On Taking Things Apart

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Posted in Contemporary economics Tagged with: , ,

Consider a handful of apparently disparate facts.

In “Wrapping It Up in a Person,” researchers last week reported in Science magazine on the first strong measurements of the impact of government-funded research on the economy – evidence designed to counter Congressional suspicions of lollygagging in programs funded by, among others, the National Science Foundation. Almost forty percent of PhD recipients whose work was funded by federal and nonfederal programs took jobs in industry, disproportionate numbers of them in high-tech and high-wage establishments. (The rest took jobs in education or government.)

And while the graduates whose experience was studied spread across the nation, there was evidence of geographic clustering around the universities where their doctorates had been obtained, in this case, Indiana, Iowa, Michigan, Minnesota, Ohio State, Purdue, Penn State and Wisconsin universities. It was the physicist J. Robert Oppenheimer who observed that the best way to send knowledge out into the world was to wrap it up in a person.

Meanwhile, Boston made a short list of cities to which General Electric Co. is considering relocating its corporate headquarters – 500 or so high-paying jobs. New York and Providence are other possibilities. The 125-year-old technology company, with annuaL sales of around $150 billion, made headlines last summer when it announced it was considering pulling out of suburban Fairfield, Conn., where it has been since 1974, after the Connecticut legislature passed a package of hefty tax increases.

GE apparently crossed off its list Cincinnati, Dallas and, perhaps, Atlanta after state Congressional delegations lined up against the Export-Import Bank. Negotiations with legislative leaders in Hartford began immediately; GE may yet decide to remain in Fairfield. What makes a good headquarters city?  A lively and diverse community, scientific and financial; neighborhood housing nearby; a short haul to a good airport; and, of course, supportive state and local government.

And in New York, activist investors led by Nelson Peltz, of Trian Partners, last week prepared to merge DuPont Co. and Dow Chemical, planning to reorganize the competing giants in order to spin them out as three companies, thus unsettling two other comfortable corporate abodes of long standing, Midland, Michigan, and Wilmington, Delaware.

What these phenomena have in common is that all are evidence of the forces reshaping both the distribution of income and the landscape itself.  These accelerating trends are described to good effect by economist Enrico Moretti, of the University of California at Berkeley, in The New Geography of Jobs (Houghton Mifflin, 2012).

For all the hype about the death of distance, Moretti says, cities remain the most important generators of wealth, much as journalist and author Jane Jacobs first forcefully asserted they were more than fifty years ago in The Death and Life of Great American Cities. Telecommuting remains rare, important interactions still occur mainly face-too-face, and most of what we learn that is valuable comes from the people we know, not from textbooks or the Web. Moretti writes:

At the same times that goods and information travel at faster and faster speeds to all corners of the globe we are witnessing an inverse gravitational pull towards certain key urban centers. Globalization and localization seem to be two sides of the same coin.

To put it mildly, there is a good deal we do not know about the two-sided processes of globalization and localization. Therefore there was special interest in what Princeton’s Angus Deaton had to say in his Nobel lecture in Stockholm last week.

Had the award for measurement economics been made seven OR eight years ago, it might have gone in a very different direction – to the great refinements in growth and national income accounting of the KLEMS program, for example. The award this year to Deaton signaled something new – what the committee called a “microeconometric revolution” in the analysis of consumption, inequality and poverty around the world also marked an apparent shift in attention to issues of distribution from the sources of growth.

It was Deaton, the committee observed, who had written two textbooks and a monograph designed to bring closer together the analysis of individual and aggregate outcomes.  Typically, he pointed out that the supposed increase in global poverty first reported in 2005 stemmed mainly from the fact that rapidly-growing India had been dropped from the set of countries forming the basis for the global poverty line, even though India had a relatively low measure of poverty compared to poorer countries. “In effect,” Deaton wrote, “India and the world have become poorer because India had become richer” because of the aggregation.

And it was Deaton who, with his economist wife Anne Case, also of Princeton, identified the soaring death rate among middle-aged US whites, driven mainly by overdoses of prescription drugs and suicides, amidst rapidly falling morbidity rates in the same age groups in other industrial countries, and in the US Hispanic population as well. It was a triumph of dis-aggregated analysis, published weeks after the Nobel award was announced.

Perhaps more than ever, it seems, there is much to be learned by taking things apart and seeking to put them back together again. The difference between the aggregates of early macroeconomics and the more sophisticated models and better data of the present day is the advent virtually limitless computing power. Theory is still important, but measurement is riding high.