Hoisted from the Archives from Nigh on Five Years Ago: What Have We Unlearned from Our Great Recession?
Hoisted from the Archives from Nigh on Five Years Ago: What Have We Unlearned from Our Great Recession?
J. Bradford DeLong on November 08, 2015 at 10:06 AM in Economics: Growth, Economics: History, Economics: Inequality, Economics: Information, History, Information: Internet, Long Form, Philosophy: Moral, Political Economy, Politics, Science Fiction, Science: Cognitive, Streams: (BiWeekly) Honest Broker, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted, Web/Tech | Permalink | Comments (14)
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It has now been seven years since the onset of the global financial crisis. A central question is how the crisis has changed our view on macroeconomic policy. The IMF originally tackled this issue at a 2011 conference and again at a 2013 conference. Both conferences proved very successful, spawning books titled In the Wake of the Crisis and What Have We Learned? published by the MIT Press.
The time seemed right for another assessment. Research has continued, policies have been tried, and the debate has been intense. How much progress has been made? Are we closer to a new framework? To address these questions the IMF organized a follow up conference on "Rethinking Macro Policy III: Progress or Confusion?", which took place at the Jack Morton Auditorium in George Washington University, Washington DC, on April 15–16, 2015.
The conference was co-organized by IMF Economic Counselor Olivier Blanchard, RBI Governor Raghu Rajan, and Harvard Professors Ken Rogoff and Larry Summers. It brought together leading academics and policymakers from around the globe, as well as representatives from civil society, the private sector, and the media. Attendance was by invitation only.
Wrap Up Video:
Session IV: Fiscal Policy in the Future Video:
Vitor Gaspar, Marco Buti, Martin Feldstein, Brad DeLong
J. Bradford DeLong
Olivier Blanchard, when he parachuted me into the panel, asked me to “be provocative.”
So let me provoke:
My assigned focus on “fiscal policy in the medium term” has implications. It requires me to assume that things are or will be true that are not now or may not be true in the future, at least not for the rest of this decade and into the next. It makes sense to distinguish the medium from the short term only if the North Atlantic economies will relatively soon enter a regime in which the economy is not at the zero lower bound on safe nominal interest rates. The medium term is at a horizon at which monetary policy can adequately handle all of the demand-stabilization role.
I have been playing with FOLD, and having fun. Here I take the transcript of the New York Comic Con "Trekonomics" panel created by the extremely-productive-on-long-airplane-flights Izabella Kaminska, add to it, and annotate it...
Hey! Why hasn't the Financial Times paid for her to step back from Alphaville and turn her Beyond Scarcity series of weblog posts into a book?
Over at Equitable Growth: The very sharp and energetic Peter Passell, who runs the Milken Institute Review these days, commissioned me to write a reader's guide to the secular stagnation debate. I set it up as a four-corner cage match--Bernanke, Rogoff, Krugman, and Summers--and I am proud of it. (But I have to offer apologies to those--Koo, Blanchard, Feldstein come most immediately to mind, but there are others--who have their own serious positions that are not completely and satisfactorily understood as linear combinations of the four I chose to be my basis vectors.) It is out:
J. Bradford DeLong (2015): The Scary Debate Over Secular Stagnation, Milken Institute Review 2015:IV (October) pp. 34-51:
Bernanke... says we have entered an age of a “global savings glut.”... Rogoff... points to the emergence of global “debt supercycles.”... Krugman warns of the return of “Depression economics.” And... Summers calls for broad structural shifts in government policy to deal with “secular stagnation.” READ MOAR
The highly-estimable Tim Duy is doing what he does best once again: worrying about the Federal Reserve's conduct of monetary policy:
Tim Duy: Some Thoughts On Productivity And The Fed: "Yellen is leaning in the direction of taking the productivity numbers at face value...
...and seeing low wage growth as consistent with the view that the productivity slowdown is real.... The unobserved component approach suggests that productivity growth decelerated to an annualized pace of just 0.82 percent by the second quarter of this year... [in line with] Fed staff estimates of potential GDP growth range from roughly 1.6 to 1.8 percent through 2020.... Yellen might think back to the 1990’s, when a surprise rise in productivity growth temporarily lowered the natural rate of unemployment... [and] reverse that logic now and think that the arguments for tighter policy are stronger....
J. Bradford DeLong on September 11, 2015 at 03:48 AM in Economics: Growth, Economics: History, Economics: Information, History, Long Form, Philosophy: Moral, Political Economy, Politics, Streams: (BiWeekly) Honest Broker, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (4)
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Today's Economic History: Paul Krugman muses:
...All pre-industrial societies, I thought, were Malthusian... at the edge of subsistence... [and] a small elite, 5 or 10 percent... liv[ing] on resources extorted.... This model still seems to me to be pretty good for the Roman Empire. But at least as Goldsworthy describes it, the Roman Republic at the time of the Punic Wars was something very different... social solidarity... loyal allies... strong commitment from a large fraction of the population... military manpower... durability.... Are there any other examples in history like this? And how did they do it?
J. Bradford DeLong on August 20, 2015 at 03:17 PM in Economics: Growth, Economics: History, Economics: Inequality, History, Long Form, Philosophy: Moral, Political Economy, Politics, Streams: (BiWeekly) Honest Broker, Streams: (Wednesday) Economic History, Streams: Cycle, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted, Twentieth Century Economic History | Permalink | Comments (44)
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Multiple Comments of the Day: What I, at least, regard as an interesting discussion in the comments to my A Very Brief Sokratic Dialogue on Website Redesign: From that post:
Platon: Five requirements?
Sokrates: Yes.... The stream... so... who want to either read what is new or to treat the site as a weblog--that is, have a sustained engagement and conversation with the website considered as a Turing-class hivemind--can do so.... The front-end... to give each piece of content a visually-engaging and subhead-teaser informative welcome mat.... The syndication... to propagate the front-end cards out to Twitter and Facebook.... The stock... a pathway... by which people can pull things written in the past... relevant... to their concerns today.... The grammar: The visually-interesting and subhead-teaser front-end... needs to lead the people who would want to and enjoy engaging with the content to actually do so.... [But,] as William Goldman says, nobody knows anything.
Platon: Is there anybody whose degree of not-knowingness is even slightly less than the degree of not-knowingness of the rest of us?...
Sokrates: My guess... http://www.vox.com--Ezra Klein and Melissa Bell and company--are most likely to be slightly less not-knowing than the rest of us....
Over at Equitable Growth: Introduction
Olivier Blanchard, when he parachuted me into this panel, asked me to “be provocative”.
So let me provoke:
My assigned focus on “fiscal policy in the medium term” has implications. It requires me to assume that things are or will be true that are not now or may not be true in the future, at least not for the rest of this and into the next decade. It makes sense to distinguish the medium from the short term only if the North Atlantic economies will relatively soon enter a régime in which the economy is not at the zero lower bound on safe nominal interest rates. The medium term is at a horizon at which monetary policy can adequately handle all of the demand-stabilization role. READ MOAR
J. Bradford DeLong :: U.C. Berkeley and NBER :: April 16, 2013 http://eurofuture2013.wordpress.com/
My problem this morning is that I have four starting points. Or maybe my problem is that I have five starting points:
This morning, Republican-appointed Supreme Court Chief Justice John Roberts wrote and five of his colleagues -- Democrat-appointed Breyer, Ginsburg, Sotomayor, and Kagan, and Republican-appointed Kennedy -- agreed that:
Section 18031 [of the Affordable Care Act--i.e., the ObamaCare Law--] provides that “[e]ach State shall . . . establish an American Health Benefit Exchange..." [But] if [a] State chooses not to do so, Section 18041 provides that the Secretary [of Health and Human Services] “shall . . . establish and operate such Exchange..." (emphasis added [by Roberts]).... The phrase “such Exchange”... instructs the Secretary to establish and operate the same Exchange that the State was directed to establish.... Black’s Law Dictionary 1661... (defining “such” as “That or those; having just been mentioned”).... State Exchanges and Federal Exchanges are equivalent—they must meet the same requirements, perform the same functions, and serve the same purposes...A simple matter of black-letter law, no? The plain meaning of the phrase "such Exchange" means that anything legal that is true of a health-insurance exchange established by, say, the state of New York is also true of a health-insurance exchange established by the federal government for, say, the state of Florida if the state of Florida fails to establish its exchange, no?
bottlerocketscience: Startup Geometry Podcast EP 004: Brad DeLong:
J. Bradford DeLong on June 17, 2015 at 12:49 PM in Economics: Finance, Economics: Growth, Economics: History, Economics: Inequality, Economics: Information, Economics: Macro, Long Form, Philosophy: Moral, Political Economy, Politics, Science Fiction, Streams: (BiWeekly) Honest Broker, Streams: Cycle, Streams: DeLong FAQ, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (1)
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J. Bradford DeLong :: University of California at Berkeley
Let me begin by thanking Matt Rognlie for doing some very serious and thoughtful digging into this set of factor-payments data. That digging leaves me in an ideal position for a discussant: There are interesting and important numbers. These numbers have not been put together in this way before. The author is wise enough not to believe he has nailed what the numbers mean to the floor. Thus I am in an excellent position to, if not add intellectual value, at least to claim a lavish intellectual-rent share of Matt Rognlie's product.
J. Bradford DeLong on June 12, 2015 at 11:06 AM in Economics: Growth, Economics: History, Economics: Inequality, Economics: Macro, Long Form, Political Economy, Politics, Streams: (BiWeekly) Honest Broker, Streams: (Wednesday) Economic History, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (10)
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At that time--or, rather, in that logical state to which the economy will converge if values of future shocks are set to zero--expected inflation will be constant at about the 2% per year that the Federal Reserve has announced as its target. At that time the short-term safe nominal rate of interest will be equal to that 2% per year of expected inflation, plus the real profits on marginal investments, minus a rate-of-return discount because short-term government bonds are safe and liquid. At that time the money multiplier will be a reasonable and a reasonably stable value. At that time the velocity of money will be a reasonable and a reasonably stable value. Why? Because of the powerful incentive to economize on cash holdings provided by the the sacrifice of several percent per year incurred by keeping cash in your wallet rather than in bonds. And at that time the price level will be proportional to the monetary base. READ MOAR
Sokrates: Internet Media and the Fall of GigaOm
Adeimantos: What? Are you now intellectually flirting with both Hinduism and techno-transhumanism?
Felix Salmon: I told you so. If I may quote myself:
Glaukon: So: Blogging...
Hypatia: I would like to start by offering the floor to the Great and Good Felix Salmon:
Felix Salmon: To All the Young Journalists Asking for Advice...: I’m also very flattered by the lovely things you said... about how you’d love to have a career in journalism... do[ing] the kind of thing... I do. You won’t.... By the time you’re my age... you’ll... be doing something... nobody today... foresee[s]....The obstacles facing you are much greater than anything I managed to overcome.... The exact same forces which are good for journalism and good for owners are the forces which are bad for journalists....
J. Bradford DeLong on April 12, 2015 at 12:52 PM in Economics: Information, Information: Internet, Long Form, Philosophy: Moral, Political Economy, Politics, Science: Cognitive, Streams: (BiWeekly) Honest Broker, Streams: Economics, Streams: Highlighted, Web/Tech, Weblogs | Permalink | Comments (5)
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It is time for me to reedit and revise this before I give it again. How should it change? What does it say that no longer needs to be said? What does it not say that now needs to be said?
Zimbabwe!: Here is a piece of currency, a dollar bill. It is from Zimbabwe. It is for $100,000,000,000,000 Zimbabwean dollars.
J. Bradford DeLong on March 31, 2015 at 09:57 AM in Economics: Health, Economics: History, Economics: Macro, History, Long Form, Obama Administration, Political Economy, Politics, Streams: (BiWeekly) Honest Broker, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (6)
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One of the things that was supposed to get done in January but didn't was a revision of this piece--it is now three years out-of-date, after all, and while it is still useful it is less useful than it was, or would be were I to properly review and update it. But it did not get done in January. It is not going to get done in February. So I am putting it up both as a useful (albeit somewhat out of date) resource, but primarily as a reproach to myself to get cracking on the revision in my copious spare time...
FEBRUARY 2012 VERSION: Budgeting and Macroeconomic Policy: A Primer
by J. Bradford DeLong
Budgeting and Macroeconomic Policy: A Primer
The policy debate on the sources, causes and potential solutions to rising income and wealth inequality has intensified in the past few years. Recently, French economist Thomas Piketty’s popular book 'Capital in the Twenty-First Century' garnered much attention and ignited further debate about these issues. Piketty argues that wealth will inevitably become more concentrated under capitalism because the returns to wealth are larger than economic growth rates. The solution he proposes is a coordinated global tax on wealth. The Baker Institute's Tax and Expenditure Policy Program will host two renowned economists to discuss the underlying causes and consequences of inequality, evaluate the empirical evidence of rising inequality, and examine potential solutions for dealing with these problems in the United States.
As prepared for delivery:
J. Bradford DeLong :: U.C. Berkeley, NBER, WCEG, INET :: February 3, 2015 :: http://tinyurl.com/dl20150202a
I am very happy to be here, especially as Texas is a state I get to relatively rarely. I have unusually few relatives in it, you see. When the DeLongs got to Wichita they decided to turn north rather than south and wound up in DeKalb County, Illinois. And those who did end up here decamped to North Carolina, leaving me with none until last year when my cousin Annie and her husband moved to Dallas. The last time my wife and I spent any extended time in Texas was on our honeymoon, when we were washed out of our campsite in a swamp near the Louisiana border by a midnight mid-June thunderstorm, so we bypassed Galveston and Houston and then spent a week and a half going Austin-San Antonio-Permian Basin-El Paso.
I want to label something that I see "cognitive capture", and think about it.
The vir illustris Ron Rosenbaum, however, disagrees. Rosenbaum is writing about David Corn's story that Bill O'Reilly was not in fact in a "war zone" in 1982, and about how O'Reilly is responding by saying: "you can tell that I am a truth-teller because the liberals attack me so much". And he thinks that "cognitive capture" is not a useful concept. We should pretend it does not exist. We should instead just tell the truth day by day as if we were having a reasoned discussion. And we should hope that eventually, with enough truth-telling, the chips will fall where they should:
Sokrates Son of Sophroniskos: You are out of your century, and out of your country...
Titus Pomponius Atticus: I claim this to be my country, and here by the docks of the Piraeus to be my place. I am not called "Atticus" for nothing, you know...
Axiothea: Why are you called "Atticus"? It doesn't sound like a very Roman name...
Atticus: I made it up. My father had only two names--good old Titus Pomponius, no claims to triple-barreled noble senatorial-class names he, just an equestrian.
J. Bradford DeLong :: U.C. Berkeley
OëNB Conference on European Economic Integration :: Vienna :: November 24-25, 2014
There is an important purpose of an opening keynote talk like this one. Its task is to start from first principles and then give a large-scale bird's-eye overview to what is to come. We have panels to come on monetary policy, balance-sheet adjustment and growth, inequality and its role in generating internal macroeconomic imbalances, external macroeconomic rebalancing, and banking sector regulation. They all presuppose that Europe, and within it the regions of Central, Eastern, and Southeastern Europe that we focus on here, need not just higher aggregate demand in the short-term but more. They need large-scale sectoral rebalancing. And that sectoral rebalancing needs to be rapid. Why? Because these economies will not grow smoothly without deep structural reforms--in these reforms need to be not just at the bottom but at the top, reforms of institutions, governance structures, and regulatory practices and mandates need to be carried out as well.
My problem this morning is that I have four starting points. Or maybe my problem is that I have five starting points:
I. A Little Dutch History
My first starting point is the history of the Netherlands.
I would have to be more rash indeed than the fifteenth century's Charles de Valois-Burgogne,2 the last sovereign Duke of Burgundy, to dare to opine about classical Dutch history with Jan de Vries in the room. But my read of it tells me that "political union" is a very vague and sketchy concept indeed. Consider the "political union" of what was surely the strongest power in seventeenth-century Western Europe: the seven United Provinces of the Netherlands that dominated the economy and were the political-military lynchpin of the coalition to contain the aggressive King Louis XIV Bourbon of France. READ MOAR
J. Bradford DeLong on January 26, 2015 at 10:49 AM in Economics: Finance, Economics: History, Economics: Macro, History, Long Form, Philosophy: Moral, Political Economy, Politics, Streams: (BiWeekly) Honest Broker, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (7)
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Septima: My good friend Omar, whom I love so dearly! You just ran into that tree!
Axiothea: And why are you walking about muttering to yourself with your eyes glued not to the beautiful mountain afternoon but to your smartphone?
Omar Khayyam: THAR SHE BLOWS! THREE POINTS OFF THE LARBOARD BOW!! IT'S THE BERNE WHALE!!!
William Gale wrote: http://www.cato.org/publications/cato-online-forum/get-fiscal-house-order
And now he responds:
Recently, I wrote an article on the role of fiscal policy on economic growth. I argued that, if we want to raise living standards of future generations, a major priority should be reducing the long-term ratio of public debt to GDP. (I also suggested that, since the benefits of higher economic growth disproportionately accrue to high-income households, those households should bear the brunt of the costs of fiscal consolidation.)
In response, Berkeley Economics Professor Brad Delong asked, “Why would anyone seek today to relatively downweight virtually any other economic policy priority in order to focus on the deficit?” At the risk of oversimplifying, Delong offers two classes of reasons for asking his question:
Over at Equitable Growth: These days, when people come to me and ask if I will run a reading course for them on Karl Marx, this is what I tend to say:
The world is divided into those who take Karl Marx's work seriously and those who do not.
On the one hand, those who do not take Karl Marx's lifetime work-project seriously are further divided into three groups:
Those who ignore Marx completely.
Those who use selected snippets from his work as Holy Texts, and
Those modern "western Marxists" who find inspiration in the works that Karl Marx wrote exclusively before he was thirty. READ MOAR
J. Bradford DeLong on December 15, 2014 at 07:06 AM in Books, Economics: History, History, Long Form, Moral Responsibility, Philosophy: Moral, Political Economy, Politics, Streams: (BiWeekly) Honest Broker, Streams: Across the Wide Missouri, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (26)
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So I finally made a chunk of time to read and think about Michael Kinsley's response to Paul Krugman's rebuttal of Kinsley's claim that Krugman was engaged in a "misguided moral crusade against" rather than a technocratic critique of "austerity".
First and most essential, I need to set some rules here: If I'm going to be called a canine of any form, standards must be maintained.
I insist that it be not "attack dog" but either:
Those are the approved options. Pick one. Use it. Stick to it. It's really not hard at all to do.
J. Bradford DeLong on December 09, 2014 at 05:30 AM in Economics: Macro, Information: Better Press Corps/Journamalism, Long Form, Moral Responsibility, Obama Administration, Politics, Streams: (BiWeekly) Honest Broker, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (14)
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Sokrates: If you wanted a focus group for the core target audience of the Old New Republic, you would look for intellectually-curious left-of-center engaged intellectuals not themselves subject-matter experts in policy and politics. And on the internet the single most concentrated slice of such people are found in the commentariat at the website http://unfogged.com. Their Ringmaster assembles such a focus group. It isn't pretty, but I do think it is an accurate picture of what has been wrought by all those liberal writers and editors who were...
Artaphernes: ...were for three decades and more willing to go the extra mile to suck up to the various and manifold bigotries of Martin Peretz and company. Isn't that what you were going to say, Sok?
Sokrates: Anyway, here are selections from the thread:
Ogged and Company: Teach Me: I've read so much blather about The New Republic's shake-up that I'm just going to skip the links and ask a simple question: in the last thirty years, what are its five best pieces of political writing?
The other contributions to Brink Lindsey's Cato Institute Online Economic Growth Forum have all been things I can engage--things that make me think, that are individual economists' honest and good-faith attempts to say where the fruit is to be picked in terms of boosting America's economic growth.
Then comes Douglas Holtz-Eakin.
And, I must say, it seems to me that it really is time for some sort of disciplinary boundary-patrol police action/intervention here...
Holtz-Eakin's piece seems to me to be, in the context of the other--remarkably good--pieces that Brink Lindsey has commissioned, a very strange intrusion from some alternative non-technocratic discursive universe--a veritable Colour out of Space:
That same nameless intrusion which Ammi had come to recognise and dread... the shaft of phosphorescence from the well was getting brighter and brighter, bringing to the minds of the huddled men a sense of doom and abnormality which far outraced any image their conscious minds could form...
Some questions for the authors of the contributions that struck me as the most interesting...
Two Questions for Scott Sumner: First Question: Why has nominal GDP targeting not already swept the economics community? It really ought to have. Second Question: I believe in nominal GDP targeting--especially if coupled with some version of "social credit" at or near the zero lower bound. But a look back at the history of ideas about a proper "neutral" monetary policy--Newton’s fixed price of gold, Hayek’s fixed nominal GDP level, Fisher’s fixed price-level commodity basket, Friedman’s stable M2 growth rate, the NAIRU targeting of the 1970s, Bernanke’s inflation-targeting—leads immediately to the conclusion that anybody who claims to have uncovered the Philosopher’s Stone here is a madman. How can you reassure me that I (and you) are not mad?
...of the long-run growth rate in the economy.... But it does offer one of the cheapest ways of boosting growth. Unlike fiscal programs such as infrastructure, there is virtually no cost to improving monetary policy.... Elsewhere (2014) I’ve argued that a policy of nominal GDP targeting would smooth out the business cycle and undercut many of the arguments for counterproductive policies.... We need to convince other economists that nominal GDP targeting is the way to go. Once we do so, the Fed will follow the consensus. READ MOAR
Princeps Cogitationis: If I am going to hold down my consulting and speech-making jobs, I need to understand what Larry Summers is talking about here:
Larry Summers: What to do about secular stagnation?
But it is too long! 3000 words! Help! What can I do?
Oeconomicarus: But I thought you read 300 books a year?
Princeps Cogitationis: I read the last chapter of 300 books a year. Then I read three short reviews of each. And then I opine fearlessly. Working through a difficult 3000-word argument and assessing it is not a good use of my time. READ MOAR
Over at Equitable Growth: As I continue to try to worry--without great success--the question of just where the increases in financial instability produced by the prolonged period of past and expected future extremely low interest rates and by quantitative easing comes from...
Two sources of risk:
To recap my thinking before now:
Joshua Brown: “Do we need to fire PIMCO?”: "In February of 2011, [Bill] Gross loudly proclaimed...
[that] Pimco Total Return had taken its allocation to US Treasury bonds down to zero. As recently as the previous December, Pimco Total Return had been carrying as much as 22 percent of its AUM in Treasurys.... Gross compounded the move by being extremely vocal about his rationale--he went so far as to call Treasury bonds a 'robbery' of investors given their ultra-low interest rates and the potential for inflation. He talked about the need for investors to 'exorcise' US bonds from their portfolios, as though the asset class itself was demonic. He called investors in Treasury bonds 'frogs being cooked alive in a pot'. The rhetoric was every bit as bold as the fund’s positioning. It’s really hard to pound the table like this and then be flexible in the aftermath...
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...
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 Equitable Growth: John Mearsheimer is only one of a surprising number claiming that the current crisis in Ukraine is predominantly the U.S.'s, and NATO's, and the Ukraine's fault:
John Mearsheimer: How the West Caused the Ukraine Crisis: Why the Ukraine Crisis Is the West’s Fault: "The United States and its European allies share most of the responsibility...
...The taproot of the trouble is NATO enlargement.... For Putin, the illegal overthrow of Ukraine’s democratically elected and pro-Russian president--which he rightly labeled a “coup”--was the final straw.... Realpolitik remains relevant--and states that ignore it do so at their own peril. U.S. and European leaders blundered in attempting to turn Ukraine into a Western stronghold on Russia’s border....
Soviet leaders... and their Russian successors did not want NATO to grow any larger and assumed that Western diplomats understood their concerns. The Clinton administration evidently thought otherwise.... The first round of enlargement... 1999... the Czech Republic, Hungary, and Poland. The second... 2004... Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia. Moscow complained bitterly.... The alliance considered admitting Georgia and Ukraine.... Putin maintained that admitting those two countries to NATO would represent a “direct threat” to Russia.... READ MOAR
Olivier Blanchard, inveighing against "ergodicity" and "linearity" as assumptions, sounds like some post-Keynesian from the 1980s. They were right then. He is right now:
Olivier Blanchard: Where Danger Lurks: "One has to go back to the so-called rational expectations revolution...
...What was new was the development of techniques to solve models under the assumption that people and firms did the best they could in assessing the future. (A glimpse into why this was technically hard: current decisions by people and firms depend on their whole expected future. But their whole expected future itself depends in part on current decisions.) These techniques... made sense only... [if] economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians)... could understand their nature and form expectations... and simple enough so that small shocks had small effects.... Thinking about macroeconomics was largely shaped by those assumptions....
David Beckworth notes that in the Bernanke-Yellen era the FOMC gets uncomfortable and decides that it has to loosen policy and steps up its interventions when PCE inflation falls below 1.5%/year and gets uneasy and decides that it has to tighten policy when PCE inflation rises above 2%/year:
[This] reduced-form relationship... is highly suggestive and consistent with my claim... that... there is a 2% ceiling to an inflation target corridor...
Over at Equitable Growth: Nick Rowe begs for North Atlantic central banks to do what he (and I) regard as their proper job, and whimpers:
Nick Rowe: Money, Prices, and Coordination Failures "The more interesting cases are...
...where a non-monetary coordination failure has spillover effects, and causes a monetary coordination failure. A worsening of asymmetric information problems in financial markets, which is a coordination problem in its own right, also causes an increased demand for money and a monetary coordination problem. Should we say that the problem in financial markets is the "root cause" of the recession, and one that should be addressed directly, if possible, by something other than monetary policy? No. Monetary policy should take the world as it is, warts and all, and do what it can do. And what it can do is eliminate that excess demand for money, even if it cannot eliminate that original problem that initially caused the excess demand for money. It does not matter, for the monetary authority, whether that increased demand for money was caused by some natural event like the weather, which nobody can change, or whether it was caused by some other problem, which the fiscal authority can and should fix. 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
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: 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:
J. Bradford DeLong on August 07, 2014 at 11:19 AM in Economics: Growth, Economics: History, Economics: Macro, History, Long Form, Philosophy: Moral, Political Economy, Politics, Streams: Across the Wide Missouri, Streams: Cycle, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (27)
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Of all the weird things that have happened in the American public sphere in my life, the most weird was the War on Nate Silver--launched in the fall of 2012 by David Brooks, Joe Scarborough, Dylan Byers, and a remarkably large company.
The underlying argument appeared to be that Nate Silver was doing something wrong and unfair by using... evidence. By... counting things. By... using statistics. By... estimating probabilities...
A few of the "best" examples:
David Brooks on the PBS NewsHour:
What I hate are the forecasts, when they say so and so has a 66 percent chance of winning or a 32 percent chance of winning.... If you tell me you think you can quantify an event that is about to happen that you don’t expect, like the 47 percent comment or a debate performance, I think you think you are a wizard. That’s not possible...
Over at Equitable Growth: I have been waiting to post this until now when there are only twelve months before the end date of my bet with Noah Smith on whether inflation would break 5% over any twelve-month period without a high-pressure labor market. I took the "no". He took the "yes" and did so, from my perspective, irrationally--he only took 50-1, while he should have demanded odds an order of magnitude greater. That the final twelve-month window of our bet is now running means it is time to set out my thoughts on the trahison des clercs of so much of the academic economics profession over the past seven years. READ MOAR
Over at Equitable Growth: I have said this before. But I seem to need to say it again...
The very intelligent and thoughtful David Beckworth, Simon Wren-Lewis, and Nick Rowe are agreeing on New Keynesian-Market Monetarist monetary-fiscal convergence. Underpinning all of their analyses there seems to me to be the assumption that all aggregate demand shortfalls spring from the same deep market failures. And I think that that is wrong.
Simon Wren-Lewis writes:
I really like David Beckworth’s Insurance proposal against ‘incompetent’ monetary policy. Here it is: 1) Target the level of nominal GDP (NGDP). 2) "The Fed and Treasury... agree... should a liquidity trap emerge anyhow... quickly work together to implement a helicopter drop...." Market Monetarists and New Keynesians [do not] suddenly agree about everything... for David this is an insurance against incompetence by the central bank, whereas Keynesians... view hitting the ZLB as unavoidable if the shock is big enough. However this difference is not critical... READ MOAR
Over at Equitable Growth: Paul Krugman admonishes me for thinking I should try to work out what model underlies the Bank for International Settlements' 84th Annual Report. It is, he says, not so much a macroeconomic model or an analytical framework. Rather, he says, it is a mood: the rhetorical stance of austerity a outrance:
Paul Krugman: Liquidationism in the 21st Century: "The BIS position... [is] that of 1930s liquidationists like Schumpeter...
...who warned against any 'artificial stimulus' that might leave the 'work of depressions undone'. And in 2010-2011 it had an intellectually coherent--actually wrong, but coherent--story... that mass unemployment was the result of structural mismatch... [and] easy money would lead to a rapid rise in inflation.... it didn’t happen. So... it... look[ed] for new justifications for the same [policy] prescriptions... playing up the supposed damage low rates do to financial stability.... That over-indebtedness on the part of part of the private sector is exerting a persistent drag on the economy... is a reasonable story.... But the BIS... doesn’t understand that model... as if they were equivalent to... real structural problems... [which] makes a compelling case for... fiscal deficits to support demand while the private sector gets its balance sheets in order, for monetary policy to support the fiscal policy, for a rise in inflation targets both to encourage whoever isn’t debt-constrained to spend more and to erode the real value of the debt. The BIS, however, wants governments as well as households to retrench... and--in a clear sign that it isn’t being coherent--it includes a box declaring that deflation isn’t so bad, after all. Irving Fisher wept....
Are the BIS’s methods unsound? I don’t see any method at all. Instead, I see an attitude, looking for justification... READ MOAR
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...
￼￼Time to update this, as my thinking on a bunch of issues has changed over the past sixteen years. But first, as I think about how to so, let me reprint it...
I construct estimates of world GDP over the very long run by combining estimates of total human populations with largely-Malthusian estimates of levels of real GDP 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.
J. Bradford DeLong
The reference of course, is to Hicks (1937): “Mr Keynes and the ‘Classics’: A Suggested Interpretation”. An important, sprawling book of economic analysis. A complex and nonobvious relationship to a previous economics literature. Large political economy and policy stakes at hazard. Is this John Maynard Keynes's General Theory of Employment, Interest, and Money? Or is this Thomas Piketty’s Capital in the Twenty-First Century? READ MOAR