Known Unknowns


Welcome to Known Unknowns, a newsletter about how the more the economy changes, the more it stays the same.


A few weeks ago, I listened to an interesting podcast with Nick Bloom, an economist who specializes in productivity. There is a puzzle: We have so much new innovation—our lives and much of our work practices are so different that they were 25 or 30 years ago—and yet productivity has not increased. How can that be? Some have argued that all this new innovation is not so meaningful in terms of output, or perhaps that all of the low-hanging fruit has already been picked.

However, I’m a bit more optimistic. Humans are pretty good at coming up with new innovations that make our lives better, and just when we think we can’t push the bar further, we continue to do so. Then what to make of low productivity numbers? Maybe it’s the fault of the measurement, or maybe it just takes more time to show up in the data. After all, the steam engine (which arguably kicked off the industrial revolution) took more than 100 years to actually make a big impact on productivity. And sometimes the technology that we have now doesn’t seem so important, but it paves the way for something else to be developed—something game-changing—just around the corner. It seems awfully arrogant to presume that history has already been written after just 20 years.

Nick Bloom made an interesting argument in the podcast. He reckons that we may see more productivity soon. We had all this technology, but failed to fully utilize it, which may explain these low productivity numbers. The pandemic, during which we’ve worked from home and used technology in order to avoid actual human contact, may have sped up the process at an exponential rate. Perhaps a large part of those 150 years that it took us to fully utilize the steam engine just happened for us in as little as seven months.

I thought about that while reading this story in the New York Times about Italy’s rapid adoption of Amazon delivery services this year. Pre-Covid, the Italians had resisted Amazon and continued to patronize local merchants instead. But now the horse is out of the gate. Italians are now realizing how nice it is to have anything you want cheaper, faster, and delivered right to your front door. Will they go back to their local merchants when the pandemic finally passes? I’m not sure.

Of course, a lot is lost here. Some local Italian merchants may lose their businesses entirely, and they are one of the many things that make Italy so special. The transition will be difficult and disruptive. But better productivity is how we achieve sustainable growth and increase our quality of life, even if there are painful costs.

Bloom also said that he’s concerned about the innovation that we’re currently missing out on. Lots of innovation comes from spontaneous collaboration, meeting a creative partner at a conference, or chatting around the water cooler. The few times that I’ve had an in-person job, the best ideas were often discovered as we gossiped over coffee about the meeting that we’d just had. You just can’t do that on Zoom. Bloom worries that if work-from-home goes on for too long, we may miss out on some important innovation.

The substack economy

Another important trend that has gained traction recently is unbundling, or charging for items and services separately rather than as a package. Remember when you once bought an airline ticket and it came with the “perks” of checked luggage and a bad meal? Now you pay extra for those things. Your basic ticket only gets you a middle seat at the back of the plane—and that’s it. We complain about it, but it’s not necessarily bad. It means that once you account for inflation, the cost of flying (without bags or food) fell. This trend was partially due to technology. When you book a ticket, you can see what all of the other airlines are charging, so the airlines needed to find some way to cut prices in order to remain competitive.

And low prices are good. So is choice. Why pay $50 for a bad meal on a plane? Why pay extra for cable channels that you don’t watch, when you can just subscribe to Netflix and HBO directly? But unbundling is a mixed bag. We see this in media now, too.

Before this trend really took off, you paid for a newspaper subscription and got well-edited content from many different writers—some news, some investigative reporting, some opinion pieces. Before Twitter, you probably consumed all of this, because where else would you get the news? You probably didn’t read everything in the paper by every writer, but it was still considered to be a pretty good deal. And this model was how we got important investigative journalism, which can be expensive and not always as eye-catching as a provocative editorial. Straight news and investigations have lots of social value, even if it’s not as profitable. High-profile writers who had a large following brought in extra subscribers, and to a large extent this model subsidized news and investigations, as well as the younger, unexperienced, and unknown writers as they honed their craft.

Enter the substack economy. Now, those superstar writers can start a paid newsletter or a podcast and keep all of that money for themselves. It’s not that they are greedier than writers were in the past. Technology just offers more options now to monetize ourselves. Also, the economy increasingly awards superstars more than everyone else, and we see this in every industry. The cost of subsidizing those lesser-known writers and editors has increased, too. This in part explains the decline of unions, which also rely on cross-subsidization that has gotten more expensive.

This all means that as a subscriber, you can now only pay for the writers that you like. And to be fair, many of these high-profile newsletter writers—the Andrew Sullivans of the world—were an escape from an intolerant newsroom. A more partisan media is contributing to this trend, too.

But the future is unknown. These big institutions are good at training people. And the high-profile writers achieved that status not only from that training, but also from the credibility and audience of the institutions that they once worked for. Where the next well-trained superstars come from is not clear in an unbundled economy. Only a few stars can make money in the unbundled economy too.

Some announcements

Larry Summers and I recently debated Robert Reich and Yanis Varoufakis on wealth redistribution for Intelligence Squared. It got fiery! And it will be on Bloomberg TV on October 9th at 7pm and October 10 at 11 am , as well as on their podcast.

I’m moderating a panel on October 8th with John Cochrane, Raghuram Rajan, and Simon Johnson. We’ll be discussing debt and fiscal policy. It frustrates me that we often talk about debt and spending without any consideration for the financial markets where interest rates are actually set. This panel aims to remedy that, and I hope you can check it out.

Until next time, Pension Geeks!