# The Changing U.S. Economy

An assignment in my Spring 2018 senior-level macroeconomics course had my students look up the total capital expenditure and total labor expenditure by economic sector. Each student was assigned a different year. I gave them a spreadsheet that ordered the sectors by labor/capital ratio and plotted them in a unit box. While the students were presenting their results, it occurred to us all that it would make an interesting movie. I slapped something together at the time, but I just went back and did it right this time.

Each year, the capital per sector is divided by total capital, so that all capital adds up to one. Similarly, the labor per sector is divided by total labor, so that all labor adds up to one. The sectors of the economy are sorted by slope (labor divided by capital). That way, their plot forms an upward curving arc from (0,0) to (1,1).

BLS (U.S. Bureau of Labor Statistics) has payroll data starting 1939, but from 1936 to 1946, it only tracks one sector: manufacturing. Starting in 1947, two more sectors were added: construction, and mining & logging. Not until 1964 was the service sector added, when it already accounted for 50% more in payrolls than manufacturing. Added at that time was a sector combining trade, transportation, and utilities, then they were split out in 1972. BLS never tracked farm payrolls – agriculture is largely taboo at BLS, it seems.

The capital data from BEA (U.S. Bureau of Economics Analysis) is remarkably consistent over the years. The sectors in BEA data are slightly different from the sectors in BLS data. It was easier to combine all agriculture and mining to put together with the mining & logging sector labor data, so the plots will always overstate capital in that sector. From 1964 to 1971, when BLS combined trade, transportation, and utilities, the capital data are combined for those sectors. The combined sector is represented by a line striped in the colors for the individual sectors.

#### Things to note

• The plots from 1947 to 1961 are not directly comparable with the other years because there are large, missing sectors during that time and especially at the end.
• The  curvature changes considerably between 1971 and 1972, when trade, transportation, and utilities were split out. The transportation sector moves to the low-labor end, the utilities sector stays about in the middle, and the trade sector moves up to the high-labor end.
• Manufacturing is always becoming less steep, that is, less labor-intensive (more automated). This appears as a clockwise rotation of the manufacturing line.
• The labor from manufacturing seems to go to construction between 1947 and 1963.
• The service sector accounts for about 30% of labor in 1964. This grows steadily to about 80% in 2016.
• Growth in the service sector is very rapid between 1972 and 2010.
• The clockwise rotation of the manufacturing line is even more rapid  between 1964 and 1971 as the services sector takes an increasing share of labor.
• The slope of the manufacturing line is relatively constant from 1972 to 2000, but resumes it’s clockwise rotation from 2001 to 2010.
• The size and slope of the manufacturing line are pretty stable from 2011 to 2016.

#### Acknowledgements

Thanks to: Kirsten Andersen, Kristin Carl, Brittany Chacon, Yu Ting Chang, Andrew Detlefs, Kyle Dougherty, Thomas Henderson, Darren Ho, Jack Hodge, Alanis Jackson, Madeline Kee, Eric Knewitz, Jackson Kniebuehler, Phuong Mach, Abraham Maggard, Alexander Palm, Luisa Sanchez-Carrera, Teran Villa, Tsz Hong Yu

# Bilateral trade deficits and other nonsense

Paul Krugman (sort of) tweeted about the hoopla over the US trade deficit with Germany. Krugman points out that bilateral trade balance is irrelevant in a global economy because the global economy is a complex organism and individual relationships have to be considered in the bigger context. All true if you believe in the global economy – and the vast majority of American consumers do based on their shopping behavior. Then Krugman digs down into the nuts and bolts of the US trade relationship with Germany.

As Krugman points out, the trade relationship with any EU country is complicated, since goods arriving at any port within the EU could be destined for any national market within the union. Krugman speculates that the large US trade surpluses with Netherlands and Belgium represent goods ultimately consumed throughout the EU, including Germany.

With this thought in mind, I took the US Census balance of trade data, computed the 2016 bilateral net exports from the US (exports from the US minus imports to the US) for each EU country, and divided that by the 2016 population of each country. Here’s what I got

The thinking here is that if some countries act as ports for US trade with the whole EU, those countries should have disproportionately large trade deficits or surpluses with the US. For example, the overall US trade deficit with the EU is \$287 per person living in the EU. For Germany, it’s \$789 per person in Germany. Belgium and Netherlands have US trade surpluses of \$1348 and \$1427, respectively, per person in each of those countries. Luxembourg chips in another \\$1648 per person, but the half-million people of Luxembourg are not going to turn around the US export economy any time soon.

These numbers support Krugman’s idea that Belgium and Netherlands are importers for the whole EU. And the US’s huge per capita trade deficit with Ireland probably reflects that Ireland is an exporter for the whole EU. The population of Ireland is a little less than one percent of the EU, however, so the size of that number is not as dramatic as it seems.

# Social Security: the laws of thermodynamics still hold

You’ve heard all the hyperbole about Social Security going bankrupt, or broke, or whatever. If you still haven’t figured out how ridiculous that is, research pay-as-you-go plans. The system doesn’t run out of money unless the number of working people goes to zero. Chances are there will be far more serious things to worry about if that ever happens.

Here’s a very simple way to think about Social Security: every working person supports herself or himself along with some number of other people – dependents and people collecting Social Security. How many people? Less than two.

You may also have heard that, because of baby boomers (you know, the generation that made America rich but are now portrayed as economic parasites), the number of people collecting Social Security will soon far outnumber the number of working people. An incredibly improbable scenario, given what we know of the biology of the human species and, for that matter, the laws of thermodynamics.

But skipping over heat death analogies of our economic future, let’s just look at some numbers. Or, better yet, a graph made from some numbers. The numbers are from the Census Bureau’s 2014 population estimate.

The pair of lines at the bottom represent the ratio of retirees to workers over the next 44 years. Yes, it is increasing – from about 0.26 in 2012 to about 0.41 in 2060. That’s about 3 retirees for every 12 workers in 2012, to about 5 retirees for every 12 workers in 2060. This, by the way, is not the actual number of retirees, it’s the population aged 65 and above. Many of those people will continue to work, so this is a worse case scenario, basically.

In the meantime, American families are getting smaller at about the same rate, as shown in the pair of lines marked Dependents. The average number of dependents per worker will go from about 1.78 in 2012 to about 1.57 in 2060. When you add them together it means that a worker in 2012, who supported an average of 2.04 people, will be supporting 1.99 people by the year 2060. These are the lines at the top.

This is the culmination of a trend that started a long time ago. Multigenerational families are disappearing as retirees become increasingly self-supporting through both private retirement insurance (e.g. 401k) and public retirement insurance (Social Security). Households are seeing financial and social benefits of bearing less of the support for older family members at the same time that they are choosing to have smaller families. And, even while trading some of the costs of raising children for the costs of supporting parents, households will still manage to lower their overall burden in terms of the number of individuals supported.

And why are there two lines for each group in the graph? Before the 2008/2009 Great Recession, labor force participation was about 66% (down from an all time high of 67%). That is, 66% of Americans aged 16 and above were working or actively looking for work. Through the recession and after, labor force participation fell to nearly 62% before rebounding slightly.

There is some evidence that this new lower level of labor force participation is a structural change. That is, many American households have elected to step back from all adults earning full time incomes yet amassing tremendous consumer debt. Young families are opting for simpler lifestyles.

Returning to the dependents graph at the top of the page, the scenario where labor force participation rebounds to 66% is portrayed with dashed lines. And the scenario where labor force participation stays at 62% is shown with the solid lines. Either way, the laws of thermodynamics are not violated – we do not suddenly dissipate all the economic energy of 154 million American workers, nor do 40 million retirees create a black hole into which all that energy is sucked without a trace.

# Math is too hard for Economics students?

The New Yorker ran an article about how math is too hard for Economics students.

My experience is that most Economics programs are not math-intensive. Maybe the top programs are – Harvard, Chicago, London School of Economics – because they can be. That is, a diploma from one of the top schools means you can do it all. If you can’t do it all, lower your expectations.

There are some math-phobic students (and professors) who want the high-prestige diplomas without the hard math. Piketty – like many celebrities – self-promotes by trivializing the institutions that got him where he is. He sounds a bit like someone in XKCD.

The reality is that there are some very important theories of Economics that require hard math. Will every economist need them in practice? No, not any more than most composers, computer scientists, or satellite engineers will need to use their foundational knowledge under normal circumstances. That’s not why they learn it: they learn it to be prepared for unusual circumstances.

The truth is that macroeconomics has a surfeit of competing explanations for almost everything – it doesn’t suffer a lack of out-of-the-box thinking. But it does suffer a shortage of sound ideas that can be tested theoretically and/or demonstrated through data. That’s where the hard math comes in.