Asymptosis

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 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.

Asymptosis Economics, Politics, Uncategorized

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?

Asymptosis Economics, Health Care, Politics

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.

Asymptosis Economics, Politics

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?

Asymptosis Economics, Politics

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…

Asymptosis Economics, Politics

Since you didn’t do anything, why should we think that you’ll do anything this time?

Here’s the cost of doing nothing:

In case tea-partiers are finding the arithmetic troubling, if we’d adopted the Clinton plan we’d currently be saving close to half a trillion dollars a year.

If we’d adopted Nixon’s plan, we’d be saving a trillion dollars a year right now.

Every year.

You can read about Nixon’s plan, in his own words, here.

But you’d rather cling to some self-aggrandizing, knobby-headed notion of “freedom.”

Sorry, we can’t afford you people any more.

Asymptosis Economics, Politics

While poking around for info on the previous post, I came across this graphic:

Which comes from this especially great WikiPedia page.

Which just re-emphasizes what we’ve seen since WWII, and especially since 1980:

Asymptosis Economics, Politics, Uncategorized

Not surprisingly, somebody went out and asked them. Here are the results:

Source. I think this pretty much speaks for itself, though it’s worth noting the commonly misunderstood fact that foreign aid accounts for less than 1% of Federal spending.

Asymptosis Economics, Politics, Uncategorized

A comment by flipspiceland on a previous post, about Democratic senators and “out of control” spending, got me curious about our spending numbers compared to other large, prosperous countries.

Short story: our governments (fed, state, local) are incredibly frugal compared to the rest of the world. This even with a defense budget that’s larger than every other country’s combined.

Here are the facts on the ground, most recent comparable data I could pull: for 2006. (As you can see, even for that year some countries haven’t reported.)

This is all in national currencies for 2006, no jimmying around with inflation adjustments or exchange rates/purchasing-power parities to convert to U.S. dollars. So the data’s pretty much as straight as you can get it.

Taking just federal government expenditures, we’re even more frugal. (A higher percentage of our government spending is by state and local governments.) Stats.OECD is kind of a pain in the ass because it’s forever expiring your session and losing all your work, so I didn’t pull this myself–found it on another blogger’s site, pulled from CIA data. (CIA, OECD, UN, etc. all ultimately get their data from the same sources—the countries themselves—using standardized metrics.)

Notice the company we’re keeping?

Federal Spending as a Percentage of GDP
13. Sweden    58.1
14. Denmark    58.1
19. Belgium    56.0
20. Norway    55.8
23. Italy    55.3
24. Netherlands    54.7
25. Austria    54.3
26. Finland    54.2
27. Portugal    54.1
34. Greece    50.7
37. UK    50.0
41. Germany    48.8
43. Canada    48.2
47. Spain    47.3
51. New Zealand    46.6
63. Israel    43.6
64. Australia    43.6
69. Ireland    41.5
76. Switzerland    37.8
78. Luxembourg    37.5
103. Japan    30.9
107. South Korea    29.3
137. Taiwan    21.2

143. Chad    19.9
144. US    19.9
145. Cameroon    19.1

Asymptosis Economics, Politics

Damn I’m busy today. I came across yet another great Wikipedia page that I really had to share: National debt by U.S. presidential terms.

I’ll just share a little top-line data. There’s much more over there.

Who are the true conservatives here?

Feel free to snark at this table. It’s just one slice out of millions that are possible, quite possibly cherry-picked. But make sure to also take down all the evidence you’ll find here and in the ensuing links. (There’s really no way to spin the data any other way without spectacular efforts at cherry-picking and statistical contortion.)

Then come back and talk to me.

Asymptosis Economics, Politics, Rhetoric