to buy into a culture of complacent paralysis. See this post for more thoughts on the difference between conditional optimism (good) and complacent optimism (bad.)

At NYU, I helped build the Marron Institute of Urban Management. In two ways, it is an unusual academic entity. First, it uses the city as the basic unit of analysis in place of the nation or the business. Second, instead of giving its faculty members the usual freedom to study anything that that seems interesting, the institute lets the problems that cities face set its research agenda. Because these choices are not the usual ones on campus, many people complained. I am proud of the work that the people working at the institute are doing. I appreciate the bet that Don Marron made on the value that could come from letting a new academic flower bloom; and the fortitude that NYU’s president and provost displayed in protecting this flower as put down roots.

As just one illustration of the value that such a unit can offer, Solly Angel is producing estimates that we never had before about such simple questions as the worldwide fraction of urban housing units that are informal, public, and private formal; and the worldwide fraction of urban expansion that is disorganized as opposed to being minimally planned.

When we embarked on this data collection effort, it was easier to get support from UN-Habitat than from the World Bank because the Bank was divided into groups that focused on specific regions, none of which had a mandate that could embrace the global population of cities. After Jim Kim took over as president of the Bank, he restructured it to shift the emphasis from regions to issues. I do not know the costs of this change, but for those of us working on the outside, the intellectual and practical benefits were large and obvious.

Organizations that generate no complaints are dead in the water. The question to ask about the organizations that do generate complaints is how they handle them. When a small minority of people complained about Apple’s decision to stop putting optical disk drives in portable computers, Apple persevered because this decision offered benefits for the vast majority of users. (Naturally, those of us who benefited did not speak up to say thanks.) In contrast, when lots of people complained because Apple Maps was a terrible piece of software, Apple worked to fix it … eventually.

These two episodes illustrate two general types of complaint. One arises when a change offers a windfall gain for some and imposes an undeserved cost on others. If the costs per person are small and the winners outnumber the losers, the best course is to persevere. But if the change offers net benefits but imposes large costs on many, it is worth finding ways to redress the split of gains and losses.

One of the most difficult judgments for an organization (or a nation) is how to draw the line that separates the cases that call for perseverance and those that require redress. An increase in international trade is a good example of a change that could increase income for a nation and impose either small costs on a few or large costs on many. Economists may have been slow to recognize that trade is now imposing larger costs on more people. As a result, we may have been too slow to take up the practical challenge of how to adjust the division between winners and losers of the total increase in national income.

The other type of complaint comes when the search for progress encourages experiments. (It should.) Complaints may be a valuable signal that one of these experiments has turned out badly. (Some will.)

When complaints show that something is not working, a healthy organization will make a change, perhaps after allowing enough time to collect a meaningful data sample.

I would never join a university that cannot abide a constant buzz of faculty complaints. (When I was at UC Berkeley, the joke was that the faculty is a group of free thinkers bound together by a shared grievance about parking.) I would not invest my retirement funds in a firm whose leaders took the absence of complaints as a reliable day-to-day indicator that they are making wise decisions. I would never work for an organization that advises the leaders of developing countries not to pursue any policy that causes some citizens to complain. As a soon-to-be member of the World Bank community, I’m glad that it will have the credibility that comes from taking its own medicine.

If I contribute anything useful to the Bank’s mission, I will inevitably generate some additional complaints. The way to judge me will be to see if I listen and assess how I respond, particularly when they reveal that something I propose is not working.

Who knows? Once I get there, I might have some complaints of my own. Which reminds me, what is the deal about parking?

Abstraction vs. Radical Specificity

Someone asked “What if Germany ran Detroit?” This kind of what-if-pigs-could-fly question mixes abstraction and specificity in a way that I do not find helpful. What works for me is iterating back and forth between two extremes — abstraction and radical specificity — and avoiding the middle.

At one extreme, I ask abstract questions such as “Could there be gains from trade in government services that like the gains from trade in private services?” Then I consider specific questions such as “Could the new authority that was formed to fix the street lights in Detroit sell its services to other cities?”

Continue reading “Abstraction vs. Radical Specificity”

Professionalism and the Academic Division of Labor

In my work, I have tried to avoid revealing anything about my personal political beliefs and even worked to obfuscate as necessary. When my father was visible in national politics as a Democrat, it was helpful to have a letterhead appointment at the Hoover Institution.

Although I stay away from the battles of national politics, in my role as an advocate for science as the greatest human institution, I am now drawn into the battles of academic politics. I seem to be the designated nag when Nobel Prize winners disappoint.

Ed Prescott has a new NBER paper (with a co-author I do not know) on monetary policy with negative nominal interest rates. Other economists have written on this topic. None of the work I know in this area is mentioned in Ed’s paper.

Continue reading “Professionalism and the Academic Division of Labor”

Conditional Optimism about Progress and Climate

Last Friday at the NBER Summer Institute, Martin Stuermer presented a thought provoking paper (written jointly with Gregor Schwerhoff.) It takes an important and puzzling fact seriously, then uses some credible theory to work out the implications of the fact. In the discussion afterwards, a challenge to the paper’s apparent optimism yielded an insight that might have practical implications for ongoing policy debates. It was a wonderful illustration of how science works.

The practical insight is that there are two very different types of optimism. Complacent optimism is the feeling of a child waiting for presents. Conditional optimism is the feeling of a child who is thinking about building a treehouse. “If I get some wood and nails and persuade some other kids to help do the work, we can end up with something really cool.”

What the theory of endogenous technological progress supports is conditional optimism, not complacent optimism. Instead of suggesting that we can relax because policy choices don’t matter, it suggests to the contrary that policy choices are even more important than traditional theory suggests.

Continue reading “Conditional Optimism about Progress and Climate”

My New Position as Chief Economist at the World Bank

I’m pleased to report that President Jim Yong Kim has asked me to join the World Bank as Chief Economist and I have agreed to accept his offer. This may surprise you. It surprises me.

I have often said to myself that the intersection of the set of jobs in Washington DC that I would find intellectually exciting and the set of jobs that I would accept is empty. Intellectual excitement depends on the chance to learn. The decisions people make when they work in Washington tend to have real consequences, so it is risky to be learning on the job there.

Continue reading “My New Position as Chief Economist at the World Bank”

Economic Growth

Compounding

In an update on an old story, an investment banker asks the client to pay by placing one penny on the first square of a chessboard, two pennies on the second square, four on the third, doubling the number on each square that follows. If the banker had asked for this on only the white squares, the initial penny would double thirty-one times to $21,474,836 on the last square. Using both the black and the white squares, the sum on the last square is $92,233,720,368,547,758.

People are reasonably good at estimating how things add up, but for compounding, which involved repeated multiplication, we fail to appreciate how quickly things grow. As a result, we often lose sight of how important even small changes in the average rate of growth can be. For an investment banker, the choice between a payment that doubles with every square on the chessboard and one that doubles with every other square is more important than any other part of the contract. Who cares whether the payment is in pennies, pounds, or pesos? For a nation, the choices that determine whether income doubles in one generation or two dwarf all other economic policy concerns.
Continue reading “Economic Growth”

Martha Derthick and Policymaking for Social Security

derthickMartha Derthick died recently at the age of 81. I never met her, but I became intimately acquainted with her book Policymaking for Social Security. I stumbled when I was collecting raw material for a paper I wanted to write to illustrate the importance of what political scientists call “expressive” voting. The book turned out to be a gold mine. It has more page markers than any other book I own. (See the photo below.)

When the Social Security program was introduced in the 1930s, it covered only a portion of the labor force. In some recent posts (see e.g. here), Paul Krugman cites this fact to illustrate the harsh realities that policymakers face when they innovate.

The evidence in Derthick’s account drives this point home with the power of a pile driver. Policymaking is like battlefield medicine. The leaders who succeed sustain a clear-eyed commitment to triage.

Continue reading “Martha Derthick and Policymaking for Social Security”

Site Refresh

It has taken much longer than I anticipated, but I’m finally ready to go live with a new version of my blog. It should be easier to read and explore, particularly on smaller devices. Getting something that works on screens of different size forces tradeoffs. If you are having trouble getting around on a small screen, try the Mobile option from the menu on the top.

I’ve tested this version on my Mac (with Chrome, Safari, and Firefox) plus a recent Android phone, an aging iPad, and an ancient iPhone. It is built on top of basic functionality offered by WordPress that has been tested more widely. But with software, you know something will go wrong. If you see anything amiss, let me know by email: blog AT paulromer.net.

Where has all the excludability gone?

My previous post, which answered the question, “Why has growth has been speeding up?” made no use of the concept of excludability. So why did I make such a big deal about partial excludability in my 1990 paper?

At least since Marshall handed down his Principles of Economics (arguably since Adam Smith told the story of the pin factory), economists have fretted about how to reconcile the increasing returns associated with what Smith called increases in “the extent of the market” with the obvious fact that in real economies, lots of firms of all sizes compete with each other. One of most important things about growth theory that I learned from Chad Jones is that this question is separable from the question about why the growth rate has been speeding up.

Continue reading “Where has all the excludability gone?”