Tag Archives: productivity

3D Printing – A new Industrial Revolution?

As a student majoring in mechanical engineering, I realized that some understanding in Economics can a big plus for applying engineering knowledge to the real world. Therefore, I decided to minor in Economics, taking ECON 411- Monetary and Financial Theory as well. This class have been very interesting to me, as I learned how monetary policy and government intervention can boost the economy.

Yet, I still think that the most direct cause for economic growth is the development in technology – where engineering takes place. One example of development in technology that led to huge economic boost is invention of steam engine in 18th century. The graph shown below, from OCCUPY LONDON – Blueprint for a new economy shows the world GDP per person, from year 1000 to 2000s. It can be seen from the graph that world GDP per person increased drastically after 18th century. The invention of steam engine increased the productivity of manufacturing and means of transportation, which led to an acute boost in economy.

It has been more than 200 years since the steam engine was invented. From then, many inventions and technological developments have been made, but none of them impacted the economy as drastically as steam engine have. I personally believe that this is mainly due to the fact that these inventions have not changed the “paradigm” of manufacturing. For instance, manufactures still manufacture using machines, labor, electricity and materials that have been used since the industrial revolution took place (of course, there have been innovations in machineries which led to a huge improvement in accuracy, precision and cost/time reduction)-until the invention of a new type of manufacturing, that might change the “paradigm” of manufacturing world – 3D printing.

3D printing is a process of making a three-dimensional solid object of any shape with use of a digital model made from computers. It incorporates additive process; multiple layers are laid down in different shapes to eventually manufacture a model. This can be a “paradigm shift” in world of manufacturing, as 3D printing can get rid of cutting and drilling which is a process of “removal of materials.”

The article General Electric on 3D printing: ‘We are on the verge of the next industrial revolution’ from ZD net suggests that 3D printing can lead to a next industrial revolution. According to the article, a 20 year old Indonesian student helped the company to manufacture a critical aircraft part that was 83 percent lighter and yet still met the safety and design criteria with saving considerable amount of budget, thanks to 3D printing. 3D printing can be used in any area, from automotive industry to medical fields, which is even more exciting and therefore attracted many investors worldwide.

So, will 3D printing lead us to a new industrial revolution? Not just yet. The Wall Street Journal article 3-D Printer Makers Get Reality Check says 3D printer manufactures’’ stock prices have fallen near 40% since January 2014, after a constant and rapid rise in 2013. Yet, this does not mean that 3D printing is inadequate for changing current manufacturing process. Engineers and researchers are still experimenting ways to incorporate 3D printing into real life, and in near future I believe that 3D printing will eventually lead us to a new world of manufacturing, with considerably higher productivity and less cost.

Immigration Reform: A Spark for the Economic Recovery

Although immigration reform in the United States can be extremely controversial, I believe  successful reform will greatly benefit the economy. A successful overhaul of America’s immigration policy would benefit our economy by opening our borders to highly skilled noncitizens. According to the Wall Street Journal, “The most important reason to reform immigration laws is to promote economic growth and prosperity. The U.S. has long had a generous immigration system, but it has been skewed to family unification rather than U.S. economic interests”. Considering the slow recovery from the financial crisis of 2008, I believe immigration reform could be an effective way to give the economy a meaningful push forward. The current immigration system seems outdated and reform seems in the best interest of the economy.

Attracting and keeping highly skilled workers would be a positive step toward economic growth. Highly skilled workers would provide a boost to productivity, which in turn would help increase gross domestic product (GDP). According to the Wall Street Journal, “In today’s global economy, with many rising nations, the U.S. is in an increasingly competitive contest for human capital. Yet often today the U.S. educates talented foreigners in our schools only to deny them visas to stay and work in America. The companies they create will be in China and India rather than Austin or Minneapolis”. I have always thought that it was silly for foreign students to come to the United States for a fantastic education, but not be able to stay after graduation and contribute to long run economic growth. During high school (boarding school), I lived with a foreign student who expressed the challenges he would face if he wished to work in the United States after college. Although some foreign students might (understandably) wish to return home, I think it is clearly in the best (economic) interest for the United States to retain these trained workers.

On the one hand, some see immigration reform as a boost for the economy. On the other hand, some claim that immigrants steal American jobs and depress wages. According to the Wall Street Journal, “The populist wing of the [right] wing party has talked itself into believing the zero-sum economics that immigrants steal jobs from U.S. citizens and reduce American living standards”. However, in the long run this will likely not be the case. The concern that immigrants “steal” American jobs operates under the assumption that immigrants only impact the labor supply and not labor demand. The key is that immigrants would not be substituting for American workers – instead, immigrants would complement the natural-born American labor force. Although adding more workers to the labor force in isolation would lower wages and add to the unemployment rate, this ignores the fact that new workers will also add to demand by spending the money they earn.

Successful immigration reform would provide increased productivity and higher wages once businesses expand to absorb the larger labor force and meet increased demand from a larger population. Unfortunately, promoting the benefits of long run policy can be a challenge since the long run is so intangible. As Keynes said, “In the long run we are all dead”. In the short run, the increase in demand for labor might lag behind the increase in demand for goods and services causing unemployment rate rise in the few years following the implementation of immigration reform. However, I am confident that the long run is not that far off. Ultimately, adding immigrants to the labor force should benefit the United States economy. The political landscape can be extremely challenging, but the Senate has a bill that might solve these issues. According to the Wall Street Journal, “This is why the Senate bill wisely opens the gates wider for foreign graduates and high-tech (H1-B) visas“. I am hopeful that the Senate bill will get passed and implement successful immigration reform.

REVISED: “The Great Decoupling” in Itself is Not the Problem

In two recent Wall Street Journal opinion pieces – “The U.S. Needs a New Social Contract” and “Closing the Productivity and Pay Gap” – William Galston presented an in-depth analysis on the widening gap between productivity and wages. He calls the divergence between these two metrics the “Great Decoupling” and believes it is a defining phenomenon of our era. A significant share of income has shifted from labor to capital. According to Glaston, “In 1947, labor received 67% of nonfarm business output. At the end of 1973, that figure still stood at 66%. In 2012 (the latest year for which data have been released), labor received only 58% of total output, the lowest by far in the entire postwar period.” The chart below taken from FRED, shows the divergence visually – total factor productivity growth has outpaced wage growth considerably since the mid 1980s.

Screen shot 2014-02-22 at 6.28.20 PM

Galston’s concern on this topic is tied closely to the inequality issue that has been a recent hot topic. While he presents compelling ways to fix this problem, Galston fails to recognize the root causes and shows a general misunderstanding of economic principles.

The divergence in productivity and wages stems primarily from efficiency gains. As technology has improved, automation and computers have taken over many tasks once performed by hand and productivity has increased without the need for new workers. Galston fails to mention this point at all and it is very important. Technological progress drives long run growth in macroeconomic models and makes everyone better off. In the short-run technological advancements will shift income to owners of capital, but in the long run this should even out as new industries and jobs are created that did not exist previously. It is also important to think about this issue in absolute terms, rather than purely relative. While it is true that labor is receiving a smaller share of total income than it did through much of the post-war period, in absolute terms most workers are better off today.

A second issue that Galston fails to recognize is that in a competitive labor market the equilibrium wages should be equal to the marginal product of labor. If the marginal product of labor is higher than wages, firms could increase profits by hiring additional workers. Eventually the marginal product reaches a point where it is equal to the wage and it is not longer profitable for firms to hire additional employees. The point that Galston fails to realize is that, from a micro level, in order to increase wages we need to increase marginal product of labor.

The best way to increase marginal product of labor and therefore wages are to increase education so workers are able to utilize the advances in technology to increase their own productivity. Education reform should be a more pressing issue than it is in order to sustain economic growth. Many unskilled workers likely have a marginal product of labor that is below the current equilibrium wage level and so it does not make sense for firms to hire them. Focusing on providing education to the most unskilled workers could improve the plight of the poorest American’s, while unlocking productivity from a currently under-utilized labor source. Galston proposes some education reform in his piece and he is right about that – he just needs to realize that the “Great Decoupling” itself is not the problem, but rather a symptom of deeper economic forces in the economy.

The Great Decoupling in Itself is Not the Problem

In two recent Wall Street Journal opinion pieces – “The U.S. Needs a New Social Contract” and “Closing the Productivity and Pay Gap” – William Galston presented an in-depth analysis on the widening gap between productivity and wages. He calls the divergence between these two metrics the “Great Decoupling” and believes it is a defining phenomenon of our era. A significant share of income has shifted from labor to capital. According to Glaston, “In 1947, labor received 67% of nonfarm business output. At the end of 1973, that figure still stood at 66%. In 2012 (the latest year for which data have been released), labor received only 58% of total output, the lowest by far in the entire postwar period.” Galston’s concern on this issue is tied closely to the inequality issue that has been a recent hot topic. While he presents compelling ways to fix this problem, Galston fails to recognize the root causes and shows a gross misunderstanding of economic principles.

The divergence in productivity and wages stems primarily from efficiency gains. As technology has improved, automation and computers have taken over many tasks once performed by hand and productivity has increased dramatically without the need for new workers. Galston fails to mention this point at all and it is very important. Technological progress drives long run growth in macroeconomic models and makes everyone better off. In the short-run technological advancements will shift income to owners of capital, but in the long run this should even out as new industries and jobs are created that did not exist previously. It is also important to think about this issue in absolute terms, rather than purely relative. While it is true that labor is receiving a smaller share of total income than it did through much of the post-war period, in absolute terms workers are better off than through most of that period.

A second issue that Galston fails to recognize is that in a competitive labor market the equilibrium wages should be equal to the marginal product of labor. If the marginal product of labor is higher than wages, firms could increase profits by hiring additional workers. Eventually the marginal product reaches a point where it is equal to the wage and it is not longer profitable for firms to hire additional employees. The point that Galston fails to realize is that, from a micro level, in order to increase wages we need to increase marginal product of labor.

The best way to increase marginal product of labor and therefore wages are to increase education so workers are able to utilize the advances in technology to increase their own productivity. Education reform should be a more pressing issue than it is in order to sustain economic growth. Many unskilled workers likely have a marginal product of labor that is below the current equilibrium wage level and so it does not make sense for firms to hire them. A focus on providing education to the unskilled workers could improve the plight of the poorest American’s, while unlocking productivity from a currently under-utilized labor source. Galston proposes some education reform in his piece and he is right about that – he just needs to realize that the “Great Decoupling” itself is not the problem, but rather a symptom of deeper trends in the economy.

The Importance of Co-Workers

One of the most under-stated factors when looking for a job, is that of co-workers. Most people who are on the job hunt focus on the company, pay, benefits, location, etc. Of course, these are all important factors. But what about considering what kinds of people you will be interacting with for large parts of your day. The reason most people don’t focus too much on this is likely the fact that this feature isn’t given much quantifiable influence on any job. However, the effects co-workers can have on productivity are massive.

This isn’t hard to see at all. How many times in your lifetime have you had to do a project with a good friend? In my experience, no work was completed until hours after talking and doing very unproductive things. This doesn’t necessarily mean working with friends is a bad idea, but we can easily understand how the people you work with can have an effect on your productivity. An article from the Wall Street Journal outlines how different kinds of “annoying” co-workers are actually beneficial to the workplace, in very different ways. Everyone has worked with an obsessive, workaholic co-worker. Though this perfectionism and over-working may seem annoying and at times counter-productive, these kinds of co-workers set high standards for everyone and generally increase productivity in this way. Now think about the self-involved, narcissist co-worker; many can actually be quite charming and engaging. Though they may not make great friends, these co-workers often attract followers and make great leaders. The article points out that this is the reason why so many bosses are this way. Finally, the most interesting part of this analysis (for me) is the conclusion about gossip in the workplace, and office gossip spreading it. a study at the University of Amsterdam (2012) concluded that gossip makes up 90% of office conversation. That’s huge! Additionally, the study found that this kind of communication may be essential in the workplace as it helps to keep under-performers in line while promoting camaraderie. Which is believed to make any office run more smoothly and experience increased productivity.

However, there is a limit to how much interaction is preferred among co-workers. An article in Forbes discusses a survey conducted by Harris Interactive. This survey shows that 86% of respondents prefer to work alone than in a group, in order to maximize efficiency. Also, 40% indicated that unplanned meetings with co-workers (like stopping by to talk about their weekend) is one of the biggest distractions in the workplace.

Clearly, co-workers can provide both beneficial and costly effects in a work environment. This being said, I strongly believe they are essential to any job. At least in my experience, working with pleasant people makes any job much more bearable. Unless someone is biologically built to need no social interaction (unlikely), having a positive work environment (filled with all the different kinds of co-workers discussed) can greatly boost morale and consequently improve productivity. Though it is simplistic and cliche, I truly believe happy people are the most productive people. Thus, the emphasis on this aspect of the work environment should be more pronounced for employers and job hunters alike.

An Analysis of “How the Economic Machine Works”: Part 1

In the past couple of blog posts I have focused mostly on emerging markets, but today I’m going to start a different set of blog posts. This set will be about credit and its effect on the U.S. economy. I recently watched a video posted by Ray Dalio, founder of Bridgewater Associates, called “How the Economic Machine Works” (if you have half an hour, it’s definitely worth the watch) and it inspired me to analyze Dalio’s claims in more detail. In the first three blog posts in the set I will summarize the model Dalio presents and in later blog posts I will focus on specific claims that he makes, testing them with economic data.

In the video, Dalio explains his view on the economy as a whole (how it works, why we experience business cycles, why large-scale recessions and booms occur, how they occur, how long they last, etc.). He starts by identifying the three main factors that he thinks drive the economy: (1) Productivity Growth, (2) The Short Term Debt Cycle (STDC), and (3) The Long Term Debt Cycle (LTDC).

  1. Productivity Growth

Dalio asserts that for most economies, the U.S. included, productivity (output per unit of input) increases with time. Advances in technology allow for this increase to occur, but these advances in technology do not explain the fluctuations in growth rate an economy experiences in the short run. Consequently, Dalio asserts that productivity growth is only significant in the long run because it does not fluctuate much and therefore does not contribute to economic swings.

So what does contribute to economic swings then? The answer is credit. Credit has many forms, but the general purpose of it is that it allows consumers and businesses to obtain something of value now in exchange for a contractual promise of repayment + interest later. A fact that might surprise you: the total amount of money in the U.S. economy is about $3 trillion, while the total amount of credit is $50 trillion! The main reason credit contributes to economic swings is that it allows consumers and businesses to increase spending at no cost in the short run. Spending, in turn, causes incomes to rise across the economy through increased productivity (see the multiplier).  Seeing these higher incomes, lenders become more willing to lend and consequently more credit is created. It’s a positive feedback loop: credit causes spending increases, spending increases cause productivity to increase, productivity increases cause incomes to rise, and income increases cause more credit to be created. This self-reinforcing cycle eventually leads to above-average economic growth. As we will see in the next blog post though, this cycle can also turn sour quickly.

When is it good time to get marry?

Marriage is very important in our lives. Not everyone gets married but most of us will choose their partner whom we want to spend rest of our lives. It is beautiful thing, I am sure some people may disagree with me that marriage is beautiful and holy, but let’s leave that argument on the side for now. Today, my blog post is about encouraging marriage and having kids at some point of our lives, because I have read a very cheerful article written in the Wall Street Journal, How Does Having Kids Affect Productivity.

Before I jump into my insights about the article, I would like to show you something.  National Health Statistics Reports, Number 49(Figure 3) has a graph which shows the probability of first marriage among the women in the United States, including all different racial groups’ ages between 18-44 years old. This graph indicates that probability of first marriage for 20 years old women in 1995 was about 0.24. However, the probability of first marriage for the same age women in 2006-2010 is less than 0.18. By the age of 30, in 1995, the probability of first marriage reaches over 0.75 while the probability of first marriage for the 2006-2010 women group is just above 0.6. From this graph, I have concluded that the age of first marriage for women has gotten older. Why is this?

A big part of reasons for late marriage is because men and women want to build up their career more before they get marry. After people get marry, they soon face the decision whether they want to have children or not. Because having children bears more burdens, at least physically on mother side, people often carefully plan the time when they want to have their first child. During the pregnancy period, women sacrifices more than men which hinders couples to have their children. However a research showed that this may the case.

According to the Wall Street Journal, a new research from the Federal Reserve Bank of St. Louis, says

“We do not observe a family gap in research productivity among female academic economists. Moreover, motherhood-induced decreases in research productivity are less pronounced than usually purported.”

Summary of their finds are followed:

  1. “Parenthood does appear linked to lower productivity while the children are 12 and younger”
  2. “Mothers of at least two children on average, more productive than mothers of only one child, and mothers in general are more productive than childless women.”
  3. “Women who are married or in a stable relationship do not have any drop in research productivity in the three years following childbirth.”

Young couples whom are postponing or delaying their marriage because they are afraid of falling it behind in their career path should read this article more carefully. Like the productivity growth plays more influential role in real GDP growth of nation than mere population growth. Becoming parents and having kids at your 20s is not as bad as what you think about it now.