Technological Pessimism and Too-Good-To-Check Quotations

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One of the most infamous statements of technological pessimism is often attributed to Charles Duell, head of the U.S. Patent Office back in 1898, who allegedly proposed closing up the patent office because "everything that can be invented has been invented."

But the quotation is apocryphal, as has been known for decades. Indeed, Duell gave a speech to Congress in 1899 about how America's economic future depended on innovation. However, there was apparently also an article in 1899 in the the comedy magazine Punch which was imagining a conversation where, at some point in the future, a genius asks about the patent office and a boy responds: "Everything that can be invented has been invented."

The story came to mind because the Robert J. Gordon has a working paper out called "Is U.S. Economic Growth Over? Faltering Innovation Confronts Six Headwinds?" (It's National Bureau of Economic Research working paper #18315. NBER working papers aren't freely available on-line, but many academics will have access through their library systems.) Like all of Gordon's work, the main theses are genuinely thoughtful and provocative. But my eye was drawn to a paragraph about classic predictions of technological pessimism. Gordon writes:


"There are four classic examples in the past of innovation pessimism that turned out to be wildly wrong. In 1876, an internal memo at Western Union, the telegraph monopolists, said, “The telephone has too many shortcomings to be considered as a serious means of communication.” In 1927, a year before The Jazz Singer, the head of Warner Brothers said, “Who the hell wants to hear actors talk?” In 1943, Thomas Watson, then president of IBM, said, “I think there is a world market for maybe five computers.” And in 1981, in the most famous of these ill-fated quotes, Bill Gates himself said in defense of the capacity of the first floppy disks, “640 kilobytes ought to be enough for anyone.”

The paragraph has no footnotes or citations, and in fact, technology writer Kevin Maney wrote an article in USA Today back in 2005 that debunked all four of these quotations: some didn't happen, some are taken at least partially out of context.

For example, that memo from Western Union about how the telephone would never work? The quotation was real enough, but it occurred when Bell was trying to sell his telephone patents to Western Union. Instead of buying the patents, Western Union tried to start its own telephone company, and its handset actually worked fairly well. But then Bell sued for patent infringement, and drove Western Union out of the market. In short, Western Union believed in the telephone and tried to become a phone company, and statements to the contrary were positioning for a patent battle.

And that statement about "who the hell wants to hear actors talk?" Turns out that Warner Bros. was investing heavily in music, thinking that musical scores would be more important than dialog. And indeed, "The Jazz Singer" was about to be a huge hit. Even today, one can argue that for a lot of movie hits, the background of sound is more important than any specific dialog spoken by the actors.

Watson's statement about how the world needs only five computers? There is no primary source or secondary source from that time frame which reports any such comment. And if you think about it, how plausible is it that the head of a computer company would announce that his world market was a total of five sales?

Bill Gates on how 640 kilobytes ought to be enough for anyone? Gates has always denied saying this, and there's no independent source which says he did. And again, how plausible is it that the visionary  head of a company selling operating systems for computers  would state that people have near-term limits on how much computer power or memory they would need?

In the journalism business, an ultra-convenient quotation is sometimes referred to as "too good to check." I remember a Peggy Noonan column from a few years back in the Wall Street Journal that explained the concept by telling a classic Margaret Thatcher story. Noonan wrote:

"The story as I was told it is that in the early years of her prime ministership, Margaret Thatcher held a meeting with her aides and staff, all of whom were dominated by her, even awed. When it was over she invited her cabinet chiefs to join her at dinner in a nearby restaurant. They went, arrayed themselves around the table, jockeyed for her attention. A young waiter came and asked if they'd like to hear the specials. Mrs. Thatcher said, "I will have beef."

Yes, said the waiter. "And the vegetables?"

"They will have beef too."

Too good to check, as they say. It is certainly apocryphal, but I don't want it to be."

Of course, not all statements of technological pessimism are wrong. The great scientist Lord Kelvin did give a speech in 1895 declaring that "heavier-than-air flying machines are impossible."

 I've always been struck that John Stuart Mill, one of the great economists of his time, wrote in his Principles of Political Economy in 1848 that the richer countries of the world already have plenty of material wealth, andthere is little reason to desire or expect much more. Instead, the focus shouldbe on a better distribution of income and on reducing the amount of work thatis necessary. Here's Mill from Book IV, Chapter VI. I boldfaced one line in particular: 

“[T]he best state for humannature is that in which, while no one is poor, no one desires to be richer, norhas any reason to fear being thrust back by the efforts of others to pushthemselves forward. ... ”“I know not why it should be amatter of congratulation that persons who are already richer than any one needsto be, should have doubled their means of consuming things which give little orno pleasure except as representative of wealth; or that numbers of individualsshould pass over, every year, from the middle classes into a richer class, orfrom the class of occupied rich to that of the unoccupied. It is only in thebackward countries of the world that increased production is still an importantobject; in those most advanced, what is economically needed is a betterdistribution ... ““It is scarcely necessary to remarkthat a stationary condition of capital and population implies no stationarystate of human improvement. There would be as much scope as ever for all kindsof mental culture, and moral and social progress; as much room for improvingthe Art of Living, and much more likelihood of its being improved, when mindsceased to be engrossed by the art of getting on. Even the industrial arts mightbe as earnestly and as successfully cultivated, with this sole difference, thatinstead of serving no purpose but the increase of wealth, industrialimprovements would produce their legitimate effect, that of abridging labor.”

If Mill, one of the truly towering minds of his time (or any time), could fall into the error of thinking there was no particular need to increase production from the levels in 1848--when per capita GDP in the U.S. was something like 1/20 of its current level--then anyone can fall into such an error. I am no expert in predicting future growth rates, and surely there are plenty of reasons to be pessimistic about the long-term growth trajectory for the U.S. economy. But I suspect that those who are alive 150 years from now will look back at the current standard of living for an average person and view it as extraordinarily and unbelievably low--much the same way that today we look back at the standard of living in 1848.

Without Health Insurance by State and County

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The U.S. Census Bureau has published "Small Area Health Insurance Estimates (SAHIE): 2010 Highlights."  The document itself is only eight pages long with a few tables and figures. But it links to a nice interactive tool that lets you look at those with or without health insurance broken down by income, sex, race, age, and state or country. You can either generate data tables or maps.

Here's a basic table showing the share of those below 138% of the poverty line who lack health insurance on a state-by-state basis. The table is striking because, after all, Medicaid provides public health insurance for many of those below the poverty line. But it's worth remembering, as I discuss in an earlier post on "Medicaid in Transition," that Medicaid is aimed at the "deserving" poor, which covers low-income families with children, along with the poor who were also disabled or elderly, but it doesn't automatically cover everyone below the poverty line. Even more, the vast majority of Medicaid's spending is not on low-income families of able-bodied adults with children, but instead on those with low incomes who are also blind, disabled, and elderly. Thus, this table is showing how many of the poor and near-poor don't have health insurance.

The table is also striking to me because it demonstrates the large size of cross-state differences in health insurance coverage. Some states have made a commitment to providing or encouraging health insurance in one way or another: for example, Hawaii, Massachusetts, Maine, and Vermont all have less than 20% of their under-65, under 138% of the poverty line population uninsured. Other states have not pushed hard in this direction: Florida, Nevada and Texas have more than 40% of their share of this specific population without health insurance.

Here's map generated with the SAFIE interactive data tool, showing the percentage of those lacking health insurance for all income levels on a county-by-county basis. The map shows that areas with relatively low proportions of those without health insurance are largely concentrated in the central and northeastern portions of the United States.


As I watch the election season unfold, it's interesting to me that many of the states which seem likely to support Obama are states that already have a relatively low population of those without health insurance, while many of those states that seem likely to support Romney have a relatively high population of those without health insurance. To some extent, the argument over providing health insurance for the uninsured is actually an argument that states which have not already taken steps to reduce the number of uninsured should be prodded and subsidized to do so.

U.S. Health Care System Running Amok: The Institute of Medicine Report

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I know that after the last few years of arguments over the  Patient Protection and Affordable Care Act of 2010, many of us are burned out with arguments over the U.S. health care system. We all know that the U.S. system has some of the finest and most innovative care in the world, along with extremely high costs and tens of millions of people without health insurance. But still, most people don't realize just how screwed up the U.S. health care system has become.

For chapter and verse, I recommend the Institute of Medicine Report, Best Care at Lower Cost: The Path to Continuously Learning Health Care in America. The Institute of Medicine is an independent, nonprofit organization, "the health arm of the National Academy of Sciences." The report is chock-full of interesting insights and comments; all quotations here are from the prepublication copy uncorrected proofs, which is available with free registration here. As is my custom, I'll delete citations and footnotes for readability. Here are a couple of palate cleansers, as the restauranteurs would say, before plunging into the main course:

"The tragic life of Dr. Ignaz Semmelweis offers an example of the challenges faced in
building a truly learning health care system. The Hungarian physician observed that simply
washing hands could drastically reduce high rates of maternal death during childbirth. But since
he could not prove a connection between hand washing and the spread of infection, he was
ridiculed and ignored. Hounded out of his profession, he died in a mental hospital. More than
165 years later, half of clinicians still do not regularly wash their hands before seeing patients."

• "If banking were like health care, automated teller machine (ATM) transactions would take not seconds but perhaps days or longer as a result of unavailable or misplaced records.
• If home building were like health care, carpenters, electricians, and plumbers each would work with different blueprints, with very little coordination. 
• If shopping were like health care, product prices would not be posted, and the price charged would vary widely within the same store, depending on the source of payment.
• If automobile manufacturing were like health care, warranties for cars that require manufacturers to pay for defects would not exist. As a result, few factories would seek to monitor and improve production line performance and product quality.
• If airline travel were like health care, each pilot would be free to design his or her own preflight safety check, or not to perform one at all."

And what are some consequences of this system, which has focused so heavily on procedures for the direct delivery of care, but so little on developing a genuinely integrated system for figuring out how and when to use these procedures? One problem is 75,000 deaths each year that should have been preventable.

 "One way to measure this impact is through mortality amenable to health care, defined as the number of deaths that should not occur in the presence of timely and effective health care. Examples of amenable mortality include childhood infections, surgical complications, and diabetes. The level of amenable mortality varies almost threefold among states, ranging from 64 to 158 deaths per 100,000
population. If all states had provided care of the quality delivered by the highest-performing state, 75,000 fewer deaths would have occurred across the country in 2005."

 Another problem is that perhaps a quarter or so of the $2.8 trillion that the U.S. will spend this year on health care is essentially excess costs. Here's the breakdown from the IOM report into unnecessary services, inefficiently delivered services, excess administrative costs, prices that are too high, missed prevention opportunities, and fraud. As the report points out, several studies with independent methodologies have found that the U.S. health care system could save something like $750 billion per year with no negative effect on health. Even saving half that amount, of course, would have extraordinary consequences for helping people see bigger raises in their paychecks and putting a huge dent in federal budget deficits.

How can the U.S. health care system simultaneously waste one-fourth or so of the king's ransom that it spends each year, while still allowing 75,000 preventable deaths each year? The long answer is in the IOM report. The shorter answer, I would say, is that health care is increasingly complex in a way that requires systematic attention to collecting information and coordinating care--and the fragmented and helter-skelter U.S. health care system has not been good at these tasks.

Here are some examples of these problems of growing complexity and lack of coordination, many more of which are scattered through the IOM report:

"The prevalence of chronic conditions, for example, has increased over time. In 2000, 125 million
people suffered from such conditions; by 2020, that number is projected to grow to an estimated
157 million ... Almost half of those over 65 receive treatment for at least one chronic disease, and more than 20 percent receive treatment for multiple chronic diseases; fully 75 million people in the United States have multiple chronic conditions. Managing these multiple conditions requires a holistic approach, as the use of various clinical practice guidelines developed for single diseases may have adverse effects. For example, existing clinical practice guidelines would suggest that a hypothetical 79-year-old woman with osteoporosis, osteoarthritis, type 2 diabetes, hypertension, and chronic obstructive pulmonary disease should take as many as 19 doses of medication per day. Such guidelines might also make conflicting recommendations for the woman’s care."

"Care delivery also has become increasingly demanding. It would take an estimated 21 hours a day for individual primary care physicians to provide all of the care recommended to meet their patients’ acute, preventive, and chronic disease management needs. Clinicians in intensive care units, who care for the sickest patients in a hospital, must manage in the range of 180 activities per patient per day—from replacing intravenous fluids, to administering drugs, to monitoring patients’ vital signs. In addition, rising administrative burdens and inefficient workflows mean that hospital nurses spend only about 30 percent of their time in direct patient care."


"As illustrated in Figure 2-8, a medication order at one academic medical center can be filled in 786 different ways, involving a number of different health care professionals and technological channels. Another study found that inefficient medication administration practices at one hospital caused nurses to waste 50 minutes per shift looking for the keys to the narcotics cabinet ...



"Another study found that in a single year in fee-for-service Medicare, the typical primary care physician had to coordinate with 229 other physicians in 117 different practices. Further, the rate at which physicians refer patients has doubled over the past decade, and the number of primary care visits resulting in a referral has increased by nearly 160 percent ..."

"Projections are for 90 percent of office-based physicians to have access to fully operational electronic health records by 2019, up from 34 percent in 2011 ..."

In short, the sharply rising complexity of what modern medicine can do, interacting with systems of health care provision and health care finance that were already growing outdated by the tail end of the 20th century, is costing enormous amounts and failing to deliver. I know full well the difficulties of collecting, organizing, and feeding back health information, and of reorganizing existing health care systems. But the financial and health costs of failing to push for such change are enormous. And frankly, both the 2010 health care legislation  and the Republican alternatives offer little more than tinkering around the edges and hoping for the best, while the U.S. health care system runs amok.

What the Official Poverty Rate is Missing

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Yesterday the U.S. Bureau of the Census released its annual report on "Income, Poverty, and Health Insurance Coverage in the United States: 2011," this year written by Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith. One finding is that the official U.S. poverty rate barely budged from 2010 to 2011, which if not positive news, is at least non-negative news. Here's a figure showing the number of people in poverty and the poverty rate since 1959:


But the theme I want to take up here is that the official U.S. measure of poverty is based on money income before taxes, not on consumption levels. This subject is taken up in some detail by Bruce D. Meyer and James X. Sullivan in "Identifying the Disadvantaged: Official Poverty, Consumption Poverty, and the New Supplemental Poverty Measure," which appears in the most recent issue of my own Journal of Economic Perspectives. (Like all articles in JEP from the current issue back through the start of the journal in 1987, it is freely available on-line courtesy of the American Economic Association.)

One set of problems is clear: some of the largest government programs to help those in poverty have zero effect on the officially measured poverty rate. For example, Food stamps are technically a noncash benefit (even if in many ways they are similar to receiving cash), so they are not counted in the definition of income used for calculating the poverty rate. The Earned Income Tax Credit operates through the tax system, it is not covered in the definition of "money income before taxes" used to measure poverty. The same is true of the child credit given through the tax code. Medicaid assistance for those with low incomes is not cash assistance, so it doesn't reduce the measured poverty rate, either.

The fact that many anti-poverty programs have no effect on officially measured poverty is no secret. The Census report itself carefully notes: "The poverty estimates in this report compare the official poverty thresholds to money income before taxes, not including the value of noncash benefits. The money income measure does not completely capture the economic well-being of individuals and families, and there are many questions about the adequacy of the official poverty thresholds. Families and individuals also derive economic well-being from noncash benefits, such as food and housing subsidies,and their disposable income is determined by both taxes paid and tax credits received." As an example, the report points out that if EITC benefits were included as income, the number of children in poverty would fall by 3 million.

But there is a deeper issue with the official poverty rate, which is that it is measured on the basis of income, not on the basis of consumption. In a given year, a household's level of income and its level of consumption don't always match up. It's easy to imagine an example, especially in the last few years with sustained high unemployment rates, that some households had low income in a given year, but were able to draw on past savings, or perhaps to borrow based on credit cards or home equity. It's possible that measured by income, such households appears to be in poverty, but if measured by consumption (and especially if they own their own homes), they would not appear quite as badly off.

Meyer and Sullivan look at how those classified as "poor" would be different if using a poverty rate based on consumption, vs. a  poverty rate based on income. They emphasize the poverty rate can be the same whether it is based on consumption or on income: it's just a matter of where the official poverty line of consumption or income is set. Thus, the poverty rate is not automatically higher or lower because it is based on income or consumption. (For those who care about these details, the official poverty meausure looks at income as measured by the Current Population Survey, while Meyer and Sullivan look at consumption as measured by the Consumer Expenditure Survey.)

Meyer and Sullivan offer a fascinating comparison: they look at 25 characteristics that seem intuitively related to household well-being: total consumption; total assets; whether the household has health insurance; whether it owns a home or a car; how many rooms, bedrooms, and bathrooms in the living space; whether the living space has a dishwasher, air conditioner, microwave, washer, dryer, television, or computer, whether the head of household is a college graduate; and others. It turns out that if one looks at poverty by income and by consumption, with the poverty rates set to be equal in both categories, 84% of the people are included in either definition. But those who are "poor" by the consumption definition of poverty are worse off in 21 of the 25 categories of household well-being.

Why is this? In part, it's because the total value of consumption includes the funds received Food Stamps, the Earned Income Tax credit, and so on.  Some of those who fall below the poverty line when these are not considered, in the official income-before-taxes  poverty measure, rise above the poverty line when these are  included. In addition, consumption poverty better captures those who don't have other resources to fall back on, so those whose income is temporarily low enough to fall below the poverty line, but have other ways to keep their consumption from falling as much, don't show up as falling below a consumption-based poverty line.


Setting a poverty line is a political decision, not a law of nature. Some decisions will always be second-guessed, and those who care about the details of what happens with different poverty lines can go to the Census Bureau website and construct alternative measures of the poverty rate based on different measures of income or different ways of defining poverty. But that said,  it seems downright peculiar to have an official income-based measure of poverty that isn't affected at all by several of the largest anti-poverty programs. And it seems peculiar to base our official measure of poverty on income, when the fundamental concept of poverty is really about having a shortfall of consumption.  

Are CEO's Overpaid?

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Are CEO's Overpaid? I confess that my knee-jerk answer to this question is "YES"! But Steve Kaplan makes a strong case for a more nuanced answer in Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges," published in July as Chicago Booth working paper 12-42. Here's a sketch of some of  his arguments and graphs.

 First, just as a matter of getting the facts straight, CEO pay relative to household income did spike back in the go-go days of the dot-com boom in the late 1990s, but since then, it is relatively lower. Kaplan argues that there are two valid ways to measure executive pay. One measure looks at actual pay received, which he argues is useful for seeing whether top executives are paid for performance. The other measure looks at "estimated" pay, which is the amount that financial pay packages would have been expected to be worth at the time were granted. This calculation requires putting a value on stock options, restricted stock grants, and the like, and estimating what these were worth at the time the pay package was given. Kaplan argues that this measure is the appropriate one for looking at what corporate boards meant to do when they agreed on a compensation package.

Here's one figure showing actual average and median pay totals for S&P 500 CEOs from 1993 to 2010. Average pay is above median pay, which tells you that there are some very high-paid execs at the top pulling up the average.  Also, average CEO pay spikes when the stock market is high, as in 2000 and around 2006 an  2007. Median realized pay seems to have crept up over time. 
Here's a figure showing estimated pay--that is, the value of the pay packages when they were granted. But this time, instead of showing dollar amounts, this graph shows average and median CEO pay as a multiple of median household income. Average pay again spikes at the time of the dot-com boom. Kaplan emphasizes that estimated CEO pay is on average lower than in 2000 and that the median hasn't risen much. My eye is drawn to the fact that median pay for CEOs goes from something like 60 times median household income back in 1993 to about 170 times median household income by 2010.

An obvious question is whether these pay levels are distinctive for CEOs, or whether they are just one manifestation of widening income inequality across a range of highly-paid occupations. Kaplan makes a solid case that it is the latter. For example, here's a graph showing the average pay of the top 0.1% of the income distribution compared with the average pay of a large company CEO.Again, the story is that CEO pay really did spike in the 1990s, but by this measure, CEO pay relative to the top 0.1% is now back to the levels common in the the 1950s.

  

Kaplan also points out that the pay of those at the top of other highly-paid occupations has grown dramatically as well, like lawyers, athletes, and hedge fund managers. Here's a figure showing the pay of top hedge fund managers relative to that of CEOs in the last decade. Kaplan writes: "The top 25 hedge fund managers as a group regularly earn more than all 500 CEOs in the S&P 500. In other words, while public company CEOs are highly paid, other groups with similar backgrounds and talents have done at least equally well over the last fifteen years to twenty years. If one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why the other professional groups have had a similar or even higher growth in pay. A more natural interpretation is that the market for talent has driven a meaningful portion of the increase in pay at the top."   

Kaplan also compiles evidence that CEOs of companies with better stock market performance tend to be paid more than those with poor stock market performance, and that CEOs have shorter job tenures. He writes: Turnover levels since 1998 have been higher than in work that has studied previous periods. In any given year, one out of 6 Fortune 500 CEOs lose their jobs. This compares to one out of 10 in the 1970s. CEOs can expect to be CEOs for less time than in the past. If these declines in expected CEO tenures since 1998 are factored in, the effective decline in CEO pay since then is larger than reported above."And the CEO turnover is related to poor firm stock performance ..."

To me, Kaplan makes a couple of especially persuasive points: the run-up in CEO salaries was especially extreme during the 1990s, and less  so since then (depending on how you measure it); and the run-up in CEO salaries reflects the rise in inequality across a wider swath of professions. While I believe the arguments that job tenure can be shorter for the modern CEO, especially if a company isn't performing well, it seems to me that most former CEO's don't plummet too many percentiles down the income distribution in their next job, so my sympathy for them is rather limited on that point.

In this paper, Kaplan doesn't seek to address the deeper question of why the pay for those at the very top, CEOs included, has risen so dramatically.  While the demand for skills at the very top of the income distribution is surely part of the answer, I find it hard to believe that these rewards for skill increased so sharply in the 1990s--just coincidentally during a stock market boom. It seems likely to me that
  cozy institutional arrangements for many of those at the very top of the income distribution--CEOs, hedge fund managers, lawyers, and athletes and entertainers--also plays an important role.  

Distribution of Taxes in 2009: CBO

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Current Account Imbalances

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