Archive for October, 2008

Economist Readers: Obama Landslide

October 30th, 2008 Comments off

Yeah, The Economist endorsed Obama. They're sane; what else could they do?

But it's their readers' endorsement that really speaks volumes.

It's true that people who read The Economist are a bunch of effete intellectual elitists. You think Sarah Palin has ever cracked its socialist covers? Not likely, toots.

But still. They are probably the best-informed, most knowledgeable, most carefully-considered group of people in the world. So maybe their opinion has some merit, even if they're mostly furriners.

But even in the U.S., Obama's at 81% to McCain's 19.

And The Economist's electoral college (they assign electors to each country by population) gives the worldwide nod to Obama by a small margin. As of now:

Obama: 9,048
McCain: 314

There is one country in the world where McCain is stong (61%): Iraq.

Oh and he does have a smaller lead in four other landmarks of peace and prosperity: Myanmar, Algeria, Sudan, and Congo.

But you really shouldn't pay any attention to this. What do these people know?

Why to Love America

October 30th, 2008 Comments off

Republicans Create Opportunity? Yeah, Right.

October 30th, 2008 Comments off

Republicans constantly proclaim that inequality is the price of prosperity. If things are more unequal, there’s more incentive–and crucially, opportunity–for people to better themselves. Everyone benefits from that.

Except it’s not true.

Let’s think about Joe the Plumber, who made $40K in 2006 but would like to buy the plumbing business he works for–for a quarter of a million dollars. It hardly seems likely (absent a windfall lightning-strike of media attention). But what about his kids? Maybe they’ll be able to climb the ladder and do better than their dad has.

That’s the real measure of opportunity and the American dream. And the American dream is failing:


What are your chances of having the same income as your parents? (Left scale.) They’re way better if you live in Britain, Italy…or the U.S. Want your kids to climb the ladder? Try Denmark, Norway, or Canada.

Norway and Canada are second and third for both median and top-decile income. So there’s plenty of mid-level and top-end opportunity there for aspiring Joe the Plumbers. And bottom-decile folks are significantly better off than in the U.S.

I’ve pointed out before that wealth equality correlates strongly with greater prosperity, especially over the long term. Give tens of millions of Americans a place to stand, and they’ll move the world.

Quarterly-report-driven Republicans will happily point out some cherry-picked, transitory short-term gains from enriching the rich. But which party is building America’s future?

How dare these people call themselves conservatives?

The Tidal Wave is Hitting the Beach

October 28th, 2008 Comments off

Mankiw’s Right: Money’s Not the Incentive

October 27th, 2008 8 comments

Subtitle: Pipe Dreams

Greg Mankiw makes more than a quarter-million dollars a year. We know that, because he's expecting to pay the 2-4% payroll tax surcharge under Obama's tax plan, on any extra dollars he earns.

He's also planning to leave his children more $3.5 million dollars (the current inheritance tax exclusion) when he dies. We know that, because he's expecting them to pay the 55% inheritance tax on any extra dollars he adds to his estate.

But he's a simple guy. He doesn't have fancy tastes, and he's not concerned with leaving his children with a huge windfall.

Nice of him to prove the point: when you've got that much money, and are making that much money, more money isn't the key incentive to work more. There's far more utility in spending time with your loved ones.

If Greg's offered a speaking gig with a $10,000 honorarium, it's not the $10,000 that's gonna get him on the plane on that snowy winter night. It's the benefits to his reputation, the opportunity to rub shoulders with his colleagues, the non-financial incentives that accompany that speaking offer.

Larry Ellison isn't looking to build his business bigger because it's gonna have any perceptible impact on his lifestyle or his children's inheritance. They'll be fine.

But what about Joe the plumber? He made $40,000 in 2006. (But he'd like to buy the plumbing business he works for. The owner wants $250,000.) Do you think Joe's $500 tax savings every year under the Obama plan might give him more incentive to work hard and strive for greater things? It doesn't seem like he'll be buying that business any time soon. But maybe one of his kids will…

Give ten, twenty, forty million more Americans a place to stand, and they'll move the world.

McCain’s Steel Ceiling: Who Loves Ya, Baby?

October 24th, 2008 Comments off

As of today, has seventeen states going for McCain.

Check out how the electoral votes shake out on my friend Mike’s site (dark blue is >10% lead for Obama, lighter blue >5%, and so on; white is EVs from tied states):


There’s an almost flat line of almost impregnable red states. It may not take another generation before people in these states accept the fact that they lost the Civil War, but it may take another decade or two.

What doesn’t come across here: the small number of people represented by the small-state slanted electoral-college red vote. With the exception of Texas, those seventeen states are all quite small, population-wise. Total, 75 million people (one third of them in Texas). 25% of the US population.

In other words, they basically represent the number of wacko holdouts in this country who still believe George Bush is a good president.

Here’s a U.S. map with states scaled by population. It gives a good feeling for how small the Red Core really is (note that contrary to this map, Montana and North Dakota are currently tossups).


All Cashed Up with Nowhere to Go: What Caused the Depression(s), and What to Do About It

October 24th, 2008 9 comments

I’ve been meaning to post about this great twopart article by James Livingston (H/T to Mark Thoma), on the causes of the Great Depression and the current…whatever it is.

Livingston’s explanation for both cases (in my words):

  • There were oceans of money with not enough productive uses available (like, investments in physical plants and wages–things that would increase productivity and production).
  • To get returns, money-holders’ only option was gambling (investments not tied or only loosely tied to production).
  • Naturally, financial companies’ share of GDP and profits skyrocketed.
  • Wages became a smaller part of GDP, and profits a larger part.
  • Income and wealth inequality increased — more money went to, and stayed with, the wealthiest.
  • The wealthy thus had oceans of money with not enough productive uses…
  • At the same time, lower wages threatened to kill the golden domestic goose: consumer spending.
  • In our current case, government deficit spending and loose Fed policy were gasoline on the fire. It ameliorated–temporarily — the weak consumer spending, but simultaneously exacerbated the more fundamental trends.

Livingston’s prescription:

The responsible fiscal policy for the foreseeable future is, then, to raise taxes on the wealthy and to make net contributions to consumer expenditures out of federal deficits if necessary.

His structural analysis is, in my mind, profound. Read his pieces and you’ll see that he both adopts the facts of Friedman/Schwartz’s Great Contraction narrative, and eviscerates the self-contradictory conclusions that Friedman and Schwartz draw from those facts.

And the first half of his prescription is also dead-on, in my opinion. More below.

But the second half of prescription is far less profound. Some might argue that if we give more money to consumers then they, in their infinite collective wisdom, will find productive uses for it. Without lengthy discussion here, I’ll just say that the presumption is somewhat tarnished.

Rather than addressing the fundamentals (productive capacity), Livingston wags the dog: consumer spending. (Because consumer spending constitutes 70% of U.S. GDP–extraordinarily high, BTW, by international standards–it is the big dog. But spending is not production, which is the tail that actually does the wagging.)

If the wealthy can’t find productive places to put their money,

1. There’s obviously a problem with supply-side theory. Lack of capital was decidedly not a constraint on growth in the 20s, or the 00s (or, once government started pouring money in, in the 30s or 40s). With oceans of cash sloshing around, transfers to the wealthy (by whatever means) do not spur real productivity/production growth.

2. Policy should concentrate on moving money into productive uses.

There are two obvious productive places that pretty much everyone agrees are screaming for money right now: infrastructure, and education. The market provides few or no incentives for individuals to invest in these areas. (I’m not talking about individual spending on education, which obviously has high incentives. I’m talking about building schools, lowering student-teacher ratios, providing class materials, etc.)

So Livingston’s right: tax the wealthy–who, pace Grover Norquist, aren’t investing their money productively–and put that money into the things that we know will spur long-term productivity and production growth.

As a side-effect, this will spur consumer spending (not as quickly as cash dropped from helicopters, but still…) and create jobs (yes, sorry, a lot of them will be government jobs), which hopefully will tide us over until the payback kicks in from those long-term investments.

Does this make sense? Talk to me. And, I’d love to hear from anyone with time-series statistics on percentage of capital stock invested in productive assets. I’ve done some digging, but without success so far.

Europe vs. U.S.: Family Time Versus Four-by-Fours and Two-by-Fours

October 23rd, 2008 Comments off

Finally! Someone has come back at me (well he didn’t know he was talking to me) with the key, perhaps-trumping argument on my Europe vs. US longatribes. I gave this argument away in a previous post, hoping someone would pick it up, but have yet to hear it well enunciated elsewhere.

Summary of my arguments: the US and Europe have been growing at the same rate for decades, despite huge disparities in tax burdens (28% versus 40% of GDP), and profound, systematic differences in social support systems. Sort of suggests that their system is not the disaster, growth-wise, that many like to believe it is.

Ian Maitland (I’m assuming it’s this Ian Maitland) comments on a Brad DeLong post:

Brad writes: “Studies of the relative aggregate efficiency levels of the economies of the US and EU come out… inconclusive–not finding that the EU is depressed by 30%.”

How does that square with this (from The Economist, “Old before their time,” 5-11 March 2005, p. 73)?: “In the post-war years to the 1980s, the world’s richest economies were mostly converging towards similar levels of income per person. During the 1990s, however, that convergence came to a halt. Nowadays, income per person in the euro area is around 30% less than in America… And average growth rates in the euro area lagged behind
America’s in the ten years to 2003.”

Brad says that: “Western Europe … has chosen politically to have a lot more leisure time than the United States.”

Isn’t it more accurate to say that Europe has “chosen politically” to take away people’s choices, say, regarding whether or not to continue working after they are 60? In the same article we read: “The OECD has attempted to measure the implicit ‘tax’on working for someone nearing retirement age…. For 55-year-olds in Germany or France, this implicit tax amounts to 50% of the average wage for people in that group. For 60-year-old Dutch people, the loss of benefits is 90% of the wage; Belgians face an effective tax rate of 80%. Faced with such arithmetic, why should older people bother to work?… If the EU does reduce the obstacles to work, many Europeans might still choose to toil less than Americans. But that would be an entirely different matter–a choice made freely, rather than in response to powerful government-supported incentives.”

Okay, point by point:

Economist: “In the post-war years to the 1980s, the world’s richest economies were mostly converging towards similar levels of income per person. During the 1990s, however, that convergence came to a halt.”

Correct. (Though I’d say the catchup ended in 1980. They did hit almost 90% of US GDP in a couple of years in the 90s, but right now they’re about even with ’80.)


There was a big, easily explicable European catchup effect for three decades after the war. They’ve been pretty much stuck, comparatively, ever since.

Economist: “average growth rates in the euro area lagged behind America’s in the ten years to 2003”

As I demonstrated, you can cherry-pick your periods as you wish. Which is what our Economist correspondent did here. While I rarely recommend ignoring The Economist, you really should so in this case.

Economist: “Nowadays, income per person in the euro area is around 30% less than in America.”

The numbers I’ve run suggest that Europe runs more like 25% behind, but that’s just noise. This is the crucial question for all us teat-sucking socialists: Why can’t Europe catch up?

There are many many factors, but it’s really a simple answer, and both Ian and Brad are right: each “capita” works less in Europe than in the U.S. This is both a good and a bad thing.

I like Bernard Wasow’s quote:

Between 1970 and 2000, GDP per person rose by 64% in the United States and by 60% in France. In America, this came about because productivity per worker rose by 38% and hours worked per worker rose by 26%. In France, it came about because productivity rose by 83% while hours worked fell by 23%.

The Europeans prefer free time, while American’s prefer big houses and big cars. Fine.

But the fact is–and both Brad and Ian stipulate to this, at least implicitly–to a great extent the society you live in imposes that choice on you. Sure, Europe has in many cases removed the option of people choosing “whether or not to continue working after they are 60.” But the U.S. has effectively removed the option of working 35-hour weeks and taking six-week vacations. (Milton Friedman’s obsession with coercion is well-placed, but he fails to realize–or at least acknowledge–that coercion goes beyond the physical; any economic system is coercive.)

Europeans have chosen leaders who instituted policies that provide (and to some extent require) what they care about. Ditto in the U.S.

But preferences are changing in this country, and globalization is coercing those changes–especially on those of more modest means. The quarter-acre lot with two or three cars is beyond the reach of most people these days, absent dual incomes and long hours/multiple jobs.

Given that reality, more people are liking the looks of the European system. Yeah, you have to give up the house/castle idea. But what do you get in return? The time to do things that—pretty much everybody agrees–actually provide a joyous life. If I have to be coerced, that’s what I’ll choose.

One last thing that really sticks in my craw: Each society is free to choose what it prefers. But when Europeans have so much time to spend with their families and friends—and when they do in fact use that time for that purpose (think: long, liesurely afternoon lunches at tables filled with loved ones, lounging in pleasant city courtyard cafes as your neighbors stroll by to chat)–how dare American get-back-to-work conservatives crow about their devotion to “family values”?

Study Sez: Rich States Are Full of Swingers

October 22nd, 2008 Comments off

No, I’m not commenting on their sexual mores. I’m talking swing voters.

A new study (PDF) by Joe Stone and Steve Hayes suggests that most or all of the market-crash-fueled movement to Obama in these closing weeks is likely to be in rich states. If you’re thinking battlegrounds/close contests, that means Colorado, Virgina, and Nevada. (Here’s Wikipedia’s list of states by GDP per capita.)

You can get an excerpt and some discussion of the paper from Mark Thoma’s site. I’ve highlighted the strong/significant vote influencers on the regression table and posted it here.

But first, what I know you all really want—the prediction:

As of September 17, when they ran the numbers, they projected Obama with 50.14%–with a margin of error of 1.58%, a statistical dead heat. (They’re not counting electoral votes, just the popular vote. Based on McCain’s many wasted votes–taking 62% in Oklahoma doesn’t help him any–a 50.14% result would almost certainly deliver a strong Obama electoral win.)

But Thoma re-runs their equations for October 22–after the stock-market dive: “if they redid them today the aggregate estimates predict a 4 percentage point win for Obama.” (Which I guess means 52/48, presumably with a similar MOE. Translated into electoral votes, that’s huge.)

Background: Economists have been developing and fine-tuning economics-based presidential win-prediction models for years. Here’s the most basic form of the model, comparing the incumbent party’s win percentage to GDP/capita growth in the first half of each election year.

There’s obviously a strong correlation, but there are far too many outliers (like, most of them) to make a prediction on any individual election.

Haynes and Stone (and their many predecessors, cited in the article) have added a bunch of other variables to improve the model’s predictive power:

  • What party’s in power?
  • How long have they been in power?
  • What’s the Dow done since the start of the election year?
  • What was the GDP growth percentage in the second and third quarters?
  • How has the percent of Americans in uniform changed in the two years before the election?
  • How has defense/security spending (as a percent of the budget) changed in the two years before the election?

By the authors’ calculations, these factors accounted for between 55% and 75% of the incumbent party’s percentage variance over 23 elections.

Far more intesting than the baseline results, though, is their application of the model to five tiers of states, divided by GDP per capita.

Short story, over the course of 23 presidential elections:

  • In poor states, the only strong win predictor is GDP growth. And it’s not a terribly strong correlation. But as Mark Thoma says, “Voters in the lower income states only care about real GDP growth.”
  • In rich states, several of the variables have a statistically significant impact on voting decsions. The  big correlations are (in increasing order of impact) the incumbent’s party, the performance of the Dow, and the two-year change in security/military spending.

Only one of these variables has changed much recently–the Dow–and it’s changed a lot. So you should expect a lot of market-driven movement in the twenty states with the highest per-capita incomes. Again, think Colorado, Virgina, and Nevada.

But what about Pennsylvania? Even though Obama seems to own it at this point (and his lead’s increasing fast), McCain is making a big play for it cause it straddles his only plausible path to victory.

Pennsylvania is 28th on Wikipedia’s rich-states list. According to Stone and Hayes’ analysis, among the factors they looked at, the only ones that stand to move Pennsylvania voters much are the incumbent’s party (that’s not gonna change) and the two-year change in military spending (ditto). IOW, don’t expect much change based on the stock market.

This is all in keeping with the work done by Larry Bartels and Andrew Gelman showing that rich people in poor states are the ones most strongly influenced by “social” issues. In rich states, those issues don’t have nearly as much traction with either rich or poor.

It seems that what does have pull in rich states is–only somewhat surprisingly–the status of people’s stock portfolios.

Oh and of course, I should probably include here the authors’ obligatory cautionary footnote:

Every election includes idiosyncratic determinants unique to that election. For the 2008 election, these would in part include the race and gender of the candidates, Black turnout, new voter registration, and the financial crisis of fall 2008 (beyond its direct impact on the economic regressors in the model). Of course, no model, no matter how elaborate, can fully capture in advance all factors that influence voters the day of the election.

Reagan, Bush, and McCain: Selling America First

October 21st, 2008 1 comment

This 2003 article by Warren Buffet–explaining in his usual pithy manner how we’re frittering away our future well-being by borrowing abroad and selling off our assets–got me looking once again at our country’s long-term financial position in the world.

And once again, I came across one of those profound inflection points at–you guessed it–1980. The dawn of Reaganomics.

Just one paragraph from Buffet’s article, but you should read the whole thing:

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

Here’s what “selling the farm” looks like (Update: added percent of private fixed assets):

owning the us

Reagan took office, and almost instantly drove us off a cliff. The rest of the world has been, literally and figuratively, buying our children’s inheritance—the fertile land that we should be preserving for them.
It would even more interesting to see net foreign ownership as a percentage of US national net worth (how much of us do they own?). But for whatever reason the BEA stopped calculating national net worth in the early 90s. (Australia and Canada, among others, continue to calculate this.)

When Cheney said, “Reagan proved that deficits don’t matter,” it was not an economic statement. (The man’s not stupid, and I’ll give you odds he wasn’t talking about Ricardian Equivalence.) It was a typically craven Republican political statement.

Ever since Reagan, with their “we’ll cut your taxes!” economic “policy,” the Republicans have been borrowing money abroad (in your name, and in your children’s and great-grandchildren’s names) to buy votes here.

To get those votes, they’re willing to turn our children and grandchildren into servants and sharecroppers.

How dare these people call themselves conservatives?

Yeah, absolutely: the Dems have been helping them. They’re no strangers to this kind of vote-buying. Bill “The Great Enabler” Clinton knows which side his skillet-bread is buttered on. You can see in the graph that he managed to pull the nose up a bit, briefly, but still: he was right in there drinking the Kool-Aid. He only choked slightly on Reagan’s seed.

It was that sticky-sweet Kool-Aid that Republicans/conservatives have been pouring down Americans’ throats for thirty years (with–it’s true–little objection from many/most Americans) that was the real culprit.

So here’s the real question: is that Kool-Aid more like the stuff you get from Ken Kesey, or from Jim Jones?

Update 2/1/2009. Despite continuing massive trade deficits, our net investment position stayed pretty flat 2000-2007, largely due to a weakening dollar. (The foreign assets we own got more valuable, and the U.S. assets they own got less so.)

Not any more. Our net investment position plunged by $2 trillion in 2008—15% of GDP. Click on the image to read the article.