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:
There are two questions that must be answered in the process of figuring out weather having the government borrow money and spend is a good idea:
What is the money being used for?
How expensive is the money to borrow?
Back in the Reagan-Bush I years--the steep run-up in the debt-to-annual GDP ratio in the 1980s and the first third of the 1990s:
The money was used to rapidly build up the U.S. military to counter the Soviet Union's overwhelming might--an overwhelming might that existed only in the fantasies of the neoconservatives who ran the "Team B" exercise initiated at the CIA by George H.W. Bush.
The money was used for tax cuts for the rich in the hope that increasingly incentivizing entrepreneurship would accelerate economic growth above the pace of the 1970s--a vain hope indeed.
The real interest rate at which the U.S. government could borrow was relatively high--between 3.5%/year and 8.5%/year, and averaging 5.5%/year in the 1980s. Plus there was the fear that as the debt-to-annual-GDP ratio rose further without any strategy for ultimately amortizing the debt, the real interest rate would rise higher. Plus there was the fear that the real interest paid on the debt understated the cost to the taxpayer of carrying it because a high debt would create expectations that inflation would rise--expectations that would require unemployment semi-permanently above the NAIRU to avoid another inflationary spiral.
...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
Yael Abouhalkahthe: Brownback’s tax cuts aren’t killing jobs on Missouri side of state line: "When he visited Johnson County in August 2012...
...Kansas Gov. Sam Brownback boldly claimed his aggressive tax-cut law would bring wonderful economic dividends to that part of the Kansas City area. “That’s a shot of adrenaline to the heart of this economy,” Brownback said at a forum of small business leaders at Johnson County Community College, pointing out that their profits would be exempt from state income taxes starting Jan. 1, 2013.... Perhaps the single biggest speculation by Brownback’s supporters was that small businesses in Kansas City would hop the state line into Johnson and Wyandotte counties. This would be the final nudge needed, it was said, to escape paying the city’s 1 percent earnings tax, too.... So far, however, all these pumped-up promises by the Brownback camp and all the stoked-up fears of Republican Missouri lawmakers have not come true.... From January 2013 through August 2014, the Kansas side of this area added 5,600 jobs for a growth rate of 1.2 percent. The Missouri side of the region gained 6,900 jobs on a slightly larger employment base, a growth rate of 1.2 percent — the exact same rate as in Kansas....
This debate would be simply something fun to watch except for the many negative effects of Brownback’s self-professed “real live experiment” with the state economy. The tax cuts have led to deeper losses in state revenue than predicted. They have not created a significant growth in jobs that could begin to replace money lost from the tax reductions. The state’s bond rating has been reduced.... But Brownback soldiers on... claim[ing] that job growth has been three times as high on the Kansas side than it has been for the Missouri side of this area... [from] June 2011 through June 2014....
Wait: Why start counting in June 2011 even though Brownback took office five months earlier? A quick look shows why the data cherry-picking occurred....
So far, the tax-cut experiment has sliced state revenues, not been a great boon to Johnson and Wyandotte counties, and not really hurt Missouri-side counties.
It is very clear to me that the Cato Institute's health-care economists Michael Cannon, Jagadeesh Gokhale "Estimating the Effect of the Patient Protection and Affordable Care Act on Kansas Medicaid Expenditures", Should Kansas Expand Medicaid Under the Affordable Care Act? A Perspective On Weighing the Costs and Benefits, and Angela Erickson (Jagadeesh Gokhale and Angela Erickson The Effect of Federal Health Care ‘Reform’ on Kansas General Fund Medicaid Expenditures) did not believe that turning down the Medicaid expansion was in the interest of the people of Kansas. They sold it to the Kansas legislature that way, but what they thought was that if enough states rejected the Medicaid expansion then congressional Democratic support for ObamaCare would collapse and a better deal could then be negotiated at the federal level. It is very clear to me that Arthur Laffer did not believe that Sam Brownback's tax-cut proposals would immediately jump-start Kansas's economy the way he told the Kansas Republican Party that they would.
There was a con.
The question is: who was in on the con? Was it Cannon, Gokhale, Erickson, Laffer, Crane, and company conning Charles Koch? Was it Cannon, Gokhale, Erickson, Laffer, Crane, Koch, and company conning Sam Brownback? Was it Cannon, Gokhale, Erickson, Laffer, Crane, Koch, Brownback, and company conning the Kansas Republican Party? Or was it Cannon, Gokhale, Erickson, Laffer, Crane, Koch, Brownback, the Kansas Republican Party, and company conning the voters of Kansas? I would dearly like to know the inside story...
Over at Project Syndicate: The extremely sharp but differently-thinking Peter Thiel:
Peter Thiel: Robots Are Our Saviours, Not the Enemy: "Americans today dream less often of feats that computers will help us to accomplish...
...[and] more and more we have nightmares about computers taking away our jobs.... Fear of replacement is not new.... But... unlike fellow humans of different nationalities, computers are not substitutes for American labour. Men and machines are good at different things. People form plans and make decisions.... Computers... excel at efficient data processing but struggle to make basic judgments that would be simple for any human.... [At] PayPal... we were losing upwards of $10m a month to credit card fraud.... We tried to solve the problem by writing software.... But... after an hour or two, the thieves would catch on and change their tactics to fool our algorithms. Human analysts, however, were not easily fooled.... So we rewrote the software... the computer would flag the most suspicious transactions, and human operators would make the final judgment. This kind of man-machine symbiosis enabled PayPal to stay in business.... Computers do not eat.... The alternative to working with computers... is [a world] in which wages decline and prices rise as the whole world competes both to work and to spend. We are our own greatest enemies. Our most important allies are the machines that enable us to do new things...
This is not good news--it is, in a sense, "mission accomplished" for the wingnuts to have managed to do so much damage so quickly that it reverses their natural partisan political advantage in Kansas. But it is remarkable that the consequences of their policies have been so negative as to make Kansas competitive at all levels...
We see that Pat Roberts has given up arguing that he would be a good senator:
Thomas Beaumont: Sen. Roberts Takes Partisan Tone Campaigning In Crucial East Kansas: "Sen. Pat Roberts of Kansas took his conservative re-election message into the state's swing-voting east...
...Saturday in his latest effort chip away any advantage from independent candidate Greg Orman in a U.S. Senate race that has unexpectedly become one of the most hotly contested in the nation.... Roberts stuck to his argument that the election is a referendum on President Barack Obama and the Democratic-controlled Senate.
That really is the issue: whether (Senate Majority Leader) Harry Reid continues to be a one-man rules committee in the Senate.... Orman is a liberal Democrat and a vote for Harry Reid. That really is the issue....
Orman ran for Senate in 2008 as a Democrat but dropped out of the primary. He has also made financial contributions to President Obama and others. He had also been a registered Republican and made contributions to GOP candidates.
Senator Roberts' increasingly desperate campaign is turning to the only playbook his new handlers from Washington, DC know: throw out a lot of baseless negative attacks, and continue to try to divide people along partisan lines. Kansans of all parties are fed up with the broken system in Washington. They want an independent voice in the Senate, and that's why every day more and more Republicans, Democrats and Independents are supporting Greg Orman for Senate...
...by higher wages. Via Reuters:
Fisher said on Friday he worries that further declines in unemployment nationally could lead to broader wage inflation. To head that off, and also to address what he called rising excesses in financial markets, Fisher said he prefers to raise rates by springtime, sooner than many investors currently anticipate....
I wondered if he was not misquoted or misinterpreted. But he definitely warns that wage growth is set to accelerate in his Fox News interview.... READ MOAR
Over at Equitable Growth: I am still thinking about the best assessment of potential output and productivity growth that we have--that of the extremely-sharp John Fernald's "Productivity and Potential Output Before, During, and After the Great Recession". And I am--slowly, hesitantly, and unwillingly--coming to the conclusion that I have to mark my beliefs about the process of economic technological change to market, and revise them significantly.
Let's start with what I wrote last July: READ MOAR
Over at the
Grauniad Guardian: Why is Thomas Piketty's 700-page book a bestseller? I like Thomas Piketty’s Capital in the Twenty-First Century a lot. It follows Larry Summers’s advice – which I have always thought wise--that the further ahead in time we want to forecast, the further back in time we should look. It deals with very big and important questions. It takes a broad moral-philosophical view, rather than a narrow technical-economist view. It combines history, quantitative estimation, social science theory, and a deep concern with societal welfare in a way that is too rare these days.
**Jo Walton: "In dialogue with his century":
I was getting a book off the shelf last night and I came eye to eye with the hardcover of Patterson's biography of Heinlein: Robert A Heinlein: In Dialogue With His Century.
And I realised what a stupid title it is.
Especially for Heinlein, who seemed to write things that went straight from the nineteenth century to the future without pausing for the present:
Twentieth Century: Cars, planes, electricity!
Robert A. Heinlein: The nineteenth century is over! Soon we will be going to the stars!
Twentieth Century: The depression, WWII!
Robert A. Heinlein: To the stars! First we'll settle the solar system. Martians!
Twentieth Century: Cold War.
Robert A. Heinlein: Bomb shelters!
Twentieth Century: Boop, be doop, be doop, be doodle-ooo, boop, be boop, be boop, be doodle-ooo, boop, be doop, be doop, be doodle-eye-doo!
Robert A. Heinlein: The nineteenth century is over! Soon we can have sex with our mothers and our clones! Also, come on, hey, we haven't even got to the moon yet, and I want to have sex with Martians!
Twentieth Century: Apollo XI. Done with space now. Boop be doop be doop...
Robert A. Heinlein: The stars!
Twentieth Century: Computers!
Robert A Heinlein: The stars! Also, more hot competent red-heads, are you listening?
Twentieth Century: If one of us isn't listening, are you sure it's me?
Over at Equitable Growth: Consider r, the required real rate of interest on government debt, and the sum of n, the labor-force growth rate, and g, the labor productivity growth rate.
When r > n+g, the case for budget surpluses and lowering the debt is strong. We believe that private investments are even more productive to society than the market rate of return on private capital formation tells us. We believe that there are private knowledge and other spillovers from private capital formation. We believe that the quasi-rents from past investments are shared among all those with market power who participate in production. Thus when the government borrows and spends, it crowds out private investments that are very profitable to society as a whole. This point is strengthened by the danger of a runaway government financial crisis should a default premium begin to incorporate itself into government borrowing rates. This point is limited only by intergenerational equity considerations: that if we think the future will be richer than the present, committing funds now to private capital formation rather than to private and government consumption worsens intergenerational inequality. READ MOAR
Annalee Newitz: 8 Things We Can Do Now to Build a Space Colony This Century: "We talked to scientists and experts about the fundamental things they think we should do right now...
...if we want to have a space colony in the next 100 years.
Save Earth: NASA astronomer Amy Mainzer, who studies Near Earth Objects at JPL, says our number one priority has to be here on our home planet. She told io9 that it's a pretty inhospitable universe out there, so our space colonies will probably never replace home:
From my perspective, the most important thing we can do to be prepared for any activity far in the future is try not to wipe out life here.... The defining challenge of the next hundred years is to come to grips with creating a sustainable future here, as a minimum precursor to building a sustainable future anywhere else.
Change the Way the U.S. Government Plans Space Missions: Ariel Waldman....
If the nation decides to begin a space colony outside of low Earth orbit, you need to talk about changing the way NASA does business. Currently, NASA engages in a capabilities-based and/or "flexible path" approach in which technologies are developed with no specific set of missions in mind.... The National Academy of Sciences' Committee on Human Spaceflight... recommend[s]... NASA switch to a "pathways" approach... [with[ a horizon goal... [and] a very specific set of stepping stones along the way.... As far as technologies needed for a pathway that leads to Mars, the committee assessed 10 high priority areas in terms of the technical challenges. The 10 high priority areas are: Mars Entry, Descent and Landing (EDL), Radiation Safety, In-Space Propulsion and Power, Heavy Lift Launch Vehicles, Planetary Ascent Propulsion, Environmental Control and Life Support System (ECLSS), Habitats, Extravehicular Activity (EVA) Suits, Crew Health, and In-Situ Resource Utilization (ISRU - using the Mars atmosphere as a raw material).
Develop 3D Printing in Space: Les Johnson suggests:
3D printing and the rocket engine are the two inventions that will eventually enable space settlement. With 3D printing you can cut that supply chain and make all the spare parts you need locally.... A colony cannot survive if it is dependent upon a supply chain from Earth. We must mine asteroids for their raw materials (making solar arrays, colony structural materials, etc from the raw materials in Near Earth Asteroids)....
Let Space Tourists Take Vacations in Orbital Hotels: Seth Shostack... heads up the SETI Institute.... He said that our best bet is to create a thriving space tourism industry today.... He told io9:
At space conferences, people interested in commercializing space want to build small hotel rooms in orbit.... The big problems here are not technical--they are liabiltiy. But there is a market.... at any price point for putting people in orbit. So the first eight space hotel rooms are expensive, but then it's cheaper for next eight....
Figure Out How Ecosystems Work:... Hedvig Nenzen... gave us the lowdown on all the things we need to research now if we ever hope to terraform a barren world:
I'm going to assume that we find a new planet without an ecosystem already on it. Thus, in order to live in space we will have to build something from scratch with species we bring us. Scientists are realizing that it's more and more difficult to make an ecosystem from nothing, and to know how exactly the new ecosystem might work. There are just so many details and parts in an ecosystem that we don't understand yet....
Build a Giant Sun Umbrella with Robots: UC Berkeley economist Brad De Long, who has written a great deal about how robots will change our future economy, noodled around late one night with a few robot-fueled ideas he shared with io9:
It seems clear to me at least that anything done at or inside the moon's orbit over the next century will be better done by teleoperated robots, because beyond the van Allen belt and the atmosphere we become very heavy creatures that need not only water but also sheaths of lead. So I have been trying to think of something we might need to do far enough outside the moon's orbit that teleoperated robots won't do it, and that would be wildly profitable--as the late Jim Baen liked to say, successful space travel and space colonization will be exothermic, not endothermic....
The big one, of course, is the giant sun umbrella at L1, 930,000 miles away. That is far enough that teleoperated robots controlled from a local station shielded against solar storms and cosmic rays might do much better then robots with a 10 second response leg controlled from earth, and that might be a vastly cheaper way of dealing with global warming successfully then hoping for the nuclear/better solar fairies to show up.
Were I NASA, I would be planning for the sunshade now—both the Earth-control 10 second lag teleoperated robot and the local station controlled versions. And, of course, the moon base—perhaps robot only, alas!—for manufacturing the station would make lifting it out of the gravity well to L1 much cheaper.
Study How DNA Repairs Radiation Damage: Sylvain Costes is a molecular biologist at Lawrence Berkeley Labs.... He has some advice.... He told io9:
To colonize another planet, you need to focus on biology. The best way to deal with radiation is to take nutrients that will protect you, like antioxidants. Of course, you need the right ones. NASA and other groups have shown that there are a lot of nutrients blueberries, and more efficient ones, that will protect you against radiation. It won't stop radiation, but it can mitigate the effects....
Costes believes we need to plan for space colonies by discovering better anti-oxidants, adopting a "risk management" approach to space travel. He also notes that it's possible that some people simply may not be able to thrive in space, because their DNA doesn't recover from damage as easily as other people's.
Educate People About Our Connection to Space: Mae Jemison... the most important first step is education:
If we are to have any hope of having a robust, healthy nation of humans living, working, growing up and excelling happily in space we have to reconnect people here on Earth today with their ancient space heritage! The task is to get people to feel that we, like our ancestors, are linked to the stars above, not just the ground beneath our feet. And to know that what we prepare now builds the future. Teach that the reason we can predict aspects of flooding today is because everyday people thousands of years ago noticed the connection of the tides to phases of the moon. And they created calendars based on the movement of the stars. Call weather and crop satellite pictures "images from space," or GPS directions "satellite navigation."... But just a rational discussion won't do it; to feel it, let's make sure that at least once a year we go outside at night with all the lights off and experience a star-studded vista!
Menzie Chinn: Wisconsin Forecasted to Lag Further Behind Minnesota, and Kansas travels its own path...
...Bruce Bartlett brings my attention to this article noting Minnesota’s economic performance. This reminded me to check on the Philadelphia Fed’s forecast.... The cumulative growth gap between Minnesota and Wisconsin (relative to 2011M01) is forecasted to grow--rather than shrink--over the past six months.... The cumulative growth gap between Kansas and the Nation is also forecasted to rise, from the current gap of 2.7%, to 3.2%, in just the next six months...
The blue states have shot themselves in the foot with respect to overall economic growth--although not with respect to growth in per-capita income, and definitely not with respect to growth in per-capita wealth--via excessive NIMBYism. (And, I would argue, via blowback from Republican state-level tax-limitation initiatives like Proposition 13 and Proposition 2 1/2: with development population growth make the lives of state and local government officials harder and not easier, you greatly diminish the political voices for American pro-development boosterism. Blame Howard Jarvis for the fact that people from Texas cannot afford to move to the better-paying jobs waiting for them in California.)
Now the red states are shooting themselves in the foot definitely with respect to growth in per-capita income, definitely definitely with respect to growth in per-capita wealth, and now--perhaps--respect to the pace of overall economic growth as well. It will be interesting to see how much of a drag this "We don't need no infrastructure/We don't need no Medicaid expansion/No common core in the classroom/Biologists! Leave them kids alone!" red-state political equilibrium exerts on the regional distribution of economic activity over the next decade. Will it be enough to offset the Hispanic population influx and the continued transition to the full air-conditioning equilibrium?
Over at Equitable Growth: The extremely-sharp Jérémie Cohen-Setton has a roundup:
Jérémie Cohen-Setton: Blogs review: The bond market conundrum redux: "Are we seeing a new version of the Greenspan 2005 conundrum?...
Fed tapering was widely expected to push up US yields. Instead, US yields have fallen since the beginning of the year.... A successful explanation of this new conundrum cannot just rely on a flight to safety... it also needs to rationalize why 5-year... and 10-year yield[s] have diverged.... READ MOAR
...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.
From David Leonhardt's The Upshot:
Claire Cain Miller: Will You Lose Your Job to a Robot? Silicon Valley Is Split: Following are a sampling of the points of view expressed in the Pew report.
Most utopian: “How unhappy are you that your dishwasher has replaced washing dishes by hand, your washing machine has displaced washing clothes by hand or your vacuum cleaner has replaced hand cleaning? My guess is this ‘job displacement’ has been very welcome, as will the ‘job displacement’ that will occur over the next 10 years. This is a good thing. Everyone wants more jobs and less work.” — Hal Varian, chief economist at Google
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
UPDATE: As Noah Smith politely points out, I did a no-no in being so lazy as to take averages of monthly returns to be "close enough" to cumulative compounded returns. Fixing that requires some edits, which I have made:
...is hovering at a worrisome level.... Above 25, a level that has been surpassed... in only... the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.... We should recognize that we are in an unusual period, and that it’s time to ask some serious questions about it...
The first question I think we should ask is: how damaging in the long run to investor portfolios were the major market drops that followed the 1929, 1999, and 2007 CAPE peaks? The CAPE is the current price of the S&P index divided by a ten-year trailing moving average of its earnings: the CAPE looks back ten years to try to get an estimate of what normal earnings are and how stock prices deviate from them. Let's look ahead and calculate ten-year forward earnings to get a sense of what signals the CAPE sends for those of us interested in stocks for the long run.
Over at Equitable Growth: Science fiction writer Charlie Stross sends us to:
Haul Train: "The first significant change in rigid haul truck design for 60 years...
...ETF Mining Haul Trains are the answer to the demand for even larger payloads than current Ultra-Class Trucks offer. The innovative design results in the lowest cost per ton in the industry.... Unique to ETF, each truck irrespective of capacity can operate together with others of the same capacity as a ‘Haul Train’ two; three, four or more individual trucks can easily be linked together using a steel arm carrying an enclosed armoured data cable within its structure. Information data from the first operator controlled truck is transmitted via the link arm to the following trucks guiding and controlling all important operating functions like engine power, steering direction and brakes, just as if each unit had separate operators following each other.
The real operational advantage soon becomes very obvious, for every train there is just one operator, so as unit numbers increase payload capacity go ‘up’ while operator costs come ‘down’. Each haul train features ‘side dumping’ capability, each truck can dump individually or together at the same time at the dump area and crusher. If for any reason the mine plan should change requiring fewer units in the train each truck unit can be de-coupled, allowing each truck to operate independently. This unique configuration provides a mine wishing to increase operating capacity simply by increasing the number of trucks in the train. ETF Mining Haul Trains can be used on the same roads where current Large Haul Trucks are operating with existing haul road profiles and bend radius. Side-tippers are standard...
The remarkable thing about this advertisement is the stress on how the "enclosed armoured data cable" allows the mind to economize on * truck drivers*. Figuring out a way to--sometimes--remove four out of five truck drivers from the necessary resources to make the mine operate is a huge selling point. But, then, if you are paying $50,000/year for a skilled mine-truck driver, that is $500,000 over the ten-year life of a truck that costs $1,000,000 (or more). The cost of getting the human brain is not the bulk of the cost of running the truck, but it is a significant proportion, and economizing on it by replacing drivers and slaving the follower trucks to the leader is a powerful potential source of economy.
I do not know whether the lesson to draw is that human brains still add immense value--look at how much of the cost of even the most capital-intensive mining operations is skilled human labor--or that a great many things that humans do today that are well-paid are ripe for disruption as soon as our technologists can figure out how to use silicon to mimic the skills of we shoebox-sized 50-watt supercomputers well enough...
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:
I find it interesting: even now so many punches get pulled and so many reporters are unwilling to even note specifics of the enormous gap between Brownback's promises and reality.
That media failure is certainly one of the things that's wrong with Kansas:
Mark Barabak: Side-by-side, Kansas and Colorado governors offer test of strategies: "Kansas... the spare flatness of the prairie relieved only occasionally by a small town or lonely farmhouse...
...the shrinking population mostly white, aging and politically conservative. People here still nod and smile at strangers they pass on the sidewalk. Colorado... its outdoorsy lifestyle beckoning the fit and fleece-vested to abandon Denver's office towers and escape the crowded freeways into the Rockies. A burgeoning Latino population has helped shade the state from politically red to purplish blue. You can legally enjoy your favorite microbrew and preferred cannabis.... An unswerving activist Republican, Kansas Gov. Sam Brownback, and a seemingly chastened, managerial-minded Democrat, Colorado Gov. John Hickenlooper. They differ not just in philosophy but, up for reelection in November, their way of facing voters’ judgment.
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
NIMBYism taken to extremes with astroturf "neighborhood associations":
April Gilbert: Berkeley restaurant has been approved: Let’s let it open: "I am a homeowner on Russell Street just below College...
and thus an Elmwood resident. A year ago, I heard that the owners of Comal on Shattuck Avenue were proposing a restaurant for the old Wright’s Garage space on Ashby and I was thrilled. It sounded like just the ticket to round out the dining options in our little neighborhood. Finally, we would have an upscale spot with a nice atmosphere and a small bar space--just what I felt had been missing. Then, I heard there was opposition from a group called the “Elmwood Neighborhood Association”(ENA)--strange given that I’d never heard of this organization despite living smack in the middle of Elmwood for eight years.... In all my years in Berkeley, I have never encountered this group. I have not gotten an email, a phone call, or a flyer in my mailbox. ENA is positioning itself as the voice of our neighborhood, which it is not. In contrast, I am quite familiar with CENA, the Claremont-Elmwood Neighborhood Association. CENA has not taken a stand on the proposed new restaurant on Ashby, but when it polled its members, the majority of its Elmwood resident members was enthusiastic about having a good restaurant open and supported the Comal owners’ efforts.
Over at Equitable Growth The estimable Neil Irwin and Tyler Cowen get, I think, things wrong here.
First, Tyler, commenting on Neil:
Tyler Cowen: Facts about non-residential investment: "One simple hypothesis is that it’s not worth spending more on American workers at current wage levels. As workers, while Americans are quite good, they are just not that much better than a variety of high-IQ individuals in cheaper countries, many of whom now have acceptable infrastructure to work with. READ MOAR
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 the Equitablog: John Fernald: Productivity and Potential Output Before, During, and After the Great Recession: "U.S. labor and total-factor productivity growth...
...slowed prior to the Great Recession. The timing rules out explanations that focus on disruptions during or since the recession, and industry and state data rule out “bubble economy” stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains. A calibrated growth model suggests trend productivity growth has returned close to its 1973-1995 pace. Slower underlying productivity growth implies less economic slack than recently estimated by the Congressional Budget Office. As of 2013, about 3⁄4 of the shortfall of actual output from (overly optimistic) pre-recession trends reflects a reduction in the level of potential.
But when I look at this graph:
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 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
Writers with Drinks: An Evening of Oversharing About Money: 7:30 p.m. July 12 :: Make-Out Room :: 3225 22nd St. San Francisco, CA :: Price: $5-$20 http://writerswithdrinks.com: "If time is money, then consider this evening with Charlie Jane Anders, J. Bradford DeLong, Frances Lefkowitz, Farhad Manjoo, and Carol Queen to be a good investment..."
J. Bradford DeLong
A few short years ago we lived, for the school district, in Lafayette. Lafayette is close to here in space and time, but distant in attitude. Lafayette is a place an unkind observer based in and comfortable in San Francisco might describe as an unholy mix of the worst parts of northern and southern California. There we had a neighbor, Bie Bostrom. She had been the oldest Peace Corps volunteer in East Africa. She kept in touch with what had been her town: Ahero, population 10K, in Nyando District, Nyanza Province, Kenya. And there she funds and runs a one-elderly-woman one-town NGO with zero administrative overhead: Grandmothers Raising Grandchildren. That's http://grgahero.org: godzilla-rath of Khan (with an r)-godzilla-alien-hitchhiker-empire strikes back-rath of Khan-omen-dot-omen-rath of Khan-godzilla. No, I'm not going to hit you up--you've been hit up already coming here, at the door.
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
Whether it is highway money, Defense Department money, agricultural subsidy money, or whatever, the governments of the states have long been eager and enthusiastic to do whatever they can to attract their share and more of what the federal government is offering to spend. Even where it is worthless for our general welfare--as much of Defense Department spending programs have been worthless for our general welfare--states have actively and aggressively competed for federal dollars.
Except for Medicaid money.
Cardiff Garcia: The growth of US student loan debt: causes and consequences: "Both rising tuition and a higher share of students borrowing...
...have contributed just as much as higher student enrollment.... A recent New York Fed report:
Between 2004 and 2012, the number of borrowers increased by 70% from 23 million borrowers to 39 million. In the same period, average debt per borrower also increased by 70%, from about $15,000 to $25,000.
From 2002 to 2012, inflation-adjusted (2012 dollars) college costs—defined as the sum of room, board and “net tuition” (tuition costs after subtracting federal, state, and private [non-loan] aid, as well as any discounts offered by the institution)—rose by 41 percent within public four-year institutions, by 9 percent for private four-year institutions, and actually fell 7 percent for two-year public institutions... average college costs rose by about 16 percent....
Furthermore, there is evidence that many students and households don’t understand what they’re getting themselves into.... That’s the background against which Obama is now proposing a plan to expand the number of borrowers who can cap their loan repayments at 10 per cent of their income, along with endorsing a bill that would allow more students to refinance at lower rates. (The latter is unlikely to get through Congress, as the proposed budgetary offset is the proposed closing of loopholes for the wealthy. Republicans are already pushing back.)
From $350 billion to $1 trillion in student debt in the eight years from 2004-2012 is an extraordinary increase--so large that even though I have checked and re-checked I cannot help but fear that somewhere an apples-and-oranges comparison has crept into the mix.
It also very strongly suggests that the marginal borrowers do not have a handle on what they are doing. If it made no sense for borrowers to take out more than $350 billion in debt in 2004--if the marginal material and psychological benefit of college then was no greater than the marginal burden of debt repayment--then it really makes no sense for borrowers to take out $1 trillion in debt in 2012. Either of them are little borrowers in 2004 we're irrationally scared of taking on student debt loads, or them are total borrowers today are much too blasé about the burdens--and by "marginal", we mean all those holding all the tranches between $350 billion and $1 trillion.
As I have said before, the key questions are: how likely are those taking on the extra debt to actually finish their B.A. degrees in a reasonable amount of time? How quickly can we move from a regime of fixed repayments to one of income-contingent loans (or, as Aaron Edlin points out, a more attractive system of income-contingent grants)? And how then do we manage the borrowing-attending decision when potential students no longer fear landing in permanent debt peonage?
My instinct is that Clark Kerr had it right: that the best compromise is to make education free for those willing to devote the time, but to make students borrow to cover their living expenses. That treats getting educated as having positive externalities broadly understood equal to the cost of education, and my guess is that is the right order of magnitude. But that is only an instinct.
These are not questions that I can answer with clarity and confidence, or even on which I can guess in a relatively informed manner. So: a question for the internet: who should I take as my guides, and whose analyses should I trust on these questions?
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:
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.
So what should I do with it? Counter-smacking inadequate and erroneous smack downs is not terribly satisfying.
But there is one task from April Fool's Day 2013 left undone. Then I dealt with chapter 12 of David Graeber's Debt: The First 5000 Years in the manner that that chapter richly deserved to be dealt with. But nobody has taken an equivalent look at the earlier chapters.
So, henceforth, now, 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. Let's go!
Over at Equitable Growth: Matt Rognlie has a first-rate exposition of his critique of Piketty:
Matt Rognlie: A note on Piketty and diminishing returns to capital: "Capital in the Twenty-First Century predicts...
...a rise in capital’s share of income and the gap r - g between capital returns and growth.... Neither outcome is likely given realistically diminishing returns to capital accumulation. Instead--all else equal--more capital will erode the economywide return on capital.... Piketty (2014)’s inference of a high elasticity from time series is unsound, assuming a constant real price of capital despite the dominant role of rising prices in pushing up the capital/income ratio. Recent trends in both capital wealth and income are driven almost entirely by housing, with underlying mechanisms quite different from those emphasized in Capital.... READ MOAR
From Eric Cantor:
The claim from the Republican noise machine this morning is that Eric Cantor lost his primary because he was not anti-Hispanic-immigration enough...
From Dave Brat:
I've never understood how a Randite of any form can be opposed to immigration, legal or illegal: illegal immigrants are precisely the kind of entrepreneurial people impatient with being told by government where they can go and what they can do that Ayn Rand exalted...
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
From Vox.com: Deng Xiaoping: "Comrade Xiannian is correct.:
The causes of this incident have to do with the global context. The Western world, especially the United States, has thrown its entire propaganda machine into agitation work and has given a lot of encouragement and assistance to the so-called democrats or opposition in China — people who are in fact are the scum of the Chinese nation. This is the root of the chaotic situation we face today.
Lawrence H. Summers: The Inequality Puzzle: "His policy recommendations are unworldly....
Success in combating inequality will require addressing the myriad devices that enable those with great wealth to avoid paying income and estate taxes.... If, as I believe, envy is a much less important reason for concern than lost opportunity, great emphasis should shift to policies that promote bottom-up growth. At a moment when secular stagnation is a real risk, such policies may include substantially increased public investment and better training for young people and retraining for displaced workers, as well as measures to reduce barriers to private investment in spheres like energy production, where substantial job creation is possible. Look at Kennedy airport... if a moment when the United States can borrow at lower than 3 percent in a currency we print ourselves, and when the unemployment rate for construction workers hovers above 10 percent, is not the right moment to do it, when will that moment come? READ MOAR