Monday, April 27, 2015

TFP vs Mandatory Minimum Sentences

"TFP" is a term of art from [macro]economics that stands for "total factor productivity." We have these equations that represent production and we want to see what happens when various input factors change. Very basically, it's how we tend to model whole economies using a modicum of math. Some inputs are very easy to measure. Total labor hours worked come straight out of data forwarded to the IRS for tax purposes. There are also periodic surveys conducted by the St. Louis Federal Reserve and some statistical analysis by the Bureau of Labor Statistics, part of the Department of Labor. We also more or less know how much physical capital exists, again because firms have to report depreciation to the IRS. Interpolation fills in the rest, and there's a 70-30 labor-to-capital cost ratio that is pretty stable over time.

So we can explain quite a bit of GDP just using those two factors. Modern macro decomposes that stuff further, picking out education, the role of mobility in fitting jobs to applicants, special categories for certain types of tech, yadda yadda yadda. Everyone's got their special little model, and first- and second-year econ grad students spend many a frustrating night (I assure you from personal experience) fiddling with models of their own. But always always always there's a big pile of productivity left over that can't be explained empirically even when you account for all these little things. By "big pile" I mean usually more than half. And if you extend the time series long enough, almost everything can't be explained by mere capital and labor.

If you've taken undergrad macro, you might recall hearing that TFP is sort of akin to "technology," things that make folks more productive without requiring extra tractors or extrusion molds or whatever. We can make tool dies more efficient by speeding them up, improving tolerances, using fewer materials to do the same job. Or we can use fancy programs written in C-sharp to automate decision-making. Or we can have videoconferencing. Or whatever. That's probably a part of the story, but I find McCloskey's claim appealing: the change in rhetoric, if not a wholesale change in the very structure of English itself to accommodate commerce was what really permitted the flourishing of euvoluntary exchange starting around the same time as the Glorious Revolution. What TFP technically means is just a residual, i.e. the part of the right-hand variable that can't be accounted for by the left-hand variables. If we really knew what it was, we'd be able to model it better.

But it totally exists. And the stylized fact of things is that TFP has gone up and continues to go up in the vast majority, if not every modern economy in the world. This means that on average, every worker in a modern economy produces more in 2015 than in 1955. Every hour, every year of today's labor makes more stuff now, contributes more to the general welfare than sixty years ago.

So when you take a worker out of the 2015 economy to do 25 years for simple possession on a three-strikes today, the social cost is considerably greater than it was in 1974, when Texas was the first state to take this particular stab at getting "tough" on "crime."

If mandatory minimums remain constant as TFP increases, could that be a stealthy usurpation of 8A jurisprudence? Why or why not?

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Do you have suggestions on where we could find more examples of this phenomenon?