Material Well-Being in America since 1979
J. Bradford DeLong
Over at Project Syndicate: Over at Project Syndicate:
How true is this, really? The answer appears to be: true--with perhaps a very few caveats, but important caveats:
Over at Project Syndicate: Over at Project Syndicate:
How true is this, really? The answer appears to be: true--with perhaps a very few caveats, but important caveats:
...less than 10% in the late 1970s but now exceeds 20%.... A large portion of this increase is due to an upsurge in the labor incomes earned by senior company executives and successful entrepreneurs. But... did wealth inequality rise as well?... The answer is a definitive yes.... We use comprehensive data on capital income—such as dividends, interest, rents, and business profits—that is reported on individual income tax returns since 1913. We then capitalize this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds.... In this way we obtain annual estimates of U.S. wealth inequality stretching back a century. Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years.... How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fueling the explosion in wealth inequality. For the bottom 90 percent of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1 percent real wages grew fast. In addition, the saving rate of middle class and lower class families collapsed over the same period while it remained substantial at the top.... If income inequality stays high and if the saving rate of the bottom 90 percent of families remains low then wealth disparity will keep increasing. Ten or twenty years from now, all the gains in wealth democratization achieved during the New Deal and the post-war decades could be lost.... There are a number of specific policy reforms needed to rebuild middle class wealth.... Prudent financial regulation to rein in predatory lending, incentives to help people save... steps to boost the wages of the bottom 90 percent of workers are needed.... One final reform also needs to be on the policymaking agenda: the collection of better data on wealth... READ MOAR
....For sixty years, he was one of my closest friends. My debt to him, both personal and professional, is beyond measure. Despite deep sadness at his death, I cannot recall him without a smile rising to my lips. He was as quick of wit as of mind. His wit always had a point, and was never mean or nasty — though some of the objects of his wit no doubt felt its sting. His occasional humorous articles — such as “The History of Truth in Teaching” — have become classics and demonstrate that had he chosen to become a professional humorist rather than a professional economist, he would have achieved no less fame in the one field than he did in the other. His death has left the world a far less joyful place for Rose and me, as for so many others.
Let's quote Thomas Piketty:
...in the United States. The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms...
...They’re intrigued, but not convinced. Perhaps Mr. Piketty has isolated the forces that will drive wealth inequality in the future, but for now, they’re not convinced the forces he focuses on are central to understanding the recent rise in wealth inequality. At least that’s my reading of the latest survey run by the University of Chicago’s Initiative on Global Markets. I’ve written before about their Economic Experts panel, which is intended to be broadly representative of opinion among elite academic economists.... The expert economists were asked whether
the most powerful force pushing toward greater wealth inequality in the U.S. since the 1970s is the gap between the after-tax return on capital and the economic growth rate.
To translate, does the T-shirt slogan “r>g” explain why wealth has become more unequally distributed?... 18 percent... uncertain. The clear majority either disagreed (59 percent) or strongly disagreed (21 percent)....
But what was the point of this? We saw from the Piketty quote up at the top that Piketty does not think that "r>g" has been driving the rise in American inequality. Why is it an interesting question to ask?
Justin, in my view, buries the lead, for he does indeed point out later on in his article:
If surveyed, it is likely that he would have joined the majority view in disagreeing with the claim the survey asked about. In Mr. Piketty’s telling, rising incomes among the super-rich are responsible for the recent rise in wealth inequality...
Shouldn't the IGM Forum at the Booth Business School of the University of Chicago have found somebody who had actually read Piketty's Capital in the Twenty-First Century to decide on what questions to ask?
I am sure that it was always such--that intellectual standards in the academy were always not that high, and that a great many of the people making arguments always were people who hadn't done their homework. But I do seem to be reminded of it more and more these days, especially since the beginning of the financial crisis back in 2007...
The University of California Press has put out a new edition of Charles Kindleberger's World in Depression early next year.
J Bradford DeLong and Barry J. Eichengreen: New preface to Charles Kindleberger,* The World in Depression 1929-1939*:
The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.
During the past two weeks the drought of high-quality DeLong smackdowns on the internet has resumed. So it is time to turn back to the promise I made myself on April Fools Day 2013, and see whether the rest of the chapters of David Graeber's Debt: The First Five Thousand Mistakes are of as low quality as the utterly bolixed up chapter 12.
As you will recall, David Graeber is infamous for:
Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other's garages...
and for having, concurrently and subsequently, offered three different explanations of how this howler came to be written and published:
He has claimed that it it all perfectly true, just not of Apple but of other companies (none of which he has ever named).
He has claimed that he had been misled by Richard Wolff, who taught him about Silicon Valley's communal garage laptop circles of the 1980s.
He has claimed that what he had written was coherent and accurate, but that (for some unexplained reason) his editor and publisher had bolixed it all up.
This passage is, in the words of the very sharp LizardBreath:
The Thirteenth Chime... that make[s] me wonder whether any fact in the book I don't know for certain to be true can be trusted...
And things have gone downhill from there...
Paul Krugman: Those Lazy Jobless - NYTimes.com Last week John Boehner, the speaker of the House, explained...
...People, he said, have “this idea” that “I really don’t have to work. I don’t really want to do this. I think I’d rather just sit around.” Holy 47 percent, Batman! It’s hardly the first time a prominent conservative has said something along these lines.... But it’s still amazing — and revealing — to hear this line being repeated now. For the blame-the-victim crowd has gotten everything it wanted: Benefits, especially for the long-term unemployed, have been slashed or eliminated. So now we have rants against the bums on welfare when they aren’t bums — they never were — and there’s no welfare. Why? First things first: I don’t know how many people realize just how successful the campaign against any kind of relief for those who can’t find jobs has been. But it’s a striking picture.... The total value of unemployment benefits is less than 0.25 percent of G.D.P., half what it was in 2003, when the unemployment rate was roughly the same as it is now.... Strange to say, this outbreak of anti-compassionate conservatism hasn’t produced a job surge.... Why is there so much animus against the unemployed, such a strong conviction that they’re getting away with something, at a time when they’re actually being treated with unprecedented harshness?...
Live Multi Bit Rate Player (1:16 video from September 19, 2014)
Q: How much of regional variation in real health-care (Medicare) costs is due to the fact that some regions have sicker populations than others?
A1 (micro): If we examine how much sicker people in different regions are, and multiply the difference in average sickness by how much extra treatment sicker people get on average, we get an incremental regional R2 ~ 0.1: an extra 10%-points of the regional real cost variation can be accounted for because some regions are sicker than others.
A2 (macro): If we just regress regional real costs on some plausible indicator of regional average sickness, we get an incremental regional R2 ~ 0.5: an extra 50%-points of the regional real cost variation can be accounted for because some regions are sicker than others. READ MOAR
Hyman Minsky: Minsky on the IS-LM obfuscation: "The glib assumption made by Professor Hicks...
...in his exposition of Keynes’s contribution that there is a simple, negatively sloped function, reflecting the productivity of increments to the stock of capital, that relates investment to the interest rate is a caricature of Keynes’s theory of investment... which relates the pace of investment not only to prospective yields but also to ongoing financial behavior.... The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context... then the full power of the revolutionary insights and the alternative frame of analysis that Keynes developed becomes evident.... The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism.... Only a theory that was explicitly cyclical and overtly financial was capable of being useful... READ MOAR
J. Bradford DeLong
Professor of Economics, U.C. Berkeley
Research Associate, NBER
September 30, 2009
A Little Background
About a year and a half ago—in the days after the forced merger of Bear Stearns into J.P. MorganChase, say—there was a near consensus of economists that an additional dose of expansionary fiscal policy was unlikely to be necessary. The Congress had passed a first round of tax cut-based stimulus, the impact of which in the summer of 2008 is clearly visible in disposable personal income and perhaps visible in the tracks of estimated monthly real GDP. The near-consensus belief back then, however, was that that was the only expansionary discretionary fiscal policy move that was appropriate. READ MOAR
Over at Equitable Growth: My four biggest intellectual mistakes over the past decade--and all four are huge--are:
My belief from 2003-2007 that the serious threat to the American financial system came from universal banks that had used their derivatives books to sell lots of unhedged puts against the dollar rather than universal banks accepting lots of house-value puts without doing any due diligence about the quality of the underlying assets.
My fear from 2008-2010 that although nominal wages were downward-sticky they were not that downward-sticky and we were on the point of tipping over into absolute deflation.
My confidence in 2009-2010 that the major policymakers--Bernanke, Obama, and what turned out to be Geithner--both understood how to use the ample monetary, fiscal, banking, and housing finance tools at their disposal to effectively target nominal GDP and understood the urgency of doing whatever it took to return nominal GDP to its pre-2008 growth path.
My failure to even conceive that "Washington" starting in 2010 could possibly be sufficiently happy with the pace of recovery that serious measures to further boost demand would vanish from the agenda.
(1) and (2) and (3) I have written about elsewhere. Today we have a piece of (4) to deal with--why do so many people prioritize low-pressure economy policies that they regard as the only safeguard of hard money over economic recovery? Paul Krugman constitutes himself the συμποσιαρχ, decides that we will be drinking κρασί ακρατος, and poses the question: READ MOAR
OK. It's time to try to pull everything together on the Red States, the Republican Party, ObamaCare, "repeal and replace", and starting at the top of the evil tree and hitting every branch all the way down...
Let's start with a catch from Austin Frakt last January:
Austin Frakt: These two tweets tell you all you need to know about the politics of health reform: January 29, 2014 at 12:30 pm: Two of Avik Roy’s tweets yesterday...
...pertaining to the recently released Senate GOP health reform plan (the Patient CARE Act [of Burr (R-NC) Coburn (R-OK), and Hatch [R-UT) and discussion thereof, are very revealing.
@matthewherper: @Avik it still seems to me that this is going to hit a lot of voters harder. Even if it makes economic sense.
@Avik: .@matthewherper By repealing and replacing Ocare, the plan is more disruptive than it needs to be. But repeal needed for Right viability.
And, of course, it had no right-wing viability at all even so.
...But not only was Hamilton more progressive for his time, he has lessons for our response to climate change. Two hundred years ago, Alexander Hamilton was mortally wounded by then Vice President Aaron Burr in a duel at Weehawken, New Jersey. Their conflict, stemming from essays Hamilton had penned against Burr, was an episode in a larger clash between two political ideologies: that of Thomas Jefferson and the anti-Federalists, who argued for an agrarian economy and a weak central government, versus that of Hamilton and the Federalists, who championed a strong central state and an industrial economy.
John Maynard Keynes (1926): The End of Laissez-Faire } "Panarchy - Panarchie - Panarchia - Panarquia - Παναρχία - 泛无政府主义: I The disposition towards public affairs...
...which we conveniently sum up as individualism and laissez-faire, drew its sustenance from many different rivulets of thought and springs of feeling. For more than a hundred years our philosophers ruled us because, by a miracle, they nearly all agreed or seem to agree on this one thing. We do not dance even yet to a new tune. But a change is in the air. We hear but indistinctly what were once the clearest and most distinguishable voices which have ever instructed political mankind. The orchestra of diverse instruments, the chorus of articulate sound, is receding at last into the distance.
Sitting next to Lord Skidelsky in the Sala Maggioranza of the Italian Treasury (after they turned off the air conditioning, I took off my tie when he took off his jacket) impelled me to reread his Keynes biography.
And, after rereading, I find that I cannot improve on what I wrote about them three years ago: my thoughts then were totally enthusiastic and totally adulatory. And my thoughts are the same now. (I haven't yet reread volume three). In his first two volumes, Skidelsky gives us John Maynard Keynes's life, entire. And he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes--who he was, what he did, and why it was so important. READ MOAR
Over at Equitable Growth: The Setup:
Let's start with Paul Krugman, who made me aware of this ebook by writing:
Paul Krugman: All About Zero: "Way back in 2008 I (and many others) argued...
...that the financial crisis had pushed us into a liquidity trap... in which the Fed and its counterparts elsewhere couldn’t restore full employment even by reducing short-term interest rates all the way to zero.... In practice the zero lower bound has huge adverse effects on policy effectiveness... [and] drastically changes the rules... [as] virtue becomes vice and prudence is folly. We want less saving, higher expected inflation, and more.... Liquidity-trap analysis has been overwhelmingly successful in its predictions: massive deficits didn’t drive up interest rates, enormous increases in the monetary base didn’t cause inflation, and fiscal austerity was associated with large declines in output and employment.... READ MOAR
Brad DeLong (2006): Milton Friedman, Friedrich Hayek, Augusto Pinochet, and Hu Jintao: Authoritarian Liberalism vs. Liberal Authoritarianism Jamie K. at Blood and Treasure writes:
Blood & Treasure: Hayekian dictatorship: Greg Grandin in Counterpunch sings of Friedman, Hayek, Pinochet, and someone closer to home:
Friedrich von Hayek, the Austrian émigré and University of Chicago professor whose 1944 Road to Serfdom dared to suggest that state planning would produce not "freedom and prosperity" but "bondage and misery," visited Pinochet's Chile a number of times. He was so impressed that he held a meeting of his famed Société Mont Pélérin there. He even recommended Chile to Thatcher as a model to complete her free-market revolution. The Prime Minister, at the nadir of Chile's 1982 financial collapse, agreed that Chile represented a "remarkable success" but believed that Britain's "democratic institutions and the need for a high degree of consent" make "some of the measures" taken by Pinochet "quite unacceptable."
So, as I said, just as I finish writing up my virtual office-hour thoughts on a framework for organizing one's thoughts on Friedrich A. von Hayek and twentieth century political economy, along comes the esteemed Lars P. Syll with a link to an excellent piece I had never read on the same thing by Equitable Growth's Fearless Leader Bob Solow.
It has been my experience that disagrees with Bob Solow at one's peril: not only has he already thought about and found reasons to object to your objection, but if you go further and find a reason to object his objection of your objection, he has already thought of a very good objection to that as well.
Solow sees a good, technocratic, information-theory focused economist Hayek, and a bad political pamphleteer Hayek. Solow sees the real Hayek as being the Good Hayek. He sees the Good Hayek as more moderate than Milton Friedman--committed to some level of professional technocratic economics guiding a social-insurance state providing basic incomes, implementing Pigovian taxes, enforcing standards and quality, and aggressively breaking-up monopolies. It is, Solow thinks, the Bad Hayek who is the problem. And the Bad Hayek is not the real Hayek, for the real Hayek had "not meant to provide a manifesto for the far right..."
I, by contrast, see not two but three Hayeks: the good Hayek, a bad macroeconomic business-cycle Hayek, and a profoundly problematic political-economy Hayek.
The Good Hayek was, I think, very very good--much better than Solow allows. Papers in mechanism design and information theory written forty and fifty years later are footnotes (often unacknowledged footnotes) to the Good Hayek.
The Bad Hayek was, I think, very very bad. To claim that the market economy exhibited large business-cycle fluctuations only because of policy errors produced by the existence of central banks (and, sometimes, because the potential availability of a lender of last resort allowed private bankers to engage in fractional-reserve banking) was just batty: contrary to all sound theory and all empirical evidence. Only an astonishing imperviousness to both thinking deeply and looking at the world could allow clinging to such a dead-ender position. Yet Hayek did. And his epigones do.
The Political Economy Hayek is, as I said, highly problematic. First of all, there is the dodging and weaving. Here is Hayek writing to Paul Samuelson:
I am afraid and glancing through the eleventh edition of your Economics I seem to have discovered the source of the false allegation about my book The Road to Serfdom which I constantly encounter, most resent, and can only regard as a malicious distortion.... You assert that I contend that 'each step away from the market system towards the social reform of the welfare state is inevitably a journey that must end in the totalitarian state' and that 'government modification of market laissez-faire must lead inevitably to political serfdom'.... How anyone who can just read my book in good faith can say this when ever since the first edition I say right at the beginning... 'Nor am I arguing that these developments are inevitable. If they were, there would be no point in writing this. They can be prevented if people realize in time where their efforts may lead...'
And here is Hayek writing a new forward for The Road to Serfdom in the mid-1950s:
Six years of socialist [i.e., Labour Party] government in England have not produced anything resembling a totalitarian state. But those who argue that this has disproved the thesis of The Road to Serfdom have really missed... that the most important change which extensive government control produces is a psychological change... necessarily a slow affair... not over a few years but perhaps over one or two generations.... The change undergone by the character of the British people... can hardly be mistaken... Is it too pessimistic to fear that a generation grown up under these conditions is unlikely to throw off the fetters to which it has grown used? Or does this description not rather fully bear out De Tocqueville’s prediction of the 'new kind of servitude'?... I have never accused the socialist parties of deliberately aiming at a totalitarian regime.... What the British experience convinces me... is that the unforeseen but inevitable consequences of socialist planning create a state of affairs in which, if the policy is to be pursued, totalitarian forces will get the upper hand... (I)
But we also have:
The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be wholly legitimate protection against a risk common to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born... (II)
Yet, in 1956:
The most serious development is the growth of a measure of arbitrary administrative coercion and the progressive destruction of the cherished foundation of British liberty, the Rule of Law.... [E]conomic planning under the Labour government [has] carried it to a point which makes it doubtful whether it can be said that the Rule of Law still prevails in Britain... (III)
And, as Paul Samuelson wrote:
The Hayek I met on various occasions--at the LSE, at the University of Chicago, in Stockholm (1945), at Lake Constance-Lindau Nobel summer conferences--deﬁnitely bemoaned progressive income taxation, state-provided medical care and retirement pensions, ﬁat currencies remote from gold and subject to discretionary policy decisions by central bank and treasury agents.... This [is] what constitutes his predicted serfdoms... (IV)
To say the least, there is a difficulty in figuring out what the Political Economy Hayek believed. Solow takes the real Hayek to be (II) and regards (I), (III), and (IV) as line wobbles from the Bad Hayek that he, Solow, will overlook. But the Bad Hayek is not just "in the text": the Bad Hayek seems to me to be well-nigh omnipresent except when Hayek is playing the injured party in front of a social-democratic audience. I think you are more likely to find the Real Hayek in the "shut up and be glad you were born" passage in The Mirage of Social Justice:
While in a market order it may be a misfortune to have been born and bred in a village where... the only chance of making a living is fishing... it does not make sense to describe this as unjust. Who is supposed to have been unjust?--especially... if these local opportunities had not existed, the people in question would probably never have been born at all... [for lack of] the opportunities which enabled their ancestors to produce and rear children... (V)
And that in fact those who do not shut up and be grateful are guilty of moral fault, as in The Political Order of a Free People:
By the slogan... 'it is not your fault'... the demagoguery of unlimited democracy, assisted by a scientistic psychology, has come to the support of those who claim a share in the wealth of our society without submitting to the discipline to which it is due. It is not by conceding 'a right to equal concern and respect’ to those who break the code that civilization is maintained... (VI)
And then there is the (missing) letter from Hayek to Thatcher, apparently urging that Thatcher go all Pinochet-medieval on Neil Kinnock and Arthur Scargill, that elicited this reply:
The progression from Allende's Socialism to the free enterprise capitalist economy of the 1980s is a striking example of economic reform from which we can learn many lessons. However, I am sure you will agree that, in Britain with our democratic institutions and the need for a high degree of consent, some of the measures adopted in Chile are quite unacceptable. Our reform must be in line with our traditions and our Constitution. At times the process may seem painfully slow. But I am certain we shall achieve our reforms in our own way and in our own time. Then they will endure. (VII)
Why, then, do I call the Political Economy Hayek just "problematic" and not "evil"? Because I think there are some passages of great value in The Constitution of Liberty and in the three-volume Law, Legislation, and Liberty. But it is, I think, important not to pretend that the Bad Hayek elements were some kind of anomaly
While Solow is much easier on Hayek than I would be, he is much harder on Milton Friedman. For Solow, it is Milton Friedman who is the real Mephistopheles here. It is Friedman who over and over again would frame the issues as freedom vs. socialism, when actually the issue is "which of the defects of a 'free', unregulated economy should be repaired by regulation, subsidization, or taxation? Which... tolerated... because the best available fix would have even more costly side-effects?" It was Friedman whose "rhetoric... irrelevant or, worse, misleading, or, even worse, intentionally misleading... made... [the] policy discussion more difficult to have... [and] did the market economy a disservice."
I disagree: I see Friedman and Hayek as being equally willing to call social democracy "socialism", and equally likely to see it as corrosive of individual freedom.
But I see Friedman as being much more moderate than Hayek--not just in terms of being a true social and personal libertarian, not just in having a more sophisticated view of social insurance, but also having both a belief in democracy and education as well as a willingness to (sometimes) mark his beliefs to market that Hayek definitely lacked. When stabilizing the growth of the money supply did not produce the smooth aggregate demand path that Friedman had expected, he changed his mind--and became a big advocate of quantitative easing...
The key paragraphs from Solow:
Robert Solow (2012): Hayek, Friedman, and the Illusions of Conservative Economics: "A Review of Angus Burgin...
...The Great Persuasion: Reinventing Free Markets since the Depression.... There was a Good Hayek and a Bad Hayek. The Good Hayek was a serious scholar who was particularly interested in the role of knowledge... [but] also knew that unrestricted laissez-faire is unworkable... monopoly power... better-informed actors can exploit the relatively ignorant... distribution of income... grossly unequal and... unfair... unemployment and underutilized capacity... environmental damage... the Good Hayek’s attempts to formulate and to propagate a modified version of laissez-faire that would work better....
The Bad Hayek.... The Road to Serfdom was a popular success but was not a good book.... Hayek’s implicit prediction is a failure.... The source of their alarm was not the danger from Soviet communism or Nazi Germany, but rather the... New Deal here and the Labor Party there... ameliorat[ing] and... revers[ing] the ravages of falling incomes and rising unemployment.... Lionel Robbins... Friedrich von Hayek... Frank Knight... Jacob Viner... Henry Simons.... What seems off-key (at least now, at least to me) is that they all felt themselves to be in a struggle between free markets and collectivism (or socialism) with no possible intermediate stopping point....
This apocalyptic tone survived into the period dominated by Milton Friedman... the language of the Tea Party Hayekians.... In 2004, Friedman told The Wall Street Journal that, although the battle of ideas had been won, 'currently, opinion is free market while practice is heavily socialist'. The point to keep in mind is that 'socialist practice' includes the Food and Drug Administration (FDA), the certification of doctors, and the public schools.... Of course for those of us trying to live on this planet, the issue is... between an extreme version of free markets and effective regulation of the shadow banking system, or between an extreme version of free markets and the level and progressivity of the personal income tax....
THE GOOD HAYEK... had not meant to provide a manifesto for the far right.... There is no reason to doubt Hayek’s sincerity in this (although the Bad Hayek occasionally made other appearances)... [that] Knight and moderates such as Viner thought that he had overreached suggests that the Bad Hayek really was there in the text....
In the spring of 1947, with a grant from the Volker Fund of Kansas City, who were the Koch Brothers of their time, Hayek was able to bring together... thirty-nine colleagues... the Mont Pèlerin Society... [which] Burgin... endows... with more significance than it ever really had.... They... could not agree on... the permissible, indeed the desirable, deviations from laissez-faire?... Good answers are available, and many of them involve government intervention.... The inability to agree about this sort of thing, or even to face up to it, seems to have dogged the MPS.... Maybe the main function of the MPS was to maintain the morale of the free-market fellowship....
Leadership... passed... to Milton Friedman... different in style and, to some extent, even in ideology.... As his ideas and his career evolved... he moved in a different, almost opposite, direction, toward a cruder government-can-do-no-right position, certainly not given to ethical worries or even to economic-theoretical fine points.... Under Milton Friedman’s influence, the free-market ideology shifted toward unmitigated laissez-faire. Whereas earlier advocates had worried about the stringent conditions that were needed for unregulated markets to work their magic, Friedman was the master of clever (sometimes too clever) arguments to the effect that those conditions were not really needed, or that they were actually met in real-world markets despite what looked a lot like evidence to the contrary. He was a natural-born debater: single-minded, earnestly persuasive, ingenious, and relentless....
Friedman’s... most important work... consumer expenditure... important and useful... anticipated in much less satisfactory form by James Duesenberry, and Franco Modigliani developed a similar and in some ways more satisfactory theory.... But monetarism... has not proved to be tenable analytically or empirically. His Monetary History of the United States, 1867–1960 (written with the late Anna Schwartz), while highly interesting, is not a towering intellectual achievement.
Burgin... attaches a lot of importance to the respectability conferred on the political right by the ideas of Hayek, Friedman, and the others.... I would not disagree, but... Thatcher profited from an ill-judged miners’ strike and, as Lyndon Johnson famously remarked, the passage of the Civil Rights Act lost the Solid South for the Democratic Party for at least a generation.
For a serious modern reader, the rhetoric is irrelevant or, worse, misleading, or, even worse, intentionally misleading.... The real issues are pragmatic. Which of the defects of a 'free', unregulated economy should be repaired by regulation, subsidization, or taxation? Which of them may have to be tolerated... because the best available fix would have even more costly side-effects? To the extent that the MPS circle made that kind of policy discussion more difficult to have, it did the market economy a disservice.
Over at Equitable Growth: One way to conceptualize it all is to think of it as the shape of a river:
The first current is the Adam Smith current, which makes the classical liberal bid: Smith claims that the system of natural liberty; with government restricted to the rule of law, infrastructure, defense, and education; is the best of all social arrangements.
This first current is then joined by the Karl Polanyi current: Polanyi says that, empirically, at least in the Industrial Age, the system of natural liberty fails to produce a good-enough society. The system of natural liberty turns land, labor, and finance into commodities. The market then moves them about the board in its typically disruptive fashion: "all that is solid melts into air", or perhaps "established and inherited social orders are steamed away". But land, finance, and labor--these three are not real commodities. They are, rather, "fictitious commodities", for nobody wants their ability to earn a living, or to live where they grew up, or to start a business to be subject to the disruptive wheel of market fortuna. READ MOAR:
Over at Equitable Growth: I have been meaning to pick on the very sharp and public-spirited Jeff Faux since he wrote this seven months ago:
Jeff Faux: NAFTA, Twenty Years After: A Disaster:
New Year’s Day, 2014, marks the 20th anniversary of the North American Free Trade Agreement (NAFTA). The Agreement created a common market for goods, services and investment capital with Canada and Mexico. And it opened the door through which American workers were shoved, unprepared, into a brutal global competition for jobs that has cut their living standards and is destroying their future. NAFTA’s birth was bi-partisan—conceived by Ronald Reagan, negotiated by George Bush I, and pushed through the US Congress by Bill Clinton in alliance with Congressional Republicans and corporate lobbyists....
NAFTA directly cost the United States a net loss of 700,000 jobs.... And the economic dislocation in Mexico increased the the flow of undocumented workers into the United States.... By any measure, NAFTA and its sequels has been a major contributor to the rising inequality of incomes and wealth that Barack Obama bemoans in his speeches.... The agreements traded away the interests of American workers in favor of the interests of American corporations.... NAFTA’s fundamental purpose was... to free multinational corporations from public regulation in the U.S., Mexico, Canada, and eventually all over the world.... The 20th anniversary of NAFTA stands as a grim reminder of how little our political leaders and TV talking heads—despite their crocodile tears over jobs and inequality—really care about the average American who must work for a living...READ MOAR
Over at Project Syndicate Ten years ago we had ridden the bust of the internet bubble, picked ourselves up, and continued on. It was true that it had turned out to be harder than people expected to profit from tutoring communications technologies. That, however spoke to the division of the surplus between consumers and producers--not the surplus from the technologies. The share of demand spent on such technologies looked to be rising. The mindshare of such technologies looked to be rising much more rapidly. READ MOAR at Equitable Growth
Karl Polanyi's The Great Transformation is certainly the right place to start in thinking about "neoliberalism" and its global spread. But you are right to notice and do need to keep thinking that Polanyi is talking about pre-World War II classical liberalism, and that modern post-1980 neoliberalism is somewhat different.
First, as I, at least, see it, there are three strands of thought that together make up the current of ideas and policies that people call "neoliberalism":
Robert Waldmann: Comment on Intellectual Origins of Reagan-Thatchernomics: "That is a long and interesting list...
...Somewhere the crime wave seems to have fallen between to stools (between 17 and 18). I think that, to be fair to both, especially Feldstein, you should number separately.
Huntington's willingness to criticize democracy and praise deference to superiors is amazingly frank...
Trying to be quicker on (18)-(30) which I will ascribe to "Mad Dog" (to avoid an concerns about context)
On (18) ["the democratic surge of the 1960s raised again in dramatic fashion the issue of whether the pendulum had swung too far..."]: His courage amazes me. Even George Will doesn't question Democracy so bluntly any more.
On (19) ["the vigor of democracy in the United States in the 1960s thus contributed to a democratic distemper... the expansion of governmental activity... and the reduction of governmental authority..."]: The word "distemper" is pejorative. Think of trying to tell a Tea Partier that a reduction in "government authority" is "distemper". I think they would lose their tempers. Again amazing frankness (I refer to Mad Dog, who may or may not have anything to do with a Harvard prof.)
Over at Equitable Growth: The intelligent Lars P. Syll depresses me by reminding me of some of the many economists of note and reputation who simply have not done their homework--or, rather, either they or I have not done our homework, and I am pretty confident it is not me--by linking to Robert Lucas:
Robert Lucas: Modern Macroeconomics: "I was convinced by Friedman and Schwartz...
...that the 1929-33 down turn was induced by monetary factors (declined is money and velocity both) I concluded that a good starting point for theory would be the working hypothesis that all depressions are mainly monetary in origin.... As I have written elsewhere, I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks... READ MOAR
From John Maynard Keynes's 1926 pamphlet The End of Laissez-Faire13: "The economists... furnished the scientific doctrine...
by which the practical man could solve the contradiction between egoism and socialism which emerged out of the philosophising of the eighteenth century and the decay of revealed religion. But... I hasten to qualify it. This is what the economists are supposed to have said. No such doctrine is really to be found in the writings of the greatest authorities. It is what the popularisers and the vulgarisers said.... The language of the economists lent itself to the laissez-faire interpretation. But the popularity of the doctrine must be laid at the door of the political philosophers of the day, whom it happened to suit, rather than of the political economists.
The policies that enabled the creation of our Second Gilded Age were born at the end of the 1970s out of a particular reading of the political economy of that moment.
Were the ideologues and the intellectuals of the right correct back when they claimed in the late 1970s that the economic problems of the 1970s were the result of "too much government" or of "an excess of democracy"? I think not. But in order to evaluate the argument we need to remember what it was.
Over at Department of "WTF?!" Chris House on Traditional Macroeconomic Models and the Great Recession,: Someone Who Remembers 1997-8 writes in comments:
I was more struck by this:
Chris House: Traditional Macroeconomic Models and the Great Recession:
Macroeconomists were caught completely off-guard by the financial crisis. None of the models we were accustomed to use provided insights or policy recommendations.... Neither the New Keynesian model nor its paleo-Keynesian antecedent feature a meaningful role for financial market failures. As a result, the policy response to the crisis was largely improvised. This is not to say that the improvised policy actions were bad. Improvisation guided by Ben Bernanke was about as good as we could hope for. Nevertheless, for the most part, the models we were accustomed to use to deal with business cycle fluctuations were simply incapable of making sense of what was going on.... While I typically do not grant much credence to heterodox economists, in this instance Professor Wray’s diagnosis is completely correct...
Has Chris House:
never heard of Walter Bagehot, Hyman Minsky, or Charlie Kindleberger?
not think that they were macroeconomists?
unaware of the debates and discussions and modeling exercises carried out around the 1997-98 East Asian financial crisis and the 1994-5 Mexican crisis?
unaware of all the credit-channel work on the Great Depression?
It is a great mystery...
Over at Equitable Growth: Most of American discussion about equitable growth these days revolves around rapidly growing inequality: that the rising tide has been lifting the big boats much more than the others, that trickle-down economics has not been trickling down, that enormous plutocratic wealth explosions at the top have been accompanied by stagnant wages in the middle and the bottom. But that is not the entire story. Equally important--at least I think it is equally important--is that the American economy has underperformed in real GDP growth since the end of the Social Democratic Era back in 1979.
If you go to Sam Williamson and company's Measuring Worth website--http://measuringworth.com--and look at the numbers he has scrubbed and put together, you can learn an enormous amount--or at least learn an enormous amount about what our current guesses as to the long-run shape of economic growth are... READ MOAR
Over at Equitable Growth: Chris Blattman: Links to Reviews of James Scott's "Seeing Like a State": "Daron Acemoglu and James Robinson...
As an emergency measure, given the continued shortage of high-quality DeLong smackdowns on the internet, on to the next Kindle screen of chapter 11 of David Graeber's Debt: The First 5000 Years:
This, too, is double-plus unhood, as Winston Smith might say...
Over at Equitable Growth: Note that when Adam Smith says "seems at first sight", he is not signaling that he is about engaging in pointless contrarianism and about to reverse field and explain that a prosperous working class is an inconvenience rather than an advantage to society. It was an age of lower irony in which often things are as they seem: he is saying, rather, that you do not need to take more than a first glance for the answer to be "abundantly clear":
Adam Smith: Smith: Wealth of Nations, Book I, Chapter 8: "Is this improvement in the circumstances of the lower ranks of the people...
...to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged. READ MOAR
In the absence of worthwhile DeLong smackdowns, continuing my reading of chapter 11 of David Graeber's Debt to see if it is in as bad shape from the viewpoint of simple accuracy of fact and coherence of argument as his chapter 12 was. The answer is "yes": chapter 11 is definitely in Chapter 11, if not Chapter 7:
I just have time to make two points today about this kindle screen:
Over at Equitable Growth: Back in the 1920s the Progressive-Republican founder of The 20th Century Fund--now The Century Foundation—-Edward Filene argued that America did not need any flavor of "socialism". What it needed instead, he argued, was "welfare capitalism".
Socialism imposed heavy taxes and used the resulting revenue to provide for social welfare. In so doing it incurred all the efficiency losses of bureaucracy. It added to those the losses from coalition-building political logrolling. It added on to those the efficiency losses that ensued from decisions made by politicians responsible to voters who were by and large not the entrepreneurial job creators. More important, in his view, the redistributive part of the social insurance state was simply not necessary. The efficiencies of scale of modern mass production would guarantee that even an unequal society would be a society of general abundance and prosperity. READ MOAR
No sooner do I manage to get my act together to deal with the shortage of high-quality DeLong Smackdowns by starting a close reading of David Graeber's Debt but Cosma Shalizi manages to show up with a high-quality DeLong smackdown. So the reading of the first text page of Graeber's chapter 11--which is, I think, thorough in chapter 11, if not chapter 7--and the first five historical errors he commits must wait until next week.
The eminent Cosma Shalizi writes:
Adam Smith: Smith: Wealth of Nations, Book I, Chapter 8: "The liberal reward of labour...
...as it encourages the propagation, so it increases the industry of the common people.... A plentiful subsistence increases the bodily strength of the labourer, and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low; in England, for example, than in Scotland; in the neighbourhood of great towns, than in remote country places. Some workmen, indeed, when they can earn in four days what will maintain them through the week, will be idle the other three. This, however, is by no means the case with the greater part.
Alfred Marshall (1885): Cambridge Inaugural Lecture: The Present Position of Economics "It is commonly said that those who set the tone of economic thought...
...in England in the earlier part of the century were theorists who neglected the study of fact, and that this was specially an English fault. Such a charge seems to be baseless. Most of them were practical man with a wide and direct personal knowledge of business affairs. They wrote economic histories that are in their way at least equal to anything that has been done since. They brought about the collection of statistics by public and private agencies and that admirable series of parliamentary inquiries, which have been a model for all other countries, and have inspired the modern German historic school with many of their best thoughts.
As the W/Ynet ratio rises the net rate of profit is likely to fall, and so it is highly unreasonable to imagine that the net savings rate out of income snet will not fall rapidly and substantially and so greatly attenuate any rise in W/Ynet. Thus substantially rising W/Y is not a problem that we should expect to see.
Should the W/Ynet ratio rise substantially, the net rate of profit is likely to fall, and so the share of income earned from wealth will rise only slightly--and may not rise at all. This is not a problem: this is wealthholders providing workers with lots of capital services at a cut-rate price. Thus rising W/Y is likely to rather than lowers working-class incomes and is unlikely to worsen the income distribution, and so the prospect is not a problem.
Even should the W/Ynet ratio rise substantially and even should the net rate of profit not fall, wealth is unlikely to become or remain highly concentrated. A high W/Y and a high r x W/Y is a big problem only if wealth becomes and remains highly concentrated, and that we are unlikely to see.
Even should the W/Ynet ratio rise substantially and even should the net rate of profit not fall and even should wealth become and remain highly concentrated, plutocrats are highly likely to get into status games of spend-my-money-to-change-the-world, and so we are unlikely not have a world in which heirs and heiresses exercise undo influence over our priorities. Even should the distribution of wealth and of income become markedly more unequal, it is unlikely to distort society's choices and lead to a grossly unequal distribution of utility. READ MOAR:
Over at Equitable Growth: I am on the hop from event to event right now, so I do not have time to give the keen-witted Greg a full and comprehensive answer to his question--nevertheless, the question does deserve a full, comprehensive, yet short answer. So may we crowdsource this?
On Wed, Jun 25, 2014 at 8:58 AM, Greg Ip wrote:
... 2) Separate but related, I am trying to describe the origins of stabilization policy. Keynes created a world in which such policy was needed; I assume it displaced a classical view of the business cycle which contained no role for government intervention. Can you point me to an article, by you or anyone else, that describes the classical view of the business cycle - and how Keynes displaced it?
2) You know, that is a remarkably hard question. There are really, three different 'classical' theories of the business cycle: READ MOAR
I remember that I found this, by Amartya Sen, totally convincing when I first read it 32 years ago. And I still find it totally convincing today:
Amartya Sen: Just Deserts: "This book... a collection of [P.T.] Bauer’s essays...
...gives an excellent account of his main theses on development policy and international relations. It also presents his approach to economic equality and inequality in general, and places his discussions of development against the background of some of the broadest issues of political economy.... I shall argue that Bauer’s approach—in spite of its power and appeal—is fundamentally flawed, and that his analysis cannot bear the weight of the conclusions that he rests on it.
The absence these days of what I regard as high-quality critiques of my writings on the internet poses me a substantial intellectual problem, since I have this space and this feature on my weblog: the DeLong Smackdown Watch. What should I do with it? I have decided that, until and unless my critics step up their game, I'm going to devote the Monday DeLong Smackdown space to a close reading of chapter 11 of David Graeber's Debt: The First Five Thousand Years. And to telegraph the conclusion: yes, like chapter 12, chapter 11 of David Graeber's Debt: The First Five Thousand Years is itself in chapter 11, if not chapter 7:
And so we get to the beginning of the text of chapter 11 of David Graeber's Debt:
Mike Konczal (2011): Examining the Limitations of a Neoliberal Safety Net: "What are the differences between our current [social democratic] approach and the Romney [neoliberal] approach?...
...The first difference is that the unemployment insurance savings accounts don’t actually involve what the liberal government does best: social insurance. There’s no risk pooling.... Whether or not you view the ideology of insurance as sound actuarial reasoning or as a form of solidarity doesn’t matter because the actual mechanisms of insurance don’t exist.... The second is that redistribution in the Romney suggestion is quietly upwards, towards the richest, instead of obviously towards those in need.... The third is that it weakens the power of the unemployed.... A fourth is that it is hard to scale outwards in cases of emergency.... And the fifth and last point is that it removes the idea of the government from the equation of people dealing with economic risks. Like much of the 'submerged' state, people will look at private savings accounts and think that the government isn’t doing anything.... There’s no social to this program and thus no politics and thus no real political constituency for it.... This is my quick read, and I’d really enjoy your thoughts. What do you think about the difference of the two approaches?
Over at Equitable Growth: It is quite clear that history has not evolved over the past 25 years ago as Francis Fukuyama thought it would back when he proclaimed its end. The inadequate and disappointing North Atlantic response to the fall of the Berlin Wall plus the failures of "transition"; the coming of a new set of wars of religion, hot, lukewarm, and cold; the failure of "convergence" in emerging economies outside of the Big Two, China and India; Japan's two lost decades; America's and Europe's (so far) one lost decade; the upward-spiral in North Atlantic income and wealth inequality to Gilded Age heights. READ MOAR:
...say that crises are rare events, though they have been happening with increasing frequency as we change the rules to reflect beliefs in perfect markets. I would argue that economists, like doctors, have much to learn from pathology.We see more clearly in these unusual events how the economy really functions. In the aftermath of the Great Depression, a peculiar doctrine came to be accepted, the so-called “neoclassical synthesis.” It argued that once markets were restored to full employment, neoclassical principles would apply. The economy would be efficient. We should be clear: this was not a theorem but a religious belief. The idea was always suspect...
The thing is that the originator of what Joe Stiglitz calls "the neoclassical synthesis"--the *fons et origo of what Stiglitz regards as a major intellectual error--was none other than John Maynard Keynes himself READ MOAR:
Ron Chernow: The Mail: Letters from Our Readers : The New Yorker: "MISTAKEN IDENTITY
Lizzie Widdicombe, in her piece about the Manhattan Institute’s Hamilton Awards, quotes a number of Republican politicians intent on promoting an image of Alexander Hamilton as representing an urban, Wall Street-friendly brand of conservatism (The Talk of the Town, May 26th). In researching my biography of Hamilton, I discovered that, in many battles with Jeffersonian foes, Hamilton proved himself to be a liberal champion. He advocated federal power against the doctrine of states’ rights and favored an expansive reading of the Constitution. He promoted abolitionism and lent his prestige to a school for Native Americans.
He was the foremost agent of economic modernity against the slavocracy of the South. When he founded Paterson, New Jersey, he espoused open immigration against the forces of nativism. Even as his Jeffersonian opponents agitated for limited government, Hamilton emerged as the chief architect of a robust executive branch. The patron saint of the Coast Guard and the Customs Service, he made the first federal investments in American infrastructure, showing the creative uses of government and paving the way for the Progressive Era and the New Deal. In his own day Hamilton was vilified for higher taxes and increased government spending—scarcely the forerunner of modern-day Republicanism, in either its Tea Party or establishment incarnations.
Over at Equitable Growth: Thomas Piketty emails:
We do provide long run series on capital depreciation in the "Capital Is Back" paper with Gabriel [Zucman] (see http://piketty.pse.ens.fr/capitalisback, appendix country tables US.8, JP.8, etc.). The series are imperfect and incomplete, but they show that in pretty much every country capital depreciation has risen from 5-8% of GDP in the 19th century and early 20th century to 10-13% of GDP in the late 20th and early 21st centuries, i.e. from about 1%[/year] of capital stock to about 2%[/year].
Of course there are huge variations across industries and across assets, and depreciation rates could be a lot higher in some sectors. Same thing for capital intensity.
The problem with taking away the housing sector (a particularly capital-intensive sector) from the aggregate capital stock is that once you start to do that it's not clear where to stop (e.g., energy is another capital intensive sector). So we prefer to start from an aggregate macro perspective (including housing). Here it is clear that 10% or 5% depreciation rates do not make sense.
No, James Hamilton, it is not the case that the fact that "rates of 10-20%[/year] are quite common for most forms of producers’ machinery and equipment" means that 10%/year is a reasonable depreciation rate for the economy as a whole--and especially not for Piketty's concept of wealth, which is much broader than simply produced means of production.
No, Pers Krusell and Anthony Smith, the fact that "[you] conducted a quick survey among macroeconomists at the London School of Economics, where Tony and I happen to be right now, and the average answer was 7%[/year" for "the" depreciation rate does not mean that you have any business using a 10%/year economy-wide depreciation rate in trying to assess how the net savings share would respond to increases in Piketty's wealth-to-annual-net-income ratio.
Who are these London School of Economics economists who think that 7%/year is a reasonable depreciation rate for a wealth concept that attains a pre-World War I level of 7 times a year's net national income? I cannot imagine any of the LSE economists signing on to the claim that back before WWI capital consumption in northwest European economies was equal to 50% of net income--that depreciation was a third of gross economic product...
If we are to talk about "equitable growth", we should have firm notions of both what is "equitable" and of "economic growth". Let us leave the first to the side for now. What do we know or can we infer about the shape of economic growth to serve as the background against which our policy and discussions can proceed?
Start with the idea that an economy can grow along either of two dimensions: it can either increase in its number of people (holding material living standards constant), or it can increase its average material living standards (holding the number of people constant). Call the first kind of growth "extensive" and the second "intensive". And in order to track these two dimensions of growth we need estimates of two things: human populations, and levels of material well-being--levels of average real annual incomes per capita.
I take my estimates of human population from Kremer (1993), but it would not matter if I had chosen some other authority. All long-run estimates of human population that I have found are quite close together (with the exception of estimates of population around 5000 BC, where Blaxter (1986) estimates a population some eight times that of other authorities). Note that this does not mean that the estimates are correct—just that they are roughly the same.
Kremer (1993), following McEvedy and Jones (1978), sees human populations as growing at an increasing proportional rate from perhaps 125,000 in one million B.C. to 6 billion today. Population reached perhaps 4 million toward the end of the mesolithic hunter-gatherer age by 10000 BC, 50 million by 1000 BC, and 170 million by the year 1. Population then reached 265 million by the year 1000, 425 million by 1500, and 720 million by 1750 before exploding to 1.2 billion by 1850, 1.8 billion by 1900, 2.5 billion by 1950, and 7.2 billion today.
Consensus forecasts are that the world will complete its demographic transition and attain zero population growth around 2050, with a maximum global population then of some 9.2 billion.
http://www.gapminder.org, relying on the U.N. International Comparison Project, Angus Maddison (1995), and a number of other sources, has constructed estimates of real annual incomes per capita for the world from 1800 to 2012. I am more comfortable thinking about labor productivity than about income per capita, and if you are willing to accept the rule of thumb that about half the population are adults engaged in net economic production that contributes to measured national income (or would contribute to national income if it were measured properly), the second measure is simply double the first. And I feel confident enough to update the 2012 numbers to 2015, so that they will be more current rather than more stale for the rest of this current decade. These estimates:
Assign a value for 2005 real annual income per capita in the United States equal to what U.S. current-dollar income per capita was in 2005, and use that as a yardstick. Thus the estimates are in "2005 dollars": "2005" for the year, and "dollars" for the country whose currency is used.
Assign values for 2005 annual incomes per capita in other countries based not on purely on the U.S. dollar value of incomes in that country in 2005, but correcting for systematic differences in price levels across countries. In all countries the prices of internationally-traded manufactured goods are pretty much the same, but the wages of unskilled labor and the prices of goods and services produced using substantial proportions of unskilled labor are much lower. This is a purchasing-power-parity adjustment, or a "PPP-adjustment".
Calculate real annual incomes moving forward and backward in time from 2005 not by calculating the change in the number of dollars received but adjusting that for inflation--for changes in the amount of goods and services that a given quantity of money commands. This is an "inflation adjustment". The estimates it creates are called "real" or "inflation-adjusted", as opposed to "nominal" estimates.
Value goods in relative terms using the relative prices found not in the U.S. but instead in a country in the middle of the world distribution of income. This produces "international dollar" as opposed to "U.S. dollar" estimates.
Do not take explicit account of the benefits of the introduction of new goods and new types of goods, but instead calculate GDP per capita in the past by valuing the commodities produced in the past at recent prices—and not making any correction for the restricted range of choice enforced by limited production possibilities in the past.
All of these save the last (5) are very reasonable ways of proceeding--are, in fact, in my view vastly preferable to the alternatives. Let us return to the last of these later. Adding up these estimates produces numbers for:
With graphical snapshots showing the divergence of average annual real incomes in different countries from the global average:
In the 2012 graph, on the far right we have the oil sheikdom of Qatar and the money-laundering havens of Macau and Luxembourg, all with annual income per capita levels above $70,000. Then come Singapore, Norway, Brunei, Greenland, Hong Kong, Kuwait, and the United States, all with levels between $40,000 and $50,000. Germany at $34,000, Japan and Britain at $31,000, France at $29,000, Russia at $15,000, Mexico at $12,000, South Africa and Brazil at $10,000, China at $8,000, and by the time we get to India, Pakistan, and Vietnam at $3,000 we have covered nearly all of the world outside of Sub-Saharan Africa. Below $3,000 we get the bulk of Sub-Saharan Africa between Nigeria at $2,500 and the Democratic Republic of the Congo at $400, with Yemen, Bangladesh, Afghanistan, and Haiti also in that range.
In the 1800 graph, on the far right we have Britain—the first industrial nation—at $2,700, followed by the Netherlands at $2,400, the United States at $1,900, Germany at $1,700, and Belgium, Switzerland, and the Czech Republic at $1,600. China, Russia, and Mexico are at $1,000. India is at $600. And the Democratic Republic of the Congo (and a few others in Sub-Saharan Africa) is down at $400.
The first thing to note is the extraordinary rise in averages: from $1,500 in 1800 to $22,200 in 2012—a nearly fifteen-fold rise in material prosperity.
The second thing to note is the extraordinary rise in range: from a range of six to one in 1800 to a range of two hundred to one in 2012—a more than thirty-fold rise in how much relative difference choosing parents of the right (or the wrong) nationality can make. There are major issues involved in a world of such extraordinary inequality of choosing one number as an index of economic growth and prosperity. When we do so, recognize that this number is much more an indicator of humanity's societal productive power at the current data. Because of its extraordinary maldistribution, taking the average as some kind of indicator of human material well-being as opposed to productive potential is extremely hazardous.
But we would like to extend our temporal vision: what can we say about global-scale economic growth in the future? And how does the economic growth we have seen in the past two centuries compare with what went on before?
First let us extend these http://gapminder.org estimates forward into the future via growth forecasts to 2050. We are fairly confident in our 9.2 billion population estimate for 2050--a lot would have to change and change relatively quickly as far as demography is concerned to get a 2050 population much below 9 billion or above 9.5 billion.
The question of what the global average real annual income per capita will be in 2050 is much more up for grabs. The U.S. value for labor productivity in 2015 is $90,000 per year. That is a reasonable guide to the average level of labor productivity that our modern technology could enable if it were properly-distributed around the globe.
One line of reasoning would be to note that modern information and communications technologies should allow modern technologies to diffuse across the globe quickly, and that a generation should be more than enough time. It would note that for more than a century labor productivity in the U.S. has been growing at an average pace of 2.0%/year. Do we then project forward today's $90,000/year number for the U.S to 2050 at this growth rate, reach a number of $181,000/year, and forecast that this technologically-feasible level of labor productivity will be reached over the entire globe?
A second line of reasoning would note that, historically, human productivity has been constrained by three things: the need for strong backs to perform large-scale gross manipulations of matter, the need for nimble fingers to perform large-scale fine manipulations of matter, and the need for human brains to make these matter manipulations useful. The rise of the nineteenth-century First Industrial Revolution first-wave machines--of steam, coal, iron, and machinery--removed the first constraint. The flowering in the early twentieth century of the Second Industrial Revolution second-wave machines--those of petroleum, internal combustion, machinery, chemicals, continuous process, and the assembly line--removed the second constraint. And now the coming of modern information processing and communications technologies is, finally, allowing for the control of gross-manipulation and fine-manipulation machines by something cheaper than a human brain. The human brain is a hitherto-unequalled cybernetic control mechanism: after all, it fits inside a shoebox, and draws only 50 watts of power. But the replacement of human brains as cybernetic control mechanisms by third-wave machines promises a previously-unimaginable upward leap in the pace of economic growth, so this line of argument. Is a level of $181,000/year for 2050 labor productivity too pessimistic?
Yet another line of argument is that what we demand is, overwhelmingly, food, shelter, clothing, and medical care; but that the major innovations to make those commodities cheaper already happened in the century-long enormous wave of the Second Industrial Revolution; and further technological progress in better satisfying those core human needs will be slow and difficult. There will be sectors of enormous technological progress, this line of argument goes, but those sectors will take up only a small portion of what we spend and hence have only a small impact on our overall well-being: yes, we will have godlike powers to read any book or watch any drama we wish instantly, but how much will that really matter? This line of argument foresees a fall in the rate of technological progress in the U.S. to 0.5%/year or so: not $181,000 in 2050, but $107,000.
Yet a fourth line of argument notes that global income inequality has, except for the years since 1975, been rising steadily since 1800. It is certainly the ace that modern technologies of information, communication, migration, and goods transportation should make it much easier to transfer technology across the globe, but it has not happened. Moreover, this line of argument notes, the reduction in the variance of the global income distribution since 1975 has been entirely the result of successful accelerations of economic growth in two and only two of the 200 countries in the world: China and India. Because these countries have such huge shares of the world population, their convergence toward North Atlantic standards has had an enormous impact on global statistics. But, this line of argument concludes, it would be rash to think that the world in 2050 will be, in relative terms, any less unequal than the world today. Even at the 2%/year growth rate seen in the United States for the past century and more, that would only give us a year-2050 level of global average real annual income per worker of $44,000.
A fifth line of argument could combine (3) and (4): a slowdown in productivity growth in the North Atlantic, and no further relative convergence toward North Atlantic levels across the rest of the globe. That would give us a year-2050 level of $26,000/year per worker.
And a sixth line of argument would note that the twentieth century brought us three violent totalitarian régimes and the admission of three world rulers--Hitler, Stalin, and Mao--to the 30 million club, that club consisting of those rulers whose policies led directly and immediately to the premature deaths of more than 30 million people. And they barely had chemical, and did not have biological or nuclear weapons at their disposal. Our, or other people's, rulers might get medieval, or get 1984, or both on us.
As we construct our picture of global economic growth, let us be relatively optimistic. Let us eschew (5) and (6) and settle on (4): forecast a year-2050 world average level of labor productivity of 44,400/year $2005. (And let us recognize that the more optimistic scenarios of (3), (1), and most optimistic of all (2) are out there in our possible future.)
The Distant Past
Suppose we want to peer backward into the economic past before 1800. Suppose we want to look as far back as the beginnings of agrarian civilizations, around 5000 BC.
Malthus: The first thing we note is that the economies in the long-ago past were very different from our economy of today. For 95% of the time since the invention of agriculture, economies have been Malthusian. Back in the agrarian age, improvements in productivity and technology showed up in the long run not as increases in average standards of living but as increases in population levels at a roughly constant standard of living. The second thing we note is that in the long-long ago the pace of invention and innovation can most optimistically be described as glacial: two hundred years or so to achieve the pace of relative change in technology that we see in twelve months. And the third thing we note is that, from the first two, arithmetic tells you that in the long-long ago the overwhelming majority of those who are or become well-off have either held on to what their parents bequeathed them or proven successful in zero-sum (marrying the right heir or heiress) or negative-sum redistributional struggles—rather than having found or placed themselves at a key chokepoint of positive-sum productive processes.
This means that, even though we lack reliable quantitative data on what economies were like before 1800, we can get remarkably close by simply spinning numbers out of thin air according to the logic of a slowly-growing technologically-stagnant Malthusian economy.
For example, we can make sound and solid global inferences from very low pre-1500 population growth rates. We know that a preindustrial not-very literate population with ample access to food and resources can and will roughly double every generation: that is the pace of European settler expansion in the Americas, after all. And we know that from 5000 BC to 1345 the average rate of global population growth was 0.07%/year—not the 2.5%/year of normal human biology with ample food and other resources. The inescapable conclusion is that resources were scarce: just barely more than necessary to keep human populations from declining given the socio-cultural institutions then prevailing. We are thus confident that during the long agrarian age—from 5000 BC up until the Black Death, say—global average material standards of living tracked “subsistence”, whatever that “subsistence” might be.
We can check this inference by consulting the long-run biomedical studies of Rick Steckel (1995), “Stature and the Standard of Living,” Journal of Economic Literature 33:4 (December), pp. 1903-40, and many others. We can use Steckel’s estimates of the relationship between height and income found in a cross-section of people alive today and evidence from past burials to infer what real incomes were in the past. The conclusion is inescapable: people in the preindustrial past were short—very short—with adult males averaging some 63 inches compared to 69 inches either in the pre-agricultural Mesolithic or today. Therefore people in the pre-industrial past were poor—very poor. If they weren’t very poor, they would have fed their children more and better and their children would have grown taller. And they were malnourished compared to us or to their pre-agricultural predecessors: defects in their teeth enamel, iron-deficient, skeletal markers of severe cases of infectious disease, and crippled backs.
Pre-industrial dire poverty lasted late. Even as of 1750 people in Britain, Sweden, and Norway were four full inches shorter than people are today—consistent with an average caloric intake of only some 2000 calories per person per day, many of whom were or were attempting to be engaged in heavy physical labor. And societies in the preindustrial past were stunningly unequal: the upper classes were high and mighty indeed, upper class children growing between four and six inches taller than their working-class peers. Moreover, there are no consistent trends in heights between the invention of agriculture and the coming of the industrial age. Up until the eve of the industrial revolution itself, the dominant human experience since the invention of agriculture had been one of poverty so severe as to produce substantial malnutrition and stunted growth.
It is this experience that makes Jared Diamond conclude that the invention of agriculture was the worst mistake ever made by the human race.
Quantifying Malthus: If we look at the http://gapminder.org data we have for 1960, if we look at the scatter of population growth and life expectancy, and if we draw a line through the scatter of those countries that had not in 1960 gone through the demographic transition, we would conclude (a) that zero population growth for a pre-demographic transition economy goes with a life expectancy of 15, but (b) that there are no such economies in 1960—not even close.
If we look at the guesstimates we have for 1800, if we accept http://gapminder.org definitions of real income per capita in 2005 PPP-adjusted international dollars, and if we draw a line through the scatter of life expectancy and estimates of real GDP per capita, we conclude that an economy would have a life expectancy of 15 if it had a level of income per capita of $160 2005 PPP-adjusted international dollars per year—and, once again, that there are no economies anywhere near that level of penury in 1800.
And if we wanted to erect a structure on top of these extremely shaky foundations, we would then say that the long-run demographic data suggests to us that material standards of living in the world during the long agrarian age from 5000 BC to the Black Death were—roughly—30% of the world’s standard of living in 1800: $160/year in 2005 PPP-adjusted international dollars in income per capita, or, with about half the population in the effective adult labor force, some $320/year in average labor productivity.
Now two corrections are needed. First, as Lemin Wu has pointed out convincingly, humans do not just produce necessaries and conveniences. They also produce luxuries, defined as commodities that we enjoy but that do not help us scramble out of the muck and have more children who will survive to adulthood. If the fraction of spending that is spending on luxuries is higher, a society will have a higher standard of living with the same generation-to-generation population growth rate. We know that luxuries tend to be invented and developed over time. Does spending on them increase? How much of spending is spending on luxuries? I do not know. And your guess is as good as mine.
Second, there is the matter of “public health”: The same level of necessaries and conveniences that could fuel a given amount of demographic expansion could fuel more or less depending on whether the health environment is better or worse. And note that “health environment” here has to be broadly construed: the classical Greek practice of large-scale female infanticide via exposure is part of the health environment. (It certainly isn’t a luxury.) How has the “health environment” changed over time? How much does it matter? I do not know. And your guess is as good as mine.
We thus find that we have to make a number of guesses in order to construct our picture of world economic growth since 5000 BC:
We have to guess at what the level of "subsistence" labor productivity was in 1800: at what level of output per worker would women have been so malnourished that their fat levels fell so low that they did not ovulate regularly, would children have been so vitamin-deprived that their immune systems were compromised and they would fall victim in larger numbers to disease, and would general poverty have robbed society of the stored grain needed to tide the population over a minor famine without severe loss, all given global institutions as they stood in 1800? My guess is: 320/year $2005. But your guess will be different.
We have to guess at how much worse “public health” was back in 1300 than in 1800. By how much would extra mortality and non-fertility raise the level of material prosperity corresponding to “subsistence” and effective zero population growth? (Note that this increase in material prosperity consistent with zpg--whether due to war and chevauchee, plague, lack of sewers, more virulent diseases, large-scale infanticide, enforced celibacy, or whatever--is not an increase in human utility. My guess is: 80/year $2005. But your guess will be different.
We have to guess at how much less availability of “luxuries” in 1300 than in 1800 lowered the level of material prosperity (and the level of human utility!) corresponding to “subsistence”. My guess is: $0. But your guess will be different.
We have to guess at the annual pre-1300 trend in “public health”--as things got even worse in the more distant past, this raises the level of material production (although not of human utility!) consistent with the extremely slow generation-to-generation population growth that we see. My guess at the effect of this trend in raising “subsistence” as we go further back in time is: 0.01%/year. But your guess will be different.
We have to guess at the annual pre-1300 trend in the introduction of new “luxuries”, which has the countervailing effect of raising the growth rate of “subsistence” over time. My guess is: 0.01%/year. But your guess will be different.
A guess as to what the global level of material prosperity was in 1500, on the eve of the Colombian Exchange, in the moment well before we are willing to even try to make quantitative estimates as crude as those of http://gapminder.org for 1800, but well after the negative population and positive income shock of the Black Death diverts the global economy from its high-Malthusian trap trajectory. I really do guess--and this really is a complete guess: $550. But yours will be different.
Remember: we also need our estimate of growth in global average labor productivity from 2015-2050. Mine is the relatively optimistic: 2%/year. But yours will be different.
And then there is a wild card: an extra factor to deal with the tremendous expansion since 1800 in the types of commodities we can even imagine producing. My guess is: 4. But yours will be different.
New Goods: This last wild card needs considerable additional explanation. A large proportion of our high standard of living today derives not just from our ability to more cheaply and productively manufacture the commodities of 1800, but from our ability to manufacture whole new types of commodities, some of which do a better job of meeting needs that we knew we had back in 1800, and some of which meet needs that were unimagined back in 1800.
Consider the question of what the 1500/year $2005 global average labor productivity in 1800 from http://gapminder.org is supposed to mean. The number is one-quarter of the present-day prosperity of India, and about equal to the average material prosperity of the poorer half of the countries of today’s Africa. But when we say “someone has an income of $1500 in today’s dollars” we think of what $1500 could buy today. And that is wrong. Looking at the things around me right now, $1500 in 1800 could be used to buy cups, water, paper, seats, foodstuffs, glass, textiles (seats and clothes), buttons (clothes), leather (shoes and wallets), keys, books, and orange juice. It could not be used to buy plastic tray-tables, styrofoam insulating cups, sealed aluminum cans of diet coke, other plastics, ice in summer (unless you were very lucky), headphones, LCD screens, iPhones, iPads, Macbook Airs, or the services of a stretched late-model Boeing 737 with just barely the range to carry me from SFO to EWR in 5 hours and 15 minutes (with a healthy tail wind) in no greater discomfort than the London-to-Bath stagecoaches of 1800. How much would I think $1500 would be worth today if I was also told: “Oh, you have to spend this only on marginal additions to your consumption out of commodities that existed in 1800”? Would it be worth $750? $375? When we calculate the rate of growth in global output per worker since 1800, should we take the gap minder.org growth rate of 1.25%/year and boost it up to the1.9%/year needed to get in two additional doublings in material standard of living because of all the new luxuries that are rapidly becoming conveniences and necessities in our minds that we did not have the slightest clue how to produce back then?
How much has this change—the fact that we make not just the same goods, but new goods and new types of goods—enhanced our material prosperity? Nordhaus (1997) provides perhaps the most eloquent and sophisticated argument that standard measures—like those of Maddison that underlie much of http://gapminder.org—that do not take explicit account of these factors grossly understate the rate of economic growth over the past two centuries.
I know that I at least would be extremely unhappy if I were handed my current income, told that I could spend it on goods at current prices, but that I was prohibited from buying anything that was not made before 1800. In at least some models of growth in which the set of goods that can be produced expands, the correct measure of real output is proportional to the product of purchasing power (income divided by the average price of a good) and the number of goods that can be produced. As best as I can determine, about three-quarters of world expenditure today is spent on commodities that simply did not exist back in 1800.
Thus my (8) guess of 4: an additional fourfold multiplication to real labor productivity since 1800 in addition to what is in http://gapminder.org. But your guess will differ. Angus Maddison's certainly did--this number of 4 made him very unhappy indeed.
So consider both sets of numbers: those that do and those that do not make this crude adjustment for new goods and new types of goods...
Choosing numbers for these eight guesstimates--these eight fudge factors--gives me my best-guess bird's-eye picture of economic growth on a global scale, at least as far as global averages are concerned, from 5000 BC to 2050.
This is what I think it looks like. But you can and will have a very different view.
So go and download a copy of:
Then fill in your own guesstimates in the eight yellow boxes. Choose for yourself the eight numbers we need in order to build a longest-run picture off of http://gapminder.org. And argue for your choices in comments, if you wish...
Over at Equitable Growth: I am once again flummoxed by the number of economists of note and reputation who have been commenting on Piketty's Capital in the 21st Century without, apparently, bothering to do the work to understand the basic arithmetic scaffolding of the book.
I think that the most fruitful way to understand the basic arithmetic is via the road I took in my "Mr. Piketty and the 'Neoclassicists'", focusing on the equilibrium rate of accumulation n+g, the wedge ω between the rate of accumulation and the warranted rate of net profit, the warranted rate of net profit rnw, and the resulting equilibrium wealth-to-annual-net-income ratio K/Yn.
But there is another road--one that goes not through prices but through the quantities of the Solow growth model: gross savings, depreciation, and population and technology growth. I think this road is less illuminating and more likely to cause confusion. But perhaps it will help some to understand the arithmetic scaffolding of the book. READ MOAR
I regret that I really have run out of DeLong Smackdowns--run out of people making what I think are good, or even arguable, criticisms of me that show that I do or perhaps might need to mark my beliefs to market...
Come on, people! Step up your game!
Oh well, we do what we can...
And today we pick on Salim Furth of the truly execrable Heritage Foundation