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The Party of Prosperity? The Seven Reasons that Democrats’ Policies are More Economically Efficient

March 10th, 2010 No comments

Or: The Seven Habits of Highly Efficient Economies

Republican economic policies are widely perceived (especially by Republicans) as being pro-growth and pro-prosperity, even though All. The. Evidence. Demonstrates. The. Opposite. (How dare they call themselves “conservatives”?) Even the rich get richer under Democrats — though not at the expense of the poor and the middle class.

Instead of pointing out that Democrats deliver more prosperity and less debt, Democrats’ main response is “Yeah, but…uh…Equality!” To which many Americans respond by reaching for the remote control.

If — as all the pundits proclaim — Democrats need a coherent, unifying, and compelling narrative (like the profoundly effective though sadly false narrative that is Reaganomics), how about this:

The Party of Prosperity

Democrats deliver more prosperity. They deliver it to more people. And they do it without busting the budget.

How do they achieve all that? Through the miracles of economic efficiency–policies that make the markets actually work — and work better — for the greater prosperity of all (including the rich).

Wisdom of the Crowds. Democrats’ dispersed government spending — education, health care, infrastructure, and social support — puts money (hence power) in the hands of individuals, instead of delivering concentrated streams to big entities like defense and business. Those individuals’ free choices on where to spend the money allocate resources where they’re needed — to truly productive industries that deliver goods people actually want.

Preventing Government “Capture.” Money that goes to millions of individuals is much less subject to “capture” by powerful players, so it is much less likely to be used to then “capture” government via political donations, sweetheart deals, and crony capitalism.

Labor Market Flexibility. When people feel confident that they and their families won’t end up on the streets — they know that their children will have health care, a good education, and a decent safety net if the worst happens — they feel free to move to a different job that better fits their talents — better allocating labor resources. “Labor market flexibility” often suggests the freedom (of employers) to hire and fire, but the freedom of hundreds of millions of employees is far more profound, economically.

Freedom to Innovate. Individuals who are standing on that social springboard that Democratic policies provide — who have that platform beneath them — can do more than just shift jobs. They have the freedom to strike out on their own and develop the kind of innovative, entrepreneurial ventures that are the true engine of long-term growth and prosperity (and personal freedom and satisfaction)–without worrying that their children will suffer if the risk goes wrong. Give ten, twenty, or thirty million more Americans a place to stand, and they’ll move the world.

Profitable Investments in Long-Term Growth. From education to infrastructure to scientific research, Democratic priorities deliver money to projects that the free market doesn’t support on its own, and that have been demonstrated to pay off many times over in widespread public prosperity.

Power to the Producers. The dispersal of income and wealth under Democratic policies provides the widespread demand (read: sales) that producers need to succeed, to expand, and to take risks on innovative new endeavors. Rather than assuming that government knows best and giving money directly to businesses, Democratic policies trust the markets to direct that money to the most productive producers.

Fiscal Prudence. True conservatives pay their bills. From the 35 years of declining debt after World War II (until 1982) to the years of budget surpluses and declining debt under Bill Clinton, Democratic policies demonstrate which party deserves the name “fiscal conservatives.”

Labor and Trade Efficiencies. (This is an update — I can’t resist adding a #8.) The social support programs that Democrats champion — if they truly provide an adequate level of support — give policy makers much more freedom to put in place what are otherwise draconian, but efficient, trade and labor policies. If everyone is guaranteed a decent wage by an excellent program like the Earned Income Tax Credit, we have less need for the economically constricting effects of unions and protectionism.

(These aren’t actually “The” seven reasons that Democratic policies are more efficient. There are many others. But the definite article made for a catchier post title.)

If you’re noticing that these talking points capture and co-opt the Republicans’ very own most cherished talking points…well yeah. (As my teenage daughter would say, “No duh.”) There’s a darned good dose of rhetorical jiu-jitsu at play here. It’s downright Machiavellian in its appeal to “Reagan Democrats,” Independents, and Republicans who are disaffected by their party’s thirty years of profligacy, malfeasance, and hypocricy.

But that doesn’t make it any less true. (If you don’t believe that it’s true, return to the first sentence of this post and start clicking links. Then come talk to me.)

And Democrats, in all their fecklessness — Obama in particular — could use a good helping of Machiavel.

Our president took all sorts of heat from his base during the campaign when he said that “Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not and in a way that Bill Clinton did not.” But he was profoundly correct. FDR did as well. And their means were decidedly Machiavellian. (Here repeating the David Stockman link from above.)

Now Obama’s got his chance to change the trajectory. And there’s a narrative that can effect that change.

The Party of Prudence. The Party of Prosperity.

Use it.

** At risk of ending this post on a wild tangent, I can’t resist citing the passage I was thinking about in writing those last two words. In M*A*S*H (the movie) there’s a football game in which one of the M*A*SH team’s players is being harassed by an opponent. Here’s the dialog:

Bastard 88 called me a coon.
Called you a what?
Coon.
OK, that’s an old pro trick to get you thrown out of the ball game. Why don’t you do the same thing to him?
What, call him a coon?
No, the boys in camp used to talk about his sister. Her name was Gladys. Use it!

Without revealing what (hilariously) ensues, I’ll just say: it worked.

My new favorite title for this post: “Gladys!”

Can Rich People Provide all the Necessary Demand?

March 9th, 2010 No comments

If an increasing number of people in America are not capable of doing economically viable work (because they don’t have the “knowledge skills” or the wherewithal to acquire them)–and as a result can’t contribute to the log-rolling exercise that is our economy by spending and providing demand for producers–is it a problem?

Can rich people do all the necessary spending to keep the log rolling? Will they?

It’s a complicated question, but I wanted to get at least a simplistic look at the numbers. So I took a look at the BLS’s Consumer Expenditures in 2007 (PDF), the latest year available (published April 2009), and threw the numbers into a spreadsheet, which you can dowload here (XLS).

Here’s one result. To maintain demand:

If spending by the bottom 69% of households (<$70K income) drops by: 10% 20% 30%
The top 7% of households (>$150K income) must increase spending by: 27% 54% 81%

In this particular example (<$70K vs. >$150K, year 2007), every 1% drop in low-end spending requires a 2.7% increase by high-end households to maintain the same level of demand from producers. (This is a function of the smaller number of households at the high end, ameliorated by the lower spending per household at the low end.)

Now obviously, if income is redistributed similarly, to the high end (as it has been so profoundly since 2001), it will also be concentrated similarly. So maybe that would suffice to effectuate those spending increases by the well off. But saying so with any certainty requires a model that it is beyond my means to produce.

That model would need to consider the following (related) questions:

• What is the relationship between income and spending at different income levels? How do each group’s utility curves (actually algorithms) respond to shifts in income?

• What about wealth, which is also a driver of spending? Higher incomes only slowly expand household wealth.

• What kind of lag times are we talking about? Will the well-off immediately ramp up their spending, or will they wait to build wealth, and make sure the income is a reliable stream?

• What about the investments that the well-off make with what they don’t spend? If producers receive those investments (which have to be paid back), is that as stimulative as sales revenues, which they get to keep?

Pondering these, all four seem to suggest that widely distributed spending (and income) are much more likely to maintain demand than spending by the well off.

I haven’t been able to find empirical research that addresses this question in a satisfying manner. (Yes, lots of theory…) Anyone else?

Do Parents Matter? Does it Matter?

March 8th, 2010 No comments

I can’t believe I’ve never posted about Judith Rich Harris, who undoubtedly ranks as at least a significant demigod in my personal pantheon.

Judy–a largely uncredentialed indy in her house in suburban New Jersey–pretty much single-handedly obliterated the notion that parenting is what causes us to be fxxxed up, and that parents in fact have much direct impact at all on how their kids “turn out.” (This side of abuse or gross negligence.)

She completely altered the way psychologists look at human development, by pointing out that developmental studies that don’t control for the effects of genes (i.e. almost all of them, until recently) are simply…worthless. They tell us nothing.

Yeah: children whose parents are alcoholics are more likely to be alcoholics. Nature or nurture? If you don’t ask that question, you can’t say anything useful on the subject.

I won’t detail it all here. Read this Malcom Gladwell piece from the New Yorker (published just before her first book came out), then run don’t walk to read her second book, No Two Alike. It’s one of the half dozen books you absolutely have to read to understand how human beings work. Her arguments and explanations are crystalline in their lucidity–issue after issue, she lines ‘em up and knocks ‘em down. (No, she’s not perfect; but she’s stunningly good.)

I have two things to say about Judy’s work.

First, I want to echo and add to Steven Pinker’s wonderfully humane (and funny) comments* in the parenting chapter in The Blank Slate (which chapter is based largely on Judy’s work).

I’ll do it via my recent response to a friend’s email, asking what I thought about screen time (watching DVDs) for her delightful, precocious ten-year-old daughter. (Mine are 17 and 18.)

My rule of thumb when making this kind of decision was always, “What effect will this have on my child on the day she graduates from college, or gets married?” (i.e., affect how she “turns out.”)

The answer, in almost every case, was “utterly imponderable” or “none.”

In that huge majority of cases, the next important questions are:

Will this thing contribute or detract from her having a joyous childhood? (The greatest gift a parent can give.)
and
Will this thing contribute or detract from us having a joyous family life?

Or perhaps even more important: will my trying to control this thing contribute or detract from the above?

Her response over lunch: “Why didn’t you tell me this ten years ago?!”

Some parents do not feel so liberated. They feel depressed and defensive. I think it’s because they want to matter. My advice, FWIW: find joy in your children; find your “matter” elsewhere.

* When many people hear these results, their first reaction is to
say, “Oh, so you mean it doesn’t matter how I treat my kids?” Of
course it matters! It matters for many reasons. One is that it’s
never all right to abuse or neglect or belittle a child, because
those are horrible things for a big strong person to do to a small
helpless one that is their responsibility. Parenting is, above all, a
moral obligation.

Also, let’s say I were to tell you that you don’t have the power
to shape the personality of your spouse. Now, only a newlywed
believes that you can change the personality of your spouse.
Nonetheless, on hearing this truism, you’re unlikely to say, “Oh,
so you’re saying it doesn’t matter how I treat my spouse?” It matters
how you treat your spouse to the quality of your marriage,
and so it matters how you treat your child to the quality of your
relationship to your child.

On consideration, I’m going to save my second comment for a later post. It’s a somewhat technical evolutionary discussion, and this post is already getting long.

Robin Hanson’s Reply to the Luddites

March 8th, 2010 6 comments

Update: I am an idiot. (You could have found that out by asking my daughters.) Curt Gardner is nice enough to point out in the comments that “the book you link to is not Robin Hansen’s, but that of his GMU colleague Tyler Cowen.” I do get the two confused at times, this being a fine example. Having framed this post by characterizing myself, I’ll leave it at that.

Robin Hanson was nice enough to drop off a drive-by comment in response to a recent post of mine (responding to a presentation of his), a post that espoused my Luddite Fantasy. His comment:

No we haven’t reached a flat plateau yet.  Only a small fraction of world income now goes to machines, and a flat part could easily trigger a faster growth mode.  No, redistribution is not required to maintain demand, and utility functions do not “flat-line.”

My initial response to this (rather curt and dismissive) reply was fairly natural — irritation. But I tried to think about it in the best light, assuming we were hearing from a busy person who didn’t have time to respond in detail to an admitted amateur — much less provide an education in basic economics to one who clearly (at least to Robin) had not acquired that education on his own.

But still, being from Missouri I was less than convinced by the unsupported denialism. So I went looking through Robin’s work [see update at top of this post] to see if he anywhere provides empirical support for his assertions. (Including — without success — in his book, which is a paean to [his own self-described] “autistic cognitive style.” Yes, I bought it in hardcover, read it, and re-read sections.)

His second comment on the post (replying to my queries) pointed toward some evidence, though without actually providing it:

“Less than 10%” [of world income now goes to {owners of} machines].

I didn’t find any support in his work, but this is not an implausible number. In the U.S., only 15% of personal income is “receipts on assets,” and over the last 80 years it’s varied between 5 and 20%. (There was a long, steady rise from ’44 to the mid ’80s, after which it declined some then stayed relatively flat.) I do really wonder how his number is, or can be, calculated, however. For instance, workers presumably reap some of the benefits of machines in the workers’ wages. How can this all be split out? (cf. multifactor productivity.) Where does his number come from?

In any case, while Robin seems to think this is a silver-bullet argument, it’s really something of an aside. His charts that we were talking about weren’t describing machines’ share of income, but the growth in machines’ abilities and the utility (to humans) of their output relative to humans’ abilities. They may be tightly related, but the relationship — especially as it interacts with aggregate demand and the macroeconomy — is far from clear.

Perhaps Robin thinks that standard economic theory explains all that, and it need not be discussed.

Robin did touch on this area in a post that I read quite carefully when it came out a while back, responding to a fellow Luddite’s self-published book and accompanying blog. One key paragraph from Robin’s post:

Ford’s mass-market theory of production is nothing like standard economic theory. Sure high income inequality might be ethically bad, and threaten political instability, but it does not at all threaten economic collapse – producers can focus on giving the rich what they want, and innovation and growth is just as feasible for elite products as for mass products.

Okay, here he explicitly invokes “standard economic theory,” and he (perhaps understandably) does not feel the need to explain it — or question it. But the whole point of my assertions was that these beliefs merit serious questioning, in particular the assertion that “producers can focus on giving the rich what they want, and innovation and growth is just as feasible for elite products as for mass products.”

Because–and this is the central point that Robin rather mysteriously does not reply to — the cognitive ratcheting of knowledge societies seems to be putting an increasing number of people below the cognitive waterline where they can be productive contributors to, consumers of, and participants in, the economy. He seems remarkably (almost autistically) blind to the situation that so many find themselves in — those who (unlike Robin) are not blessed with an “autistic cognitive style.”

To address two more of Robin’s assertions:

No, redistribution is not required to maintain demand

My gentle readers will forgive me, I hope, if I repeat a question I’ve asked before: Why is it that every large, thriving, prosperous country — with no exceptions — engages in massive doses of redistribution? If libertarian principles are so efficient, why hasn’t a single country emerged that operates according to those principles, and surged ahead of all the rest? Could libertarianism be a utopian fantasy? We know how those have turned out over the centuries…

utility functions do not “flat-line.”

This seems to be asserting that a second or third Lamborghini has the same utility-per-dollar ratio as providing a comfortable home for one’s family. Is he just quibbling over the “flat-line” wording, when he knows that “flatter” is what’s being discussed? Is he tossing aside any insights at all from happiness research, and in fact from “standard economic theory”? His six words, while giving some impression of heat, shed little light.

Finally, I would ask Robin if he has a better explanation for this rather profound and accelerating trend. Based on everything I’ve been able to find, standard economic theory is at a loss to explain it.

After lengthy consideration, the impression I receive from Robin’s hands-over-ears, eyes-closed, humming-loudly reply is perhaps best encapsulated in two words: Undergoing Bias.

Is Swiss Health Care a Good Model for Ours?

March 6th, 2010 9 comments

While perusing Arnold Kling’s post for my previous, I came across the following, which simply cannot go unchallenged:

…why not try single-payer in one part of the country and radical deregulation in another? Switzerland, which is about the size of Maryland, has different health care systems in each of its 20-odd cantons, which are about the size of Maryland counties. Surely it must be possible to try different health care approaches in Texas and Massachusetts.

I have no doubt that Arnold knows perfectly well (on some level of consciousness) the profound errors in these statements, assertions, and proposals. The Swiss health care system is heavily regulated. There are no cantons that are experimenting with “radical deregulation.”

To begin with, nobody in Switzerland gets turned down for insurance, or cut off when they get sick. All the rest (in some form or another) inevitably follows from that.

Here’s a quick precis of the Swiss system that I found here.

  • All insurers that offer the mandatory basic plan need to register with the Swiss Federal Office of Public Health. The health insurance market is decentralized and operates at the canton level (there are 26 cantons and each can have up to three regions.)
  • There is no group coverage, coverage for dependents or employer sponsored insurance; all plans are purchased on a per capita basis.
  • Most people purchase additional supplementary coverage for services excluded from the basic package (dental coverage, for example). Often times, an insurance company will have a non-profit branch that offers the basic plan and a for-profit branch that offers private, supplementary insurance.
  • Basic plans have a minimum deductible and coinsurance requirements; enrollees may opt for a higher deductible and obtain a reduced premium. (There is a minimum deductible of $225 and maximum deductible of $2,125. Once the deductible has been met, enrollees pay a 10 percent coinsurance rate with an annual maximum of $595. Maternity care and several preventive services are excluded from the deductible.) Switzerland tends to have relatively high out-of-pocket expenditures.
  • Aside from some variations in deductibles; individual insurers can vary premiums only according to age group (0-18, 19-25, 26 and older).
  • Insurance companies are free to set the prices for individual policies, but the Federal Office of Social Insurance has the power to reduce the price.
  • There is a risk equalization system that redistributes premium revenue among insurers according to the age and sex of their enrollees. This helps insurers with high-cost risk pools.
  • The Swiss have the option to change insurers each year during the annual open-enrollment period.

In many respects, it sounds surprisingly like…what we’re now trying to implement. If the ’Pubs had actually gotten involved constructively instead of posturing for the cameras, our plan would probably look even more like the Swiss one.

So what do you think, Arnold? Would that be a good thing? Do you think we can get there “incrementally”? When, exactly?

Want to Spread the Power? Spread the Wealth.

March 6th, 2010 No comments

You’re forever hearing Republicans and conservatives saying that they want to put decision-making–political power–in the hands of states and localities. This post by Arnold Kling is a good example out of thousands. The reasoning is not crazy (though it is contestable):

Wisdom of the crowds. More people trying different policies results in succesful policies winning, hence better policies.

Greater equality. Because power is less concentrated, there is less disparity between the very powerful and the less so.

Less danger of government “capture.” Since government power is dispersed, it’s harder for corporations and other wealth concentrators to capture and control those governments.

But do the economic policies championed by Republicans and conservatives actually promote this dispersion of power? Are they actually promoting the principle that individual (market) choices, in aggregate, deliver the greater good? Not so much.

Let’s assume for the moment that money is power. (Because…it is.) Which end of the U.S. political spectrum does more to disperse money into the hands of individuals, whose collective choices will (theoretically) allocate resources efficiently and make everyone better off?

That’s the mantra that right-wingers proclaim. But do they walk the economic walk?

I would suggest that lefties think government spending should be more widely dispersed (i.e. more to individuals than to entities). Hence: money to public infrastructure, health care, education, and direct transfers to individuals, rather than defense and business.

The streams that lefties promote are less prone to capture because they’re not delivered in large blocks to singular entities. It’s a matter of degree, of course–infrastructure versus food stamps. But nobody can argue that defense spending is less prone to capture than welfare spending.

Righties believe that that dispersion (of money hence power) is achieved through market mechanisms, if government doesn’t create monopolies and other concentrations.

Lefties point out that that’s obviously not true: unfettered markets–especially given the spectacular efficiency of corporate capitalism–inevitably pump money (and power) to the top, which is inevitably used to capture government.

Lefties also believe that government is the only entity powerful enough to capture back the money (hence power), and disperse it.

Most lefties make these arguments on persuasive moral grounds, but in my view they are even better supported–in terms of rhetoric that will convince the other side, and independents–by the evidence for greater efficiency, utilitarianism, bigger pie, all boats rise, all that.

Are Machines Replacing Humans? Or: Am I a Luddite?

March 4th, 2010 19 comments

Update: You can find a followup post including some brief answers from Robin Hanson (and my commentary on same) here.

My gentle readers will undoubtedly remember a question I’ve asked repeatedly: as technology steadily increases productivity, will we (have we) come to a point where a large portion of workers can’t do “valuable” enough work to earn a decent living? Where only the technologically adept, and owners of technology, “merit” liveable earnings?

My thinking is not particularly original. As Robin Hanson points out in the presentation I’m about to discuss, it goes back at least to David Ricardo. who went after this subject quite rigorously in 1821 (The Principles of Political Economy and Taxation, 3rd Edition).

Many will say (not without grounds) that my thinking is simplistic, amateurish, and silly. The most powerful argument that my concerns are groundless or stupid: invoking history in the form of The Luddite Fallacy:

If the Luddite fallacy were true we would all be out of work because productivity has been increasing for two centuries.*

If technology is making human labor less valuable, how do you explain the steady, seemingly inexorable rise in wages/earnings/GDP per capita (choose your measure) over the last century or two? (Yes–if you look globally–even over the last few decades.)

That, by my lights, is a bloody strong argument. How does one respond to it?

It’s a question I’ve struggled with mightily, not only to protect my pet theories but because of a feeling that something was missing. And I think I’ve found an answer in Robin Hanson‘s “Economics of Nanotech and AI” presentation at the Foresight 2010 conference. (Liberal-bashers take note: Robin is a quite devoted if decidedly idiosyncratic libertarian.) If you’re a reader like me you’ll find much of the matter, more quickly, in Robin’s IEEE Spectrum article, “Economics Of The Singularity“–though if you’re feeble-minded like me you’ll also need to view the presentation and the slides (PowerPoint) to understand his insights.

This is probably old-hat to many who are better-versed than I. But it’s something of an aha! for me, and may be likewise for some of my readers.

Here’s the heart of his matter, a debate  economists have been having for centuries: do machines, does technology, complement (I would prefer “augment”) or substitute for (I would prefer “replace”) human labor? If all technology does is augment human labor–making each person more productive–that increased productivity is purely good and all boats rise (at least over the long term, though obviously with local disruptions, both temporal and geographic, that societies might want to address and ameliorate.) If technology replaces human labor, then some portion of the population, over time, will get squeezed out, with no opportunity to “earn” a share of the increased production. (And/or, wages for labor will decline.)

So which is it–does technology complement or substitute for human labor? Augment or replace? My immediate, uninformed answer is “Yes. Both.” But I’ve had no idea how to quantify those effects, or characterize their interactions.

The economic consensus (as I’ve discerned it and as Robin reports it) is that it’s all complement/augment–substitution is only local and temporary. And two centuries of rising wages certainly give a great deal of weight to that position. But it still seems more likely to me, even obvious, that both occur.

Which leads me to wonder: How do the two effects interact? What’s the ratio of the two? Does that ratio change? Most interestingly to me, has that ratio changed in any steady way over the decades and centuries?

Happily, it turns out that Robin is a Yes man like me:

I want to help you understand how they can both be right. (22:32)

He explains it with the following waterline model.

Machines do (obviously) take over human tasks, replacing human labor in those tasks, as machines gain a “better relative ability” to do those tasks than humans. No doubt about it. That’s the point where the waterline meets the shore, where a task can be equally well/efficiently done by a machine or a human. And the waterline is obviously rising.

But (not shown) those machine tasks complement the (more cognitive/creative) tasks that humans still do–and give humans time to do those tasks–increasing the humans’ productivity. (Robin explains: “The tasks themselves are all complements–and this is a very robust, standard thing [in economics]–the better the world economy does any one thing, the more valuable doing all the other things becomes.”) This makes the human effort steadily more “valuable,” so the humans can produce more with machines’ help, and because the humans’ work is valuable, those humans can claim their share of the increased production. Sounds great.

Another way to think about it: humans can only migrate so far above the waterline. They need that vast body of technology–that body of water at their back–to expand into new territories.

It’s worth pointing out that there’s an unstated presumption here: that the graph continues up and to the right, that humans can climb to ever-higher levels–leaving lesser tasks to machines while we tackle tasks that deliver ever-greater value per hour–ever-greater productivity. (Designing more efficient cars instead of building cars.) Assuming that everyone shares in that greater prosperity (as everyone has, in the long historical picture though certainly not in detail), this truly is an all-boats-rise scenario.

But here’s where things get interesting–when Robin changes the shape of the shoreline:

The land contour is actually a graph of the change in the complement/substitute ratio. Sometimes one effect dominates, sometimes the other. On the left, machines’ takeover of human tasks does more to complement human effort than it does to substitute for that effort–resulting in economic growth and human prosperity. (To repeat: this rosy view reflects a big-picture, long-term orientation. Some individuals can’t make the steep climb, and they drown. But humanity moves ever higher.)

But then that ratio changes–the shoreline flattens out, and the scenario shifts radically. For every increase in machine abilities, there’s more substitute, and less complement. But the water keeps rising.

It looks to me like a lot of people just drowned, while a lucky few remain perched on the precipice.

Here’s Robin’s explanation:

There’s both a substitution and a complementary effect. And which dominates depends on the shape of this curve. Down here where it’s very steep you have very little substitution and a lot of growth. The machines getting better basically means people get richer, wages rise. But we could also reach a point [slide change] where there’s a large flat region in principle, and we could have the wave of water coming in, to a point where most income in the world is going to the machines, and a relatively small fraction is going to the people, and depending on the shape of this shoreline it might simply flood the entire region.

Unlike the future that Robin’s envisioning, though, in our world machines have no claims on earnings–they aren’t “people,” so they don’t get income. Their owners do. So he’s describing a situation “where most income in the world is going to the [owners], and a relatively small fraction is going to the [workers].”

Robin says this quite explicitly in his Spectrum article:

Wages could fall so far that most humans could not live on them.

This is, to my understanding, exactly the situation that the Luddites (and many others since) were so concerned about.

Robin is rather blithe in his statement that “in principle” there could be a large flat region. His talk has heretofore argued that periods of rapid growth (the steep parts of the curve) occur, highlighting the agricultural and industrial revolutions. And he asserts that those periods are getting closer together. He also asserts that another one is imminent–he thinks in the next hundred years.

Which would suggest that we are currently in one of those flat periods, where you see a lot more substitution relative to complementing–where a lot of people are being squeezed out of the economic system (drowned), without commensurate gains via complementarity (machines’ increased ability to produce things–and help humans produce things–that humans value).

Let’s hope the hill keeps going up to the right, and that humans have the capacity to keep climbing.

But here, perhaps, is the issue: many don’t. While measured IQ has been increasing over the decades since it was first measured (they keep having to recalibrate the test to achieve the 100 median), it’s not increasing anywhere near as fast as machines’ abilities. It’s possible that a large group of humans–at least in advanced, knowledge-driven societies like the U.S.–are being left below the waterline.

There’s much more I’d like to say on this topic, but I find myself out of time. (And I’m thinking you might be as well.) So I’ll just leave you with the questions I posed for Robin on his blog (slightly modified and expanded here).

Robin:

Your augment/replace waterline model is, IMHO, profound. To bring it down to our current situation:

Have we reached that plateau? Perhaps sometime in the 70s, give or take?

Is it related to the limits of (aggregate) human cognitive capacity? IOW, since 50% of people have an IQ below 100, and “valuable” knowledge-worker tasks are requiring ever-greater cognitive skills, can the ameliorating effects of education continue to maintain the augment/replace ratio, as they did for much of the twentieth century?

Since machines currently are not people, but are owned by people (so the machines’ earnings go to the owners), could this explain the increasing wealth and income disparities (labor vs. capital, wages versus rents) in recent decades?

Re: your much-less-than-satisfying answer to the question about Germany’s success (highly industrialized, but with major social programs): is it possible that in order to maintain demand for ever-more-efficient productive capacity, government redistribution is a necessity? No–not at 1,000 times some imagined level, but somehow relative to per-capita shares of production?

Given that individual utility functions (as measured by “happiness”) seem to flat-line at about $15K in annual income in developing countries, about $60K in the U.S. (yes, iffy stuff, but the threshold/flat-line seems likely at some level), can the demand from a small cadre of owners–who don’t “value” most goods very highly–provide the demand necessary to keep the economic log rolling?

Could the absence of this widespread demand–making it difficult for capital to find productive investments that pay a good return–explain the massive increase in “casino investing” over recent decades? A desperate search for returns in a world where demand does not reward valuable production?

Could this situation also explain the downward pressure on secondary-education budgets? A vague sense of (impending) declining returns to education?

Could it also explain the rapidly increasing lengths of “jobless recoveries” since the 70s?

Is it possible that the current…difficulties are like a wave crashing on that plateau?

IOW, because of the limits of human capability, could the Luddites (finally) be right? Even a stopped clock…

‘Pubs Love Catastrophic Coverage. Too Bad the Free Market Doesn’t Provide It

March 3rd, 2010 3 comments

Perhaps with very good reason, free-marketeers believe that catastrophic health coverage produces the best market efficiencies. People pay for everyday health care out of their own pockets, which gets them to shop for services and ask what the cost is, pushing costs down. They have an inexpensive insurance plan with a high deductible to cover the really bad stuff.

I’m a believer–at least when it comes to my own coverage. I have a $3,500 annual deductible, and my premiums are well below $5,000 a year.

But my plan only covers generic drugs, which is exactly the opposite of what I want. I want to pay for my own generic drugs (I just made the rational choice to switch from name-brand Lipitor to generic Simvastin because the cost-benefit analysis is obvious), but be covered if the worst occurs–some kind of terrible disease that can only be treated by a wildly expensive non-generic drug.

It’s called catastrophic prescription coverage, and it’s completely unavailable, at least in Washington State.

No, put that thought out of your mind: it’s not the government’s fault. I asked the insurance commissioner’s hotline, and they say that there are no rules preventing insurers from offering that kind of coverage. It’s just that none of them do.

Even among Cadillac comprehensive plans, every single one has a low ($2,000-$5,000) annual cap on what they’ll pay for name-brand drugs.

One insurance rep I talked to surmised that maybe they couldn’t offer such a plan for what people would be willing to pay. Maybe.

But I’m here to ask, how do they know if they don’t even try? Here’s one customer who’s ready to lay down serious cash on the barrelhead.

Markets constantly fail to offer what people want and are clamoring to pay for. (Think: high-MPG turbodiesels that are widespread in Europe and Asia, made by the very companies that for some reason don’t offer them here. Just try to find a used VW TDI.) I really can’t figure out why. Thoughts?

Deficits Don’t Matter? The (Supposed) Experts Speak

March 2nd, 2010 3 comments

Dick Cheney famously said, “Reagan proved that deficits don’t matter.” I’ve argued elsewhere that this was a political, not an economic statement. People love to complain puritanically about debts and deficits, but they vote for politicians who promise to cut their taxes. Hence the 30-year hegemony of Reaganomics.

But do deficits mattter (economically)? In particular, does high government debt result in slower economic growth one year, ten years, or twenty years down the line?

There’s been quite a bit of discussion lately in the econoblogosphere (see here, here, here, here, and here) of a recent paper (PDF) by Carmen Reinhart and Ken Rogoff, “Growth in a Time of Debt.” Their conclusions, in brief:

First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more.

I’m here to say that while their data set is impressive, their analysis is so weak–downright amateurish–as to make any conclusions in the paper largely useless. Given the same data set, any bright, diligent freshman with a copy of Excel could produce the same analysis with less than a day’s work. They could produce much of what’s provided using easily accessible, web-available data.

The paper, it seems to me (in my amateurish ignorance), makes the most basic error that I see in almost all “determinants of growth” econometrics: it doesn’t consider multiple lags–what periods (of debt) are being compared to what ensuing periods (of growth).

Post hoc obviously doesn’t mean propter hoc, but “ensuingness” is one of the few natural-experiment handles we’ve got in a science where you can’t re-run the experiment.

While the paper (oddly, it seems to me) doesn’t say so explicitly, it seems to be comparing a country’s debt levels in a given year to that country’s GDP growth in the same year. While the data set is impressive (are they sharing?), the analysis is based on the most simplistic of correlations.

And it’s not even adjusted for the most widely-accepted of necessary corrections–“convergence” or the “catch-up effect”–the tendency of less-prosperous economies to catch up with their cohorts due to transfers of technology, expertise, trade, capital, etc. (Which effectively changes the question to something like, “Gee, these countries didn’t catch up, when they should have.” Or “This country keeps surging ahead. Why?”)

Also, the paper only looks at GDP growth–not growth in GDP per capita, which is necessary to correct for different population growth rates in different countries.

But putting those two issues aside: Reinhart and Rogoff acknowledge their lag-blindness in a decidedly less-than-reassuring parenthetical (p. 7):

(Using lagged debt should not dramatically change the picture.)

“Should not.” Now that’s a convincing piece of robustly supported econometric evidence and argument, don’t you think?

The paper provides at least one perfect–downright eye-popping–example of this lag-blindness, and the false picture it paints. In Figure 3 (p. 10), they show their debt-to-growth correlations (broken into their “buckets” by debt/GDP ratio) for the U.S., purportedly demonstrating that debt/GDP levels above 90% result in far lower GDP growth levels.

But note the footnote to this table: they have only 5 samples (years) out of 216 in which debt/GDP was greater than 90%.

It’s not hard to figure out what years those were:

U.S. Federal Debt as a Percentage of GDP
1944 91.45
1945 116.00
1946 121.25
1947 105.81
1948 93.75
1949 94.60

Source.

I find six years to their five, but in any case.

This was a period of profound economic turbulence–the years when our economy was struggling to recover from the massive back-and-forth swings of unprecedented economic forces in the preceding 10-15 years. Things didn’t smooth out until the fifties. If these years constitute Reinhart and Rogoff’s “proof,” well…there’s just not a lot of there there.

While arguments can be made to the contrary, it’s not insane to suggest that the deficits of the war years—finally breaking the back of The Great Depression–and the resulting debts of the late 40s, were in fact the impetus (or at least enabler) for The Great Prosperity of ensuing decades.

But whether or not you buy that argument, this example demonstrates that Reinhart and Rogoff’s lag-blindness in this paper (combined in this example with a completely misrepresentative five- or six-sample data set) quite resoundingly undercuts the value of its conclusions.

Their choice of correlations–year-X debt to year-X growth (or to be precise, growth from the preceding year to year X)–exemplifies a dismaying tendency among U.S. growth econometricians, particularly those like Rogoff who display a predilection for making political points and getting on talk shows: a tendency to concentrate on short-term results rather than long-term benefits.

I think almost all will agree that the important question we need to be asking is, “What effect will debt levels have on our (country’s) long-term prosperity and well-being?” Will our children and grandchildren decades hence be more or less prosperous as a result of Policy X, or Policy Y? (This also because we can actually have an effect on those long-term outcomes–if we think and plan long-term, and act diligently.)

In my amateurish way, I’d like to suggest that answers to those questions can be found more readily by looking at many lag periods for any given correlation. In particular–since many important economic effects (arguably the most important ones) play out over many years or decades, and it takes years or decades to implement significant policies–we should be looking at long lag periods to draw our conclusions. This also has the statistical benefit of smoothing out short-term blips and bleeps in the data that serve only to confuse and pollute our judgments (and of course provide splendid opportunities for cherry-picking).

Here is one example of long-term, multi-lag, multi-period analysis–comparing U.S. to EU15 GDP/capita growth rates for all the periods from 1970 to 2006. (I apologize that this is not corrected for convergence/catch-up.)

http://www.asymptosis.com/europe-vs-us-who%e2%80%99s-winning.html

And another example here, suggesting that wealth equality correlates with somewhat slower growth in the short term, but profoundly faster growth in the long term. (Again, not corrected for catch-up.)

http://www.asymptosis.com/wealth-equality-and-prosperity.html

I’m sorry to say that I don’t have time at the moment to pull this kind of analysis for the debt-to-growth correlation. Anyone care to do so? Reinhart and Rogoff, can we borrow your data set please?

Update March 3. I should add based on comments elsewhere: I am in no way arguing that debt is benign (based on Ricardian equivalence or whatever), or that there might not be some thresholding effect where it starts to have decidedly non-benign effects on short- or long-term growth. Obviously there has to be a point where it would.

I’m simply saying that because of their analysis methods, R&R’s paper doesn’t give us any real insight into that. Because of their zero-lag analysis, they certainly give no insight into the long-term effects, which strike me as the effects that really matter. Compounding interest and all that…