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A Quarter Century of American Prosperity: Four Graphs

September 8th, 2014 No comments

If you equate wealth and prosperity (not a crazy equation), then one of the best measures of a country’s prosperity is median household net worth. It arguably says a lot more about prosperity than various income measures. It tells you how the typical household (50% have more, 50% have less) is doing.

If lots of households have lots of wealth, that’s pretty much a description of a widely prosperous country — the kind we built in this country in the 20th century — at least until the late 70s/early 80s.

The best estimates we have of this measure come from the Fed’s triennial Survey of Consumer Finances. It started in ’89, and the ’13 report just came out, so we now have twenty-four years of surveys to look at.

Here’s what that quarter century looks like:

scf graphscf legend

Here it is zoomed in on the bottom 60% of Americans:

scf graph bottom

Top 10%: Up 61%, even with the post-’07 decline. (Top 1% and .1% got richer way faster even than that).

Upper middle class (60–90%): Up 25-32%. Pretty darned good. (Remember, these are inflation-adjusted dollars.) Imagine if we’d all done that!

Middle class (40–60%): Down 18%. Prosperity! Freedom!

Lower middle class (20-40%): Your net worth is down 50% from 1989. It’s been diving since ’95 — almost 20 years.

Lower class (bottom 20%): A huge spike — you’re up 85%! Except: 1. Your holdings are still trivial — $6,100. You’re only two or three months from being on the street. And: 2. You’re down 40% in the last twelve years. Here’s that graph zoomed in:

scf poor graph

If you’re  in the bottom 60%, here’s how you’re doing compared to the top ten:

Screen shot 2014-09-08 at 7.13.40 AM

I’ll say it again:

Widespread prosperity both causes and is greater prosperity.

We could all (collectively) be much richer right now, even as we could all be much richer.

A nod to income, and how it builds wealth: Say you’re a 50%er. Now imagine that in 2007, you and your friends were making $94,000 a year instead of the $76,000 you actually made. (That’s how much you would have made if wages had gone up with productivity — GDP per hour worked — since the 80s.)

Think we’d all be more prosperous?

Cross-posted at Angry Bear.

A Definition of Money Is Not Sufficient, But it Is Necessary to Understand Economies

September 3rd, 2014 19 comments

Paul Krugman takes aim today at me (though he doesn’t know me from shinola), and others of my ilk who are at least somewhat obsessed with coming to a coherent definition of “money.”

…people who spend too much time thinking about money in general — specifically, on trying to decode money’s true meaning and find the real, true measure of the money supply; they end up starting to believe that everything in economics hinges on getting that measure right, when in fact almost nothing does.

He’s certainly — obviously — right that defining “money” coherently would not be sufficient to give economists an understanding of how economies work. But I’m here to suggest that it is a necessary condition — that absent such a definition, economists are inevitably fated to wrestle endlessly with incoherent understandings of how economies work.

Economists are like physicists trying to ply their trade without a coherent, agreed-upon definition of “energy.” (That definition is not conceptually simple, but it is coherent and agreed-upon.) Absent that definition, physicists’ discussions would devolve into exactly the kind of unending, unresolvable mare’s nests that are the ubiquitous norm in economics. Cue Truman’s “one-handed economist.”

Without a coherent definition of “money,” it’s impossible to have a coherent discussion — or arguably, even a coherent understanding — of how economies (inevitably, monetary economies) work.

I’ve written repeatedly (you could start here or here) about what I consider to be economists’ central, crippling confusion: even some of the most careful money-thinkers out there (e.g. Isabella Kaminska, J. P. Koenig Koning) frequently confute “money” with “currency-like things.” It’s understandable — we’ve always considered Roman coins to be “money” — but it’s a vernacular understanding that considered carefully, is conceptually incoherent.

I’ll end by again bruiting my preferred definitions of “money,” “financial assets,” and “currency,” and pointing to my many previous posts explaining those definitions’ undeniable virtue (and difficulties):

Money is the exchange value embodied in financial assets.

Financial assets are legal constructs defining claims. The exchange value of those claims is “money.”

Physical currency consists of physical tokens representing balance-sheet credits (claims), so it is actually an extra step removed from being “money.”

So financial assets (even dollar bills), which embody money, cannot “be” money.

These definitions cannot be “true.” I only suggest that they are the most useful, coherent definitions for thinking about economies that I’ve been able to come up with.

To return to Krugman: by this definition, the most useful measure of the money stock (in understanding and exploring how economies work) is not any measure of currency-like things (M1, M2, MB, even divisia measures), but household net worth.

In the big picture, the money stock = household wealth: households’/people’s net stock of claims on all our real stuff (tangible and intangible). Or to be conceptually precise: the money stock = the exchange value of those claims.

Cross-posted at Angry Bear.

How We Reduce Poverty, and How “The Market” Doesn’t

August 1st, 2014 1 comment

Matt Bruenig gives us a great breakdown of what poverty would look like if we relied on the market to solve it (as we did almost exclusively for thousands of years before the emergence of enlightened modern welfare states over the last two centuries).

The poverty rate among the elderly would be > 45%. (Old folks with long memories: sound familiar?)

Thanks to Social Security, Medicare, etc., it’s 9%.

Here are Matt’s numbers in graphical form for easy digestion:

Screen shot 2014-08-01 at 8.46.54 AM

Read the whole thing.

Cross-posted at Angry Bear.

The Reagan Revolution, In One Graph

July 30th, 2014 No comments

Policy Prefs: I’m Right at the Peak of America’s Bell Curve. Where Are You?

July 29th, 2014 No comments

The idea of democracy is to give the people what they want, right?

Ezra Klein points us to a great study by Ray LaRaja and Brian Schnaffer examining policy preferences by political donors (5% of the population) vs. non-donors (95%).

Here’s my rendition of the results:

Screen shot 2014-07-29 at 10.48.43 AM

Whose preferences would you say are embodied in our current government?

Non-donors as a group are pretty coherent, and seem to give a good representation of what Americans want.

Donors, perceived as an entity, not so much — the group is downright schizophrenic, in particular due to that anomalous bulge at the right. And that 5% or .5% determines what we get — not the 95%. (Money? Pernicious? Feh.)

Now: ask yourself where the self-professed liberals and conservatives that you know land on the left-hand graph.

Just sayin’.

Cross-posted at Angry Bear.

The New Synthesis? Market Monetarists Meet New (and Post?) Keynesians on Helicopter Drops

July 27th, 2014 No comments

A a year or so back I highlighted David Beckworth’s great post on Helicopter Drops. And the world’s best econoblogger, Steve Randy Waldman, did as well. (A “fantastic post,” he said.)

I’ve been pinging ever since to see a response to that post from Market Monetarist opinion-leader Scott Sumner. (AS SRW said, what we’d gotten from him was largely “quibbles.”)

I won’t rehash it all here but rather point you to Nick Rowe’s wonderfully successful effort to bring it all to conclusion, synthesizing Market Monetarist and New Keynesian thinking into support for a policy proposal that I think Post-Keynesians and MMTers would also jump on with gusto. (Also read the comments to Nick’s post, including one from Scott Sumner.)

I feel quite sure that Democrats/Liberals would embrace the policy wholeheartedly. Republicans/Conservatives, unfortunately, would consider it to be heresy and apostasy (often-sensible but utterly toothless Reformocons nothwithstanding).

Which pretty much clarifies where the problem lies…

Cross-posted at Angry Bear.

Nassim Taleb: Two Myths About Rivalry, Scarcity, Competition, and Cooperation

June 28th, 2014 2 comments

I’m delighted to find that someone with the necessary statistical chops has answered a question I’ve been asking for a while: Have any of the 130+ evolution scientists who’ve savaged Wilson and Nowak’s Eusociality paper (and Wilson’s Social Conquest of Earth) gone deep into the maths of their model (laid out in their technical appendix)? I check periodically, but don’t follow the field carefully.

According to this Taleb Facebook post, the answer’s still no, almost four years after the paper was published.

Emphasis mine, links in the post:

There are two myths that prevail in academic circles (hence the general zeitgeist) because of mental contagion and confirmatory effects (simply from the way researchers look at data and the way it is disseminated): 

1) That people are overly concerned by hierarchy (and pecking order), and that hierarchy plays a real role in life, a belief generalized from the fact that *some* people care about hierarchy *most the time* (most people may care about hierarchy *some of the time* but it does not mean hierarchy is a driver). The problem is hierarchy plays a large role zero-sum environments like academia and corrupt economic regimes (meaning someone wins at the expense of others) so academics find it natural so they tend to see it in real life and environments where if may not be prevalentMany many people don’t care and there is no need to pathologize them as “not motivated” –academics who publish tend to be “competitive” and “competitive” in a zero-sum environment is deadly. I haven’t seen any study looking at things the other way.

2) That “competition” plays a large role compared to *cooperation* in evolutionary settings –of course if you want ruthless competition you will find examples and can model it with bad math. The latter point is extremely controversial, Wilson and Nowak have been savagely attacked for their papers (with >130 signatures contesting it) and, what is curious NOBODY was able to debunk the math (very very very rigorous backup material). If Nowak/Wilson were wrong someone would have shown where, and in spite of the outpour of words nobody did.

I’d condense my thinking on the subject as follows:

1) People mistake rivalry for scarcity. If one tribe excludes all the others from a water source, forces them to do their will to get water, there’s obviously scarcity, right? Wrong.

Don’t get me started on the sacralization of (largely inherited) “property rights,” ownership — the right to exclude others.

2) They don’t understand that competition’s only virtue is increasing and improving cooperation. Cooperation — non-kin altruism, eusociality, etc. — is the thing that got us to the top of the food chain. Cooperation is what wins the battle against scarcity.

Competition fetishists think that competition is always good because it sometimes improves cooperation, even though it frequently does the exact opposite.

Think: trade wars. Or just…wars.

Cross-posted at Angry Bear.

The Pernicious Prison of the Price Theory Paradigm

June 5th, 2014 3 comments

Steve Randy Waldman has utterly pre-empted the need for this post, cut to the core of the thing, in the opening line of his latest (collect the whole series!):

When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness. 

But I’ll try to help a little. What that means:

In the mid 20th century, economists decided:

It’s impossible to measure absolute utility. We can’t say what the value to you is of a heart bypass for your mother, or the value of a college education for your kid, or the value of (you or someone else) buying a third or fourth Lamborghini.

So we’re simply going to punt, and only talk about ‘preferences’. For our discipline, in its scientific impartiality, absolute utility — because we can’t measure it — will effectively not exist.

Inside our hermetic logical construct, we not only aren’t able to think about absolute utility — actual human value — we are forbidden to do so. Barred.

And with this spectacular piece of rhetorical legerdemain, the discipline disavowed itself of any responsibility for the implications and effects of that rhetorical legerdemain. (It’s hard not to be impressed.)

The effects? Economic analysts must assume, prima facie, that a billionaire buying a third or fourth Lamborghini delivers the same value as buying a college education for your kid or a heart bypass for your mom.

Who are we to second-guess preferences? They’re all the same price, right?

The (inexorable) implications? Concentration and distribution of wealth and income not only don’t matter. For economists who aren’t willing to tear open the prison door (at serious risk to tenure and employment), they can’t matter.

Steve explains it all far better, with circles and arrows and a paragraph on the back of each one explaining how each one is to be used as evidence against us. But I hope this little summation helps.

Cross-posted at Angry Bear.

The Five Best Nonfiction Books

June 2nd, 2014 11 comments

Okay fine, not the best. (Click bait!) But for me, the most important — the five books that, more than any others, taught me how to think about the world.

A friend in my “classics” book group asked me for nonfiction book recommendations. Here’s what I wrote:

The NF books that wow me, get me all excited, have me thinking for years or decades, are ones that are comprehensible to mortals but that transform their fields, become the essential touchstones and springboards for whole disciplines and realms of thought. Writing for two such disparate audiences is insanely hard, and the fact that these books succeed is a big part of what makes them brilliant.

Also books that cut to the core of what we (humans) are, how we know. (So, there’s much science tilt here, but far bigger than arid “science.”)

“I don’t know how I thought about the world before I read this.”

Or:

“Yes! That’s exactly what I’ve been kinda sorta thinking, in a vague and muddled way. THANK YOU for figuring out what I think.”

These books let you sit in on, even “participate,” in discussions at the cutting edge of human understanding. They make you (or me, at least) feel incredibly smart.

And they’re fun to read — at least for those with a certain…bent…

Probably have to start with Dawkins’ The Selfish Gene. When it came out in ’76 it crystallized how everybody thought about evolution, hence life and humanity. The amazing Dawkins, amazingly to me, has become kind of hidebound and reactionary in response to new developments since then (group/multilevel selection, inheritance of acquired characteristics), but the new information and new thinking that make parts of this book wrong, couldn’t exist without the thinking so beautifully condensed in this book. Might not need to read the whole thing, but it’s pretty short and you might not be able to resist. Very engaging writer and full of fascinating facts about different species and humans. Also the place where the word “memes” was coined.

Steven Pinker. The Blank Slate: The Modern Denial of Human Nature. The most important book I’ve read in decades. Philosophy meets science meets sociology, anthropology, psychology, politics, law… Pinker’s core expertise is in language acquisition, how two-year-olds accomplish the spectacularly complex task of learning language (see: The Language Instinct: How the Mind Creates Language.). He has a love-affair with verbs, in particular. Just loves those fuzzy little things. But his knowledge is encyclopedic and his mind is vast. And he’s laugh-out-loud funny on every other page. Also incredibly warm and human. I have such a bro-crush on this guy. (Also: everything else he’s ever written, including at least some chunks of his latest, The Better Angels of Our Nature: Why Violence Has Declined.)

Daniel Kahneman, Thinking Fast, and Slow. Kahneman and his lifelong cohort Amos Tversky (sadly deceased) are psychologists who won the 2002 Nobel Prize — in Economics! — for their 1979 work on “Prospect Theory.” (Fucking economists have been largely ignoring their work ever since, but that’s another subject…) About “Type 1″ and “Type 2″ thinking: the first is instantaneous, evolved heuristics that let us, e.g., read a person’s expression in a microsecond from a block away. The second is what we think of as “thinking” — slow, tiring, and…crucial to what makes us human. Interestingly, in interviews Kahneman says that he almost didn’t write this book, thought it would fail, for the very reason that it’s so great: it addresses both mortals and the field’s cutting-edge practitioners, brilliantly. The book’s discussions of his lifelong friendship and collaboration with Tversky are incredibly touching.

E. O. Wilson, The Social Conquest of Earth. Q: How did we end up at the top of — utterly dominating — the world food chain? A: “Eusociality”: roughly, non-kin altruism. Wilson knows more about the other hugely successful social species — insects and especially ants — than any other human. He basically founded the field of evolutionary psychology with his ’76 book, Sociobiology. As with the others, this is deep, profound, wide-ranging, and incredibly warm and human in its insights into what humanity is, what humans are. Those things that are wrong in The Selfish Gene? Here’s where you’ll find them.

Michael Sandel, Justice: What’s the Right Thing to Do? Philosophy. It draws on some scientific findings, but mainly this is very careful step-by-step thinking through a subject, a construct, that is not uniquely human, but close. (Elephants, apes, etc. do seem to care about justice, sort of.) I find it especially engaging and important because it addresses and untangles the central political arguments of recent times — is it “just” to make everyone better off by taking from the rich and giving to the poor? Should individual “liberty” trump individual rights? What rights? Etc. This book did much to help me comb out my muddled thinking on this stuff.

Morton Davis, Game Theory, a Nontechnical Introduction. Stands out on this list cause it’s not one of those “big” books. Available in a shitty little $10 Dover edition. But it’s an incredibly engaging walk through the subject, full of surprising anecdotes and insights. And he does all the algebra for you! The stuff in here makes all the other books above, better, cause they’re all using some aspects of this thinking. Here’s an Aha! example I wrote up: Humans are Pathologically Nuts: Proof Positive.

Okay, you noticed there are six books here. Did I mention click bait?

Cross-posted at Angry Bear.

Wealth Is Not Capital: The Brilliant Seth Ackerman Explains It All 4 U

May 30th, 2014 No comments

I’m stunned by how good the new Jacobin piece by Seth Ackerman is: “Piketty’s Fair-Weather Friends.” It gives what I find to be the best understanding so far of the whole Piketty “think space.”

It’s so good that I can’t encapsulate it, so I’ll just share some of the passages I’m most taken with, with my highlights for your skimming pleasure. RTWT.

it’s increasingly doubtful whether (or how) [Capital's] arguments can be reconciled with the MIT-style economic paradigm to which Piketty’s most ardent American promoters — liberal economists like Joseph Stiglitz, Paul Krugman, Brad DeLong — swear allegiance.

For [Paul Krugman], the lesson of Capital in the Twenty-First Century is that mainstream theory has shown its worth: “You really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing.”

At the heart of the neoclassical apparatus lie the twin concepts of marginal productivity and the aggregate production function (more on these below), and as Thomas Palley has written, when it comes to these totems, “you are either in or out.” Thus, as soon as an economist who aspires to theoretical originality wishes to investigate the dynamics of income distribution, she’s liable to find herself swiftly tangled in a conservative straightjacket.

Now that the book’s arguments are being digested, the same liberal, MIT-style economists who did so much to thrust Piketty’s book into the spotlight are expressing serious doubts — and the reason goes back to marginal productivity theory. That theory might end up resembling less a wall that Piketty could circumvent than a maze in which he will find himself trapped.

Marginal productivity theory … makes up something like neoclassical economics’ “operating system” — the language in which almost every proposition must be embedded in order to work.

Popular attempts to recount [the Cambridge Capital] debate tend to get needlessly bogged down in the abstract. They typically focus on the brain-teaser question of whether it’s possible to quantify the “amount” of capital in the economy, given that this capital stock is made up of a vast number of heterogeneous goods, from jackhammers to hard drives. And that was, in fact, the issue that first got the debate started.

But what the argument was fundamentally about was whether the marginal productivity theory of income distribution — marginalism — is a logically coherent theory.

In the Cambridge capital debate, this textbook theory was advanced by neither side. It’s a fairy tale told to undergraduates.

the leading mid-century neoclassicals, they had long disavowed any claim that this story could logically explain the income distribution, for a simple reason: whether or not such marginal products actually exist in the real world is an entirely empirical question, and the answer is that they generally don’t.

Today, empirical studies of manufacturing industries are unanimous in finding that per-worker productivity is constant, not diminishing, as more are put to work in a factory; while even in fast food joints (as this riveting online tutorial for McDonalds managers makes clear) the volume of sales per worker does not depend on how busy the store is, except maybe during the graveyard shift, due to a residuum of fixed labor costs.

it would be irrational for a firm to lay off some workers just because, say, a strike or a minimum wage law hiked up their wage. The employer would get the worst of both worlds: a lower profit margin on every unit of output produced (because of the higher wage) and fewer units produced (because of the laid-off workers). Rather, her best option would be to keep producing as much as she can manage to sell while simply accepting the lower profit rate, assuming profits are still being made. Analyzed in this way, there’s no necessary reason why the platitude “when the price goes up, less is bought” ought to apply to human labor.

But the neoclassical economists on the MIT side of the Cambridge debate already knew all that. They were defending a more sophisticated version of marginal productivity theory that was subtler and, in a way, simpler.

It argued as follows: when the wage is hiked up …consumers switch their purchases from labor-intensive to capital-intensive goods, while firms and entrepreneurs building new lines of business choose more capital-intensive, rather than labor-intensive, techniques. … they are exerting demand for labor or capital through their purchases

And this was the argument that the Cambridge University side defeated

it becomes clear that a rise in the wage does not necessarily make labor-intensive goods relatively more costly to produce, as the neoclassicals had assumed. …it all depends on the complex pattern of input-output relations in the economy as a whole — how many units of good A it takes to produce good B, how many of good B to produce good C, etc., for all the millions of goods in the economy.

Once this neoclassical story — where the relative demands for labor and capital are dependent on their relative prices — is “debunked,” to use Paul Samuelson’s contrite term [he admitted that he lost the argument --SFR], the competitive market economy no longer contains any necessary mechanism pushing the various wage rates or the profit rate to any determinate level.

Rather, history and custom, as well as politics, laws and struggle, will determine who gets what. It’s a system of grab what you can.

Or in my words: the distribution of income, and supermanager compensation, is determined not by scarcity, but by rivalry. The prize goes not to those who put resources to best use, but to those who control who gets them.

it’s unsurprising we should find marginal productivity to be the point where Piketty’s sweeping vision of modern inequality would run into trouble with the economics mainstream.

marginal productivity theory sees a rise in the capital-output ratio as an increase in the “supply of capital,” which, in classic supply-and-demand logic, ought to bring about a reduction in its “price” — that is, a fall in r. According to the theory, this should neutralize the effect on the r-g gap.

[Piketty] contended that as growth slows and the capital-output ratio rises, r might decline (as theory predicts) but the magnitude of the decline might still be small enough to permit a net widening in the g gap.

The technical term for the quantitative relationship involved (that is, between the size of a change in the capital-output ratio and the size of the change in r that supposedly results, or vice versa) is the elasticity of substitution: the higher the elasticity, the smaller the “response” of r to a given change in the volume of capital.

Piketty’s estimate of the elasticity of substitution can’t really be compared with those in the literature. … his pertain to all private wealth, while the literature focuses narrowly on production capital. These are very different concepts.

To interject: this is exactly what I’ve been trying to say, folks. Returns on financial wealth (in the form of money/financial assets/dollars) have only the vaguest and most tenuous relationship to returns (in the form of real output) on real capital — even over very long periods. That’ the crucial lesson of the Cambridge Capital Controversy.

Money matters, and money doesn’t only appear due to the creation of real assets. It appears when real assets are indebted (particularly or generally).

Wealth is (financial assets, including deeds, are) claims on real capital — both particular claims on particular assets, and generalized claims on the stock of real assets. The relationship between wealth and capital remains almost entirely untheorized by economists.

Wealth is not an input to production. Capital is. The creation of wealth in the form of financial assets requires no inputs to production, or any real production at all. Capital does.

Even Piketty fails here; he uses “wealth” and “capital” synonymously, thereby walking right into the rhetorical mind-trap that is marginal productivity theory.

Ackerman says it perfectly:

the elasticity of substitution simply cannot be regarded as a meaningful measure of an economy’s technology (or anything else), or as providing any clue to its future.

What’s essential, rather, is Piketty’s empirical demonstration that the rate of return on wealth has been remarkably stable over centuries — and, contra Summers, with no visible tendency to vary in any consistent way against the “supply of capital.”

And that brings us to a lacuna in Piketty’s analysis that Paul Krugman and other reviewers of Capital have rightly pointed to. The skyrocketing of top-end income inequality we’ve actually witnessed so far in the English-speaking world has mainly come in the form of inflated “labor” earnings, rather than pure capital income.

Which brings us back to marginal productivity theory. Manacled to that concept as their “baseline” theory of income distribution, most liberal economists have done no better than Piketty in their efforts to account for the elephantine growth of these managerial incomes. They’ve had to depict that growth as the result of “rents,”

The problem with these arguments is that neither financiers nor public company executives have led the swelling of high-end incomes over the past several decades. Rather, the single largest contributor has been the income growth of managers in closely-held corporations outside the finance sector  — that is, firms with only a few shareholders, where the controlling owners are almost always the managers themselves, usually family members.

the incomes of supermanagers are in fact an inseparable blend of “labor” and “capital” income.

resurgent capitalists in the 1970s and 1980s, emboldened by a weakened working class, drafted managers tightly into their ranks using the tools and personnel of Wall Street, and reshaped the economic landscape.

Capital has used extraordinary compensation schemes to conscript top management into their ultimate project: ensuring that all possible surplus from production goes to them.

Which prompts me to share this perfect encapsulation of our current situation, from an Albert Wenger post that you should also read in full:

Unskilled labor has been pushed to its reservation price, skilled labor is receiving its marginal product, and all the value creation [the surplus from production] is being split between top management and capital.

I’d say that pretty much nails it.

Cross-posted at Angry Bear.