Archive for the ‘Politics’ Category

American Exceptionalism Re-Revisited: OECD Taxes/GDP Since 1965

April 26th, 2015 No comments

Darwin Wept: Pyramid Schemes, Collusion, and Price-Fixing, the Modern American Way

April 21st, 2015 No comments

The story hardly bears repeating:

Pricing is the ultimate miracle of Darwinian markets. Competitors who produce goods at lower prices thrive, expand their operations, and produce more. Those who charge higher prices (for equivalent goods) are driven to extinction when sensible purchasers abandon them for their more-efficient competitors. This inexorable mechanism drives innovation, investment, and productivity, and the eternal grinding evolutionary churn of “creative destruction.” Survival of the fittest makes us collectively fitter, and fills our wants and needs at ever-lower prices.

All of that, or course, requires price competition among producers. The ultimate bogeyman, choking that mechanism, is competitors colluding to fix their prices. If they agree not to compete with lower prices — collectively stealing higher profits from their customers — the pricing mechanism doesn’t exist, and its manifest benefits are denied us.

It’s a compelling and convincing story. But: The key word in that second paragraph is “agree.” It’s illegal, of course, for competing firms to explicitly collude to set higher prices. But price collusion occurs constantly at higher, institutional levels, where it is unstated, implicit…and profoundly pernicious.

The Economist highlights this reality in its recent package on family companies. We’re not talking mom-and-pop shops: this is about vast networks of corporations controlled and owned by small groups of families — especially common in Asia (South Korea!), but also in Europe. The small control groups at the top of these pyramids have every incentive to back off on price competition among their subsidiaries, reaping higher profits at the expense of their customers. And they have the wherewithal to do it:

Randall Morck, the academic, finds that in large parts of the world pyramidal business groups allow “mere handfuls of wealthy families” to control entire economies.

A stylized diagram depicts the rather obvious mechanism for this control and collusion:

With all competitors controlled, ultimately, by a handful of actors, price collusion seems inevitable.

Interestingly, The Economist continues:

This problem is particularly marked in developing countries, but is also common in much of the rich world, except in the Anglo-Saxon sphere.

In America, we do things differently. In a recent Slate article,  and  explain our innovative, fiendishly clever, and truly “exceptional” mechanism for pyramid control:

Mutual Funds’ Dark Side: Why airlines and other industries keep prices too high

They cite a paper by José Azar showing that:

United’s top five shareholders—all institutional investors—own 49.5 percent of the firm. Most of United’s largest shareholders also are the largest shareholders of Southwest, Delta, and other airlines. The authors show that airline prices are 3 percent to 11 percent higher than they would be if common ownership did not exist. That is money that goes from the pockets of consumers to the pockets of investors.

We’ve all watched this airline-pricing scenario play out over recent months, with fuel costs plummeting while airfares remain unchanged.


The investment management company BlackRock is the top shareholder of the three largest banks in the United States; BlackRock is also the largest shareholder of Apple and Microsoft. The companies that are the top five shareholders of CVS are also the top five shareholders of Walgreens. (And yes, one of them is BlackRock.) Institutional investors dominate the economy.

If you’re like me, you’re immediately wondering: Really, how does the price-fixing actually happen? The answer isn’t terribly surprising, or far to find (emphasis mine):

How exactly might this work? It may be that managers of institutional investors put pressure on the managers of the companies that they own, demanding that they don’t try to undercut the prices of their competitors. If a mutual fund owns shares of United and Delta, and United and Delta are the only competitors on certain routes, then the mutual fund benefits if United and Delta refrain from price competition. The managers of United and Delta have no reason to resist such demands, as they, too, as shareholders of their own companies, benefit from the higher profits from price-squeezed passengers. Indeed, it is possible that managers of corporations don’t need to be told explicitly to overcharge passengers because they already know that it’s in their bosses’ interest, and hence their own. Institutional investors can also get the outcomes they want by structuring the compensation of managers in subtle ways. For example, they can reward managers based on the stock price of their own firms—rather than benchmarking pay against how well they perform compared with industry rivals—which discourages managers from competing with the rivals.

(This is right out of Chomsky’s Manufacturing Consent: media corporations control news content by hiring people who they know will deliver the content, and message, they want. Those who do so are promoted and rewarded. They don’t need to tell them explicitly what to write.)

In America, you don’t find the explicit, extreme, and obvious family-pyramid control that’s so apparent in some other parts of the world. Control and ownership is more widely distributed across perhaps a hundred or a thousand families at the top. (Before you object: it depends on how you define “family” and “the top.”) How could price collusion happen among this larger group, with the inevitable incentives for some to defect with lower prices and take market share from the others?

Simple: America’s richest families have farmed out their collusion to institutional entities who control markets (and market pricing), with small groups of institutions controlling all the players in each industry.

The Darwinian view that underpins the “free market” belief system reveals a fundamental misunderstanding of a key evolutionary mechanism: groups can thrive and propagate at the expense of other groups, if members of one group are better cooperators. That cooperation can take myriad forms (both beneficial and pernicious to the common weal), and there are myriad evolutionary mechanisms by which that cooperation can arise. However it arises, in the case of price-setting within groups, we call that cooperation “collusion.”

In Posner and Weyl’s telling locution, “Competition among mutual funds cannot substitute for competition among corporations.” Ditto if you replace “mutual funds” with “private equity firms.” And likewise: competition among limited-liability corporations (Can’t pay off that loan? The people walk away scot-free) is based on incentive structures that are utterly orthogonal to those of independent butchers and bakers.

The agents operating those institutions know quite clearly which side their personal bread is buttered on. The families who ultimately own everything, meanwhile, are many stages removed from, largely unconscious of, any particular pricing decisions. But they can be confident that those decisions are being made in their families’ best interests.

Adam Smith, poster-boy for free-market enthusiasts, understood this reality better than most:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

He could not perhaps have conceived, however, how cleverly colluders would construct institutions that would achieve that price collusion, while masking and obscuring it even from their own eyes. He perceived the familiar “principal-agent” problem of joint-stock companies quite clearly:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

But he didn’t perceive these institutions’ potential for price collusion.

America’s founders, on the other hand, displayed and expressed a far deeper distrust of limited-liability, joint-stock companies. Charters for such companies were uncommon and extremely restricted in their scope (building a particular public work, for instance) well into the 19th century. “Any legitimate business purpose” is a very recent innovation.

But there’s another crucial innovation: corporations owning shares in other corporations (the very crux of modern pyramid-control schemes, familial and institutional). This was not even legal under state corporate charters until late in the 1800s. The ill effects of that rule change were not long in coming, and had to be addressed vigorously via the trust-busting and rule changes of the early 1900s. (See: interlocking directorships and The Pujo Committee.)

Proponents of free markets seem unaware that that “peculiar institution” — corporations owning corporations — is in fact very peculiar indeed. It is arguably the most destructive innovation ever to strike at the miraculous wonder of the free market’s pricing mechanism.

Further Reading

Anti-Competitive Effects of Common Ownership. April 15, 2015. José Azar, Martin C. Schmalz, and Isabel Tecu.

Concentrated Corporate Ownership. 2000. Randall K. Morck, ed.

Competitive Effects of Partial Ownership: Financial Interest and Corporate Control. 2000. Daniel P. O’Brien and Steven C. Salop.

Do Publicly Traded Corporations Act in the Public Interest? March 1990. Roger H. Gordon.

Financial transaction costs and industrial performance. April, 1984. Julio J. Rotemberg.


Cross-posted at Angry Bear.

National Debt: Since When is the Fed “The Public”?

April 14th, 2015 12 comments

This issue has been driving me crazy for a while, and I never see it written about.

When responsible people talk about the national debt, they point to Debt Held by the Public: what the federal government owes to non-government entities — households, firms, and foreign entities. (Irresponsible people talk about Gross Public Debt — an utterly arbitrary and much larger measure that includes debt the government owes to itself.)

Debt Held by the Public is the almost-universally-accepted measure of “the national debt.” That would be perfectly reasonable, except that…

Federal Reserve banks are counted as part of “the public.” So government bonds held by this government entity — money that the government owes to itself — are counted as part of the debt government owes to others.

The Fed has bought up trillions of dollars in government bonds since 2008, to the point that Debt Held by the Public has become an almost meaningless measure (click for source):

fredgraph (15)

Here it is as a percent of GDP:

fredgraph (16)

Debt actually held by “the public” equals 57% of GDP — and declining — not 73% of GDP.

I don’t know how economists or pundits think they can have any conversation at all about this subject, analyze it in any useful way, if they ignore this basic reality. Reinhart and Rogoff, are you listening?

Cross-posted at Angry Bear.

Why Liberals Keep Losing

March 4th, 2015 2 comments

James Carville was certainly right: “It’s the economy, stupid.”

And under Democrats (compared to Republicans), the economy kicks ass:

Screen shot 2015-02-23 at 8.41.56 AM

This is GDP growth, but that kick-assness is blatant in any economic measure you look at, from job growth to stock-market returns to household income to government deficits. And it’s true over any lengthy period (say, 30+ years) over the last century. I could post fifty graphics here that tell exactly the same story. (Here’s a favorite: even the rich get richer under Democrats.)

But now ask yourself: how many Americans know that Democrats make them richer? (Lots richer.) One in ten? Maybe? Now ask yourself why liberals keep losing.

The Republicans have successfully branded themselves as “the party of growth,” and Democrats have just let them do it, for decades — even though it’s completely contrary to reality.

Democrats have the strongest possible political argument sitting in their rhetorical holsters, but for whatever reasons, they just won’t draw.

There is one and only one story that Democrats need to be telling, and they need to follow the Republican political playbook: repeat it endlessly, for years on end:

We will make you richer. We’ve been doing it for decades, and we’ll keep doing it.

“Equality” is important (especially because it does make people richer). But really: Americans just change the channel.

“Opportunity” is important. But it’s just a proxy for, a chance of, getting richer.

“Getting the rich” (truly progressive taxes, a more-level playing field, reining in finance) is necessary and important. But Americans get only visceral satisfaction from that message — it doesn’t speak to personal, direct, material benefit that they’re going to experience.

Americans want to hear how Democrats are going to make them more prosperous. Full stop.

And Democrats have a loud-and-clear story on that subject. They just need to 1) tell that story constantly, repetitively, ad nauseum, like the Republicans do, and 2) put aside other stories (like, identity politics) that dilute, confuse, and distract from that story.

Start with that lede — “we make America prosperous” — and a whole litany of talking points emerges. And they’re the very talking points that have driven Republicans’ (otherwise inexplicable) political success over the last thirty years.

But there’s one key advantage for Democrats: In their mouths…the story is true.

Democrats could be stealing Republicans’ best Frank Luntz/Grover Norquist talking points and riding them all the way to the ballot box. Here’s a sampling to start with:

Wisdom of the Crowds. Democrats’ widespread government spending — education, health care, infrastructure, 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 innovative, entrepreneurial ventures that drive 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…Reagan) 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. 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 admittedly mixed blessings of unions and protectionism.

Take the graph from the top of this post and put it on billboards all over America. It’s time for Americans to understand who makes them richer.

Cross-posted at Angry Bear.

How Much Was Your Ballot Worth in 2014?

November 8th, 2014 1 comment

Amateur Socialist at Angry Bear asked me about how much was being spent per vote in 2014, and did the due diligence of finding me a spreadsheet showing how many ballots were cast per state. Ask and ye shall receive.

Based on that data, here’s a rough-and-ready calc of how much was spent on each ballot. Have your way with it…

dollars per ballot

Cross-posted at Angry Bear.

More Bad News for Dems: Total Total Total 2014 Spending Favored Them (Slightly)

November 7th, 2014 Comments off

If you’re like me, you’re often frustrated trying to find total (like, total) campaign spending by Democrats vs. Republicans. Outfits like the Sunlight Foundation do yeoman’s duty tallying spending, but you tend to get articles like this that (for fairly good reasons) don’t give you totals, rather breaking it down into campaign/party-committee spending vs SuperPAcs vs 501-whatever “social welfare organizations.”

What’s the bottom line? (Caveats follow.)

Screen shot 2014-11-07 at 6.46.58 AM

The Dems show a slight advantage (in the Senate and overall), but not much beyond the margins of estimation. Given the difficulties of estimation, the two parties spent about the same amounts this cycle on national elections.

To emphasize: this is an estimate. Three are undoubtedly some errors in the spreadsheet, both mine and others’. (Sunlight had Senate candidates Tim Scott of South Carolina and Bill Cassidy of Louisiana, for instance, tagged as a House candidates.) But fixing those errors would likely have little impact on the big picture:

Spending was roughly equal, probably a slight advantage for Dems.

The trickiest part of this estimate, based on Sunlight’s candidate spreadsheet, was allocating attack-ad spending by independent groups. If outside groups opposing Cory Gardner spent $30 million  in Colorado (tallied in the spreadsheet on Gardner’s line), I posted that as $30 million “spent” by/for his opponent, Mark Udall. And vice versa. My spreadsheet’s here.

Following are the Senate race-by-race spending totals. You may spot what look like anomalies, and you may be right. I obviously haven’t vetted Sunlight’s data. But if these numbers are close to correct, Democrats can’t claim a money avalanche by Republicans as a reason for the 2014 election results.

AK BEGICH, MARK 30,633,986
SULLIVAN, DAN 24,929,865
AR COTTON, THOMAS 33,199,597
PRYOR, MARK L 26,944,292
CO GARDNER, CORY 40,680,025
UDALL, MARK E 51,528,326
WADE, KEVIN L 123,614
PERDUE, DAVID 26,113,966
SCHATZ, BRIAN 5,688,359
IA BRALEY, BRUCE L 36,987,144
ERNST, JONI K 38,678,344
RISCH, JAMES E 977,987
IL DURBIN, DICK J 8,001,304
ROBERTS, PAT 15,937,833
LA LANDRIEU, MARY L 14,742,847
CASSIDY, BILL 7,506,478
MA HERR, BRIAN 857,332
MARKEY, EDWARD J 16,618,341
COLLINS, SUSAN M 4,864,766
MI LAND, TERRI LYNN 19,349,759
PETERS, GARY 28,049,683
MN FRANKEN, AL 20,172,311
COCHRAN, THAD 8,953,107
DAINES, STEVEN 6,313,452
NC HAGAN, KAY R 62,882,952
TILLIS, THOM R 41,752,166
NE DOMINA, DAVID A 1,143,959
NH BROWN, SCOTT 20,055,693
SHAHEEN, JEANNE 26,139,531
NJ BELL, JEFFREY 1,145,250
BOOKER, CORY A 16,980,057
NM UDALL, TOM 5,497,983
WEH, ALLEN 2,735,520
OK INHOFE, JAMES M 3,232,035
WEHBY, MONICA 5,378,129
RI REED, JACK F 2,454,090
HUTTO, BRAD 350,093
BALL, GORDON 1,180,680
TX ALAMEEL, DAVID M 10,217,029
CORNYN, JOHN 11,521,565
WY ENZI, MICHAEL B 2,486,637

None of this even glances, of course, at spending on state-level races. Given the condition of our campaign/electoral system and the amount of work it took to assemble these simple numbers, I tend to wonder whether that information will ever be known.

Cross-posted at Angry Bear.

Are Poor People Consuming More than They Used To? Six Graphs

October 12th, 2014 5 comments

“Poor people today have air conditioners and smart phones!”

You hear that a lot. “You should be looking at poor people’s consumption, not their income. By that measure, they’re doing great.”

The basic point is very true. If poor people today have more and better stuff, can buy more and better stuff each year, maybe we should stop worrying about all those other measures that show stagnation or decline.

Does this measure tell a different story? Curious cat that I am, I decided to go see. I had no idea what I’d find.

The first thing I found: this simple data series isn’t available out there, at least where I could find it. Notably, the people who claim it’s so revealing don’t seem to have assembled it.

Consistent, high-quality expenditure data is available going back to 1984, from the BLS Consumer Expenditure Survey (CES). (Pre–2011 here. 2012 and after here. See “Quintiles of income before taxes.”) But you have to open a table for each year and pull out these numbers, which I did. The spreadsheet’s here. It’s simple, clear, and easy to work with, so please have your way with it. (Note: CES measures “consumer units” — “households” precisely defined for the purpose of measuring consumption. All the CES terms are defined here.)

The household spending measure is in nominal dollars. I converted the values to 2013 “real” dollars using the BEA’s deflator for Personal Consumption Expenditures. Here are the results (mean values; medians would be somewhat lower).

Screen shot 2014-10-11 at 5.11.24 PM

By this measure poor people’s consumption is up 5% since 1984 — not exactly the rocket-ship prosperity growth for the poor that consumptionistas proclaim.

But truth be told, this isn’t a very good measure as it stands — because households have gotten smaller. For the bottom 20% that looks like this:

Screen shot 2014-10-11 at 10.08.20 AM

Declining household size means:

1. Per-person spending would trend up (if income per household is the same, with less people per household).

2. But: you have to adjust because living with more people is cheaper per person because of shared rent, utilities, etc. If you don’t, it looks like the average person in a four-person household consumes vastly less than a person in a one- or two-person household — which clearly isn’t correct.

I corrected for that with the household-size adjustment method used by the Pew Research Center. This standard method is somewhat synthetic (more on that below), but it also clearly yields a more useful and accurately representative measure of poor people’s consumption. Here’s what those results look like:

Screen shot 2014-10-11 at 5.10.15 PM

By this measure, things have gotten more better: poor people’s consumption is up 14% since 1984, compared to 5% using the other measure. But really, that’s still nothing to crow about; real GDP per capita grew 63% in that period — four times as fast.

Screen shot 2014-10-12 at 7.43.01 AM

More comparison: the real price of a share in the S&P 500 has increased 370% over that period. That’s not counting dividends.

To get an apples-to-apples comparison, here’s a look at annualized growth rates for various periods:

Screen shot 2014-10-11 at 5.29.11 PM

Poor people have gained a little bit of ground in absolute terms. But they’ve lagged way behind the rest of the country. Growth in every period except the 1990s Clinton heyday was moribund or negative — notably ’84–90, the last twelve years, and (especially) the last four years of economic “recovery.”

The consumptionistas are absolutely right: this is a really good measure.

And it tells exactly the same story as the other measures.

No child left behind?

- – – – – – – – – – – -

Before I leave you, some proleptic responses to the predictable objections:

But, the Brookings study! Many point to this study (PDF) by the (liberal!) Brookings Institution. The study devises and tracks a measure they call “consumption poverty.” Here’s the money graph:

By this measure, very few people these days are living in “consumption poverty.”

Here’s the thing: this study uses the same data set you saw above. But you’re looking at it through a very synthetic lens: a somewhat-arbitrary “poverty threshold.” What percent of people are below that threshold? Which means you gotta ask: Is that a relative or absolute poverty threshold? How does it change year to year? How’s it calculated? Etc.

To say it another way: This measure is some calculation steps removed from — it’s a second or third or fourth derivative of — the data as measured by the BLS. I’m not saying it’s a bad or un-useful measure. I haven’t gone into the weeds with it. And Brookings tells you exactly how the threshold is calculated. But you have to understand the lens’s multiple assumptions and hold them in your head while you’re peering through the lens.

The graphs above, by contrast, are much closer to “the facts on the ground.” Assuming you’re interested in those.

Worth noting: the people who might prefer the story told by the Brookings poverty-threshold measure are the very same people who are forever complaining about measures that use arbitrary (and relative) poverty thresholds. Just saying.

The inflation adjustment misrepresents poor people’s reality. The “real” consumption spending in the graphs is also filtered through a lens: the BEA’s price index for personal consumption expenditures. What if that index is wrong? It is based on “hedonic” estimates, after all: what’s the value (as opposed to price) of today’s laptop compared to 1990’s? Cars are far more reliable than they used to be; knowing that your car will start every time you turn the key has real value. Air conditioning is more valuable than box fans. And think of all the free digital goods that poor people have access to now — from Google to online banking to… Those have no “pricing,” so they’re undercounted or uncounted in this measure.

This is basically saying, “you should create your own, different Consumer Price Index.” It’s exactly the same argument as the ShadowStats craziness, but in reverse: there’s not more inflation than is shown in the CPI, there’s less — more deflation. There’s a “true” index that’s misrepresented by the rather remarkable and diligent efforts of BEA statisticians.

Scott Sumner is rather the poster-child for this position. He says exactly this:

we should ignore all the official data, and use our eyes.  Travel around the country.  Go into poor people’s houses.  … I think I do have a rough sense of the different sorts of consumption bundles purchased by different classes of people.

You should construct your own CPI index by holding up your thumb and squinting, eyeballing poor people’s consumption bundles. Because…the official CPI is not saying what Scott Sumner would like it to say.

Scott’s been going on about his superior CPI estimates for years. Karl Smith probably gave the best response, a year back:

basically anyone with MS Excel and a rudimentary knowledge of the subject matter in question can create a workable index…. a task that brilliant people have devoted their life to

The thing is, Sumner doesn’t even use a spreadsheet. He does it in his head. (Now that’s brilliant.) We should clearly do likewise, or just adopt his index — if we knew what it was.

Finally, note: the comparisons above — to real GDP and S&P growth — use the BEA’s GDP-deflator and CPI indexes, which are only slightly different from the PCE index used here for consumption. Almost-identical apples to almost-identical apples. Feel free to mess with that in the spreadsheet if you’re so inclined. It won’t get you much of anywhere.

The household-size adjustment is invalid. This is another lens interceding between you and the measured data, on top of the inflation adjustment. No doubt about it. But as with inflation adjustment, you can’t get around it. You can’t ignore shrinking household size any more than you can ignore today’s less-valuable dollars. And you can’t just divide household income by people per household, or people in four-person households look like they have vastly lower consumption than people in one-person households. That just isn’t reality.

One part you might reasonably question: The Pew size-adjustment methodology uses a chosen variable that can be from 0 to 1; they choose 0.5 based on some decent research over the years. I tried values between 0.1 and 0.9. Lower numbers lower and flatten the red line, and show a consistent upward trend from ’84 to ’01 (flat thereafter). But the basic story is unchanged.

- – – – – – – – – – – -

Look: no method is going to give you the perfect gauge of human well-being — the”obvious,” magic-bullet measure that conservatives seem to forever be after in their eternal Search For The Simple. This consumption measure is no exception. But advocates of this measurement approach are absolutely right: it’s much simpler and easier to measure than most other measures, and it’s a very good measure of how poor people are doing.

Bottom line: Poor Americans’ consumption grew, very slowly, over the past three decades. Meanwhile the rest of the country grew four times faster, and a typical stock-market investment grew at least 27 times faster.

Do with that what you will. Adjust your priors as appropriate, if that’s something you do.

Then take a look at some closely related measures that might tell other important parts of the big story:

How much of this picture is about young versus old? The population is aging; do we need to change the story this measure tells based on changing demographics?

Did poor people take on more debt to achieve that higher consumption? How has that affected their lifetime well-being?

 How much of that consumption growth resulted from government spending, and how much from the market doing its job of allocating resources efficiently? (i.e., to those who will value them highly?)

Are poor people working more hours to get that consumption increase? Do they have more or less leisure and family time?

How economically secure are people? What is the typical person’s chance of falling into this bottom-20% consumption group? How has that changed?

I’ll try to address some of those questions in future posts.

Cross-posted at Angry Bear.

Explaining “The most important chart about the American economy you’ll see this year”

October 4th, 2014 1 comment

See update at bottom.

Pavlina Tcherneva’s chart has been getting a lot of play out there:

Vox/Matthew Yglesias labeled it “The most important chart about the American economy you’ll see this year.”

Scott Winship at Fortune came back at it on methodological grounds, with the headline “No, the Rich Are Not Taking All of the Economic Pie (In 8 Charts).” He ends up with what he calls the “money chart,” supporting his headline:

Yglesias responded, and Winship responded to him.

The basic contention at this point: who is actually “explaining” the situation?

Do Scott’s corrections explain the situation better? Do they paint a 1. more accurate, and/or 2. more complete picture? By those two standards, is he more honestly and fully informative? Let’s run through his changes.

1. The household method as opposed to tax-unit method is at least a useful additional measure, and is arguably more accurate and explanatory. It’s also less complete because the data only goes back to ’79. But he completes it with Tcherneva’s (by this standard less-accurate) earlier data. It’s a useful addition to understanding, but with little change in the story it tells.

2. The full-business-cycle approach (as opposed to just showing expansions) is also arguably more accurate hence informative. But it (necessarily?) ignores the post-2007 period because the current business cycle isn’t over yet. By Tcherneva’s measure this period is far and away the most egregious demonstration of the inequality trend we’re examining. Scott could have included recent years, with visual and verbal caveats explaining that the cycle is not complete, so the measure that period is not directly comparable. It has less explanatory power, but that doesn’t mean it has none. Omitting the very period that by Tcherneva’s measure are the “money proof” of the trend (and so omitting explanations of that period) arguably explains less about that trend.

3. Looking at the non-elderly population is arguably more accurate and is at least quite informative. It paints roughly the same picture, though less extreme.

4. Post-tax-and-transfer measures are arguably more accurate and informative, but again with the completeness problem. And he should explain that the pre-’79 picture would look quite different if it displayed post-T&T data; the bottom 90% would have been getting more of the pie, which would make the inequality trend look more pronounced than it does in his graph.

I do wish he’d shown a graph as he suggested, including health/medical benefits in T&T (assigning a value other than $0), despite the methodological difficulties he points to. I have no idea how or how much this would change the picture.

5. Omitting capital gains (because they’re hard to measure) for the final “money chart” — suggesting that it’s the most accurate, complete, informative, and definitive chart — is a massive hit to accuracy and explanation. Cap gains are the very vehicle, the primary means, by which the increasing inequality we’re trying to understand is realized. “The data might not be accurate” begs the question: Is excluding that data more accurate? To use Scott’s own words, “assigning a value of $0 is surely not right.”

So some of Scott’s corrections help to usefully and informatively explain the situation better, or at least more. But to summarize the changes that are less informative or downright misinformative:

• The blatant inaccuracy of ignoring cap gains in #5. It completely misrepresents the situation.

• The omission of recent years in #2 — the very years where the trend is arguably most apparent and egregious. Hiding the elephant under the rug?

• The blithely dismissive headline of Scott’s first post.

With these combined, I hope Scott can understand why many see his post as an effort to pooh-pooh and obfuscate the whole subject — the very antithesis of “explaining.”

Part of that hand-waving, obfuscation, and general chaff-dispersal is the proleptic but of course you’re right” rhetorical ploy, right up front in Scott’s second paragraph:

Let’s stipulate that income inequality is at staggering levels in the U.S., and that income concentration at the top has probably risen (probably)

One really must ask: if income inequality is at “staggering” levels, how did it get there…if it hasn’t risen?

How do you square that staggering stipulated reality with Scott’s headline assertion: that “the Rich Are Not Taking All of the Economic Pie.”

I can’t see how to draw any other conclusion from this direct self-contradiction: he’s talking out of both sides of his mouth. I’ll leave it to my gentle readers to decide why.

Takeaway: obfuscation is the opposite of explanation.

Update: Scott has taken issue with my only-barely-implicit imputation of his motives. He’s right on that. I both regret that and apologize for it. I still think the import of his post (especially the “money chart” and title) — that inequality’s not that bad and not that important — contradicts his “staggering” stipulation, and is rhetorically pernicious. But that’s not the same as bad faith. I withdraw and apologize for any suggestion of the latter.

Cross-posted at Angry Bear.

The Pernicious Myth of “Patient Savers and Lenders”

October 1st, 2014 15 comments

Banks are obviously different from households. But I think explaining two key differences goes far towards explaining why “endogenous money” theory — often pooh poohed as either confused or obvious — is important to economic thinking.

The first is a dweeby accounting difference. The other, which arises from that, is very, very real.

1. When the banks lend to households, the banks expand their collective balance  sheet. New assets (loans due) and new liabilities (deposits payable).

When households “lend” (deposit their currency in a bank, buy bonds), they do not expand their balance sheets. They just shift the composition of their asset portfolios (currency traded for deposits, deposits traded for bonds).

(Of course if households were lending directly to other households, that would expand household balance sheets. But they don’t, hardly at all.)

Unlike banks, households only expand their balance sheets by borrowing. New liabilities (loans payable) and new assets: houses residable, cars drivable, food eatable, education usable, health livable. The stuff of life.

This points to the other key difference:

2. Households consume their assets. They have to, in order to live. The very necessary business of living constantly pushes their balance sheets towards imbalance — topped up, for most households, only through labor.

Not so banks. They don’t consume their assets. They don’t have to, in fact can’t. Financial assets (claims against real assets) can’t be consumed.

Banks’ assets are never diminished through consumption, or through use, decay, illness, obsolescence, or death. Excepting borrowers’ payoff or default, their assets are eternal and immortal (as are the banks, for all intents and purposes).

Which exposes the whole notion of “patient lenders” and “impatient borrowers” as the wholesale claptrap that it is. When the banks expand their balance sheets by lending, they are not displaying “patience.” They are not “saving” in any sense of the word, and they are certainly not “patiently foregoing current consumption.” When a household displays “impatience,” it is the inevitable and inexorable impatience of life, passing.

Bankers face very little or no personal risk from expanding their balance sheets; it’s just how they make money. Households, quite otherwise.

Do with this reality what you will, but don’t tell me that the “patient savers and lenders” construct describes any real world that any of us lives in, or the incentives of the lenders in that world.

Cross-posted at Angry Bear.


Liberal Economists: Don’t Bring a Knife to a Gunfight

September 29th, 2014 Comments off

Jared Bernstein has offered a muscular and cogent response to my recent take-down of his CAP paper on inequality and growth. (I called it “week-kneed.”)

I’d like to respond to his many excellent points in just two ways.

1. My critique is primarily of his rhetoric, not his reasoning. Progressives, IMO, should be shouting the manifest reality from the rooftops: progressive administrations in the U. S., over many decades and looked at every which way from Sunday, have delivered resoundingly superior economic performance by pretty much every economic measure. (Occam’s explanation: better economic policies.) By contrast, the skyrocketing wealth and income concentrations delivered by the Reagan Revolution have been accompanied by stagnation, instability, and — by many important measures — decline.

Is there incontrovertible evidence that the wealth and income concentration caused that? No. But: is there incontrovertible evidence that cutting taxes and shrinking government creates growth and prosperity? Quite the contrary. Does this prevent conservative economists from endlessly laying claim to such “manifest’ benefits? Hell no.

Liberal economists like Jared tend to be — and understandably like to see themselves as — reasonable, curious people. They like to look at the evidence and suss out what they can say definitively, then speak carefully when going beyond that. That’s understandable. But it’s also crippling to the progressive agenda. Economics and the constructs on which it is built are inescapably normative — centuries of faux-positivist theorizing notwithstanding. Conservatives pretend otherwise while unabashedly overstating their supposedly positivist case, to further their normative goals. Liberals — admirably, but unfortunately for the cause — do not respond in kind. Again: I think it’s time for liberal economists to start taking their own side in this inevitably normative argument.

2. I didn’t offer an alternative to Jared’s statistical construct because I don’t have the statistical chops. I’m an amateur. I dismissed his construct without offering an alternative — very fair point. But I did suggest the multiple-lag-based statistical methodology (Dube’s or similar) that I think professional economists should be employing. (And I showed a little amateurish example of it that I did manage to cobble together.) It requires some serious statistical skills that Jared may not have handy in his holster, but that he and his circle could easily lay hands on within his economics milieu.

Now maybe the newly launched Washington Center for Equality and Growth is currently funding exactly this kind of sophisticated analysis of the MPC/Velocity of Wealth hypothesis (a.k.a. “underconsumption”), and I just haven’t heard about it. But I am quite sure that liberal economists have not pursued that promising hypothesis with even a scintilla of the spectacular energy that conservatives have devoted to trickle-down, inequality-drives-growth arguments.

Should liberal economists be cherry-picking economic measures and analytic methods, and distorting the import of their findings, the way conservatives do? No. Should they at least be seeking out promising data and methodologies to explore (and support) the MPC argument? With only a hint of trepidation, I say yes. Don’t bring a knife to a gunfight.

The judicious thoughtfulness that Jared displays does have rhetorical value. It gives credibility to the progressive movement that he represents. Tyler Cowen is a great example on the other side. His curious thoughtfulness on so many subjects is a remarkably effective camouflage for the Mercatus Center that he heads, even while Mercatus is broadcasting blizzards of tweets about Fox-News hobby-horses like the Export Import Bank — relatively unimportant but base-rabidizing topics that Tyler (sensibly) has little or no time for.

Liberals have the judiciousness, but not the fire-eating that the judiciousness supports.

If you want to look “reasonable” in a gunfight, bring a gun.

As usual, Steve Randy Waldman has said this all far better — and more judiciously — than I.

Cross-posted at Angry Bear.