Archive for January, 2011

Line of the Week

January 22nd, 2011 Comments off

The always fabulous Steve Randy Waldman:

the fabulously successful strategy of governing incompetently while using each failure as evidence that government action cannot help but be corrupt and inept. Heckuva job, Brownie!

via interfluidity » Endogenize ideology.

Congress Passes Socialized Medicine and Mandates Health Insurance -In 1798

January 21st, 2011 6 comments

In July of 1798, Congress passed – and President John Adams signed – “An Act for the Relief of Sick and Disabled Seamen.” The law authorized the creation of a government operated marine hospital service and mandated that privately employed sailors be required to purchase health care insurance.

Congress Passes Socialized Medicine and Mandates Health Insurance -In 1798 – Rick Ungar – The Policy Page – Forbes.

I Was Wrong: There Is a Substitute for Investment (Investment)

January 17th, 2011 Comments off

In a recent post I pointed out that taxing financial investments doesn’t discourage financial investment, because there is no substitute for financial investment. If you have money, you either put it in financial investments or your put it in your mattress and watch if dwindle with inflation.

But I was wrong: the substitute for investment is . . . investment.

Allow me to explain two key terms that people — even economists — regularly misuse or use so vaguely as to be meaningless or misrepresentative (mea culpa): “investment” and “capital.” There are two (main) meanings for each.

Investments (these are flows)

1. Productive investments: Known in the National Income and Product Accounts (NIPAs) — the whole pyramid of data underlying GDP — as “fixed investment,” and sometimes called “investment spending” – purchases of assets that are used to produce goods and services (including places to live — “residential fixed investment”*). These assets include structures, hardware (a.k.a. “equipment”), and software. (This should also include knowledge and skills purchased through education and training, but that isn’t included in “fixed investment” in the NIPAs.) I like to call these “productive investments.”

2. Financial “investments”: or more accurately, “savings.” This vernacular usage is what causes the confusion. It so happens that almost all of those savings are stored in financial instruments (“investments”), cause there’s nowhere else to store them. They sure feel like “investments” to those who make them, but they don’t produce anything we can eat or touch or read or ride (or ask to repair the lathe or program the alarm system).

Capital (these are stores, stocks, holdings, or balances)

1. Fixed capital: a.k.a. “the fixed capital base” or “fixed capital stock.” The amount of productive stuff we have — structures, hardware, and software (and knowledge/skills). Fixed investment adds to this stock (or replaces the stock that’s no longer useful).

2. Financial “capital”: a.k.a “money.”** Again, this vernacular usage causes the confusion. Our “financial capital” is, roughly speaking, the total amount of money we have — most of it stored in financial instruments. Savings adds to this stock; fixed investments (and consumption spending) are drawn from it.

So if you have a pile of money, you have four alternatives:

1. Store it in your mattress (or the basic equivalent: a low- or no-interest FDIC-insured bank account).

2. Store it in financial “investments.”

3. Spend it on/invest it in fixed capital — either business capital that generates/increases production of goods and services, or in residential capital that provides places to live.

4. Spend it on current consumption — not a substitute for either kind of investment, because it doesn’t 1. store your money for the future or 2. deliver income/returns on your money.

Key takeaway: Investing in fixed capital –“investment spending” – reduces savings, hence the stock of financial capital (just as consumption spending does). And vice versa: given a certain amount of income and consumption, more savings and financial capital means less investment spending and fixed capital.

When somebody tells you that cutting taxes on the rich increases “investment” or “builds the capital base,” in my experience there’s a good chance they don’t know — or at least aren’t saying — which “investment” or “capital” they’re talking about.

More anon.

* Note that buying a house is not investment in fixed capital; it’s an asset swap. Just like a purchase or sale of a financial security, it has no (direct) effect on GDP. (Though associated commissions and fees do.) Building or remodeling a house is investment in fixed capital, and contributes to GDP.

** People have been arguing for centuries about what “money” means. I won’t enter that fray. I’ll simply say that compared to fixed investments, financial “investments” are very liquid; the great majority can be turned into money/”cash,” even currency, fairly quickly or immediately. That money can be spent on consumption, or invested in fixed capital. (Or be stored in a mattress.)

Equality, Growth, Lane Kenworthy, and the Earned Income Tax Credit

January 16th, 2011 Comments off

Update 10/26/2011: Lane has a great article on upping the EITC here.

I’ve long been meaning to post about the Earned Income Tax Credit (EITC), which I believe we should expand significantly. Much of my thinking on the subject has its roots in work done by Lane Kenworthy, so it’s not surprising that his latest post (on winner-take-all economies) prompted me to get verbose in the comments.

I’ll simply repeat my comments here, as always curious to know if my gentle readers think it makes any sense.

Lane sed:

A good substitute [for very rapid economic growth] might be moderately strong growth coupled with strong unions (as in the 1950s and 1960s) or low unemployment (as in the late 1990s).

I sed:

Lane, I’m surprised you don’t mention expanding the EITC, which you make such a good case for in the last chapter of Egalitarian Capitalism.

Your suggestion of “moderate growth” seems to accept implicitly that strong unions would preclude fast growth (?). That may well be true.

But I know of no good evidence (only rather hoary theory, i.e. Okun) suggesting that redistribution per se is antithetical to growth — that equity and economic efficiency collide in some inevitable zero-sum tradeoff.

In fact, quite the contrary:

1. In your paragraphs on “Left government” in the Oxford Handbook of Comparative Institutional Analysis you cite multiple studies showing that left governments correlate with faster economic growth. You cite no studies to the contrary.

2. A. In aggregate, the econometric literature (including yours) states pretty resoundingly that in prosperous countries, equality and long-term growth either correlate positively, or have no significant correlation. (My rather amateurish analysis of the Luxembourg Wealth data suggests a quite strong correlation between wealth equality and long-term growth.) B. You’ve shown that that equality is the result of redistribution, not market forces.

3. There is not a single prosperous, modern country that does not engage in massive quantities of redistribution. If that redistribution was a constraint to growth, should we not expect to have seen more “efficient” countries emerge, and surge ahead of the rest? Hasn’t happened.

Now it’s possible that prosperity breeds bleeding hearts, and that explains the ubiquitous redistribution — that if humans were more steely-eyed, we’d all be better off. But the absence of even a single exemplar makes that surmise seem . . . libertopian. (And we all know how planned utopias have turned out over the centuries.)

Here’s the possibility I’d like to suggest, that I have yet to see even considered in the professional economics literature: that a certain level of redistribution is in fact necessary for a modern, technological, high-productivity economy to thrive. The theory would probably have much to do with:

1. Maintaining and increasing aggregate demand — keeping the log rolling, and growing.

2. Increasing the amount of money circulating in the real economy, and overall monetary velocity.

3. Allocation of financial capital into productive pursuits, especially fixed capital. (IOW, money flows being directed to producers by consumers based on their wants and needs, rather than by the omniscience of a supplier elite. Wisdom of the crowds.)

4. The increasing inability in advanced economies of less cognitively blessed individuals to find work which gives them an economic claim on a decent share of our country’s spiraling prosperity, hence an income to contribute to aggregate demand and money velocity.

5. Wider distribution of the opportunity that economic security delivers — providing a safe and solid springboard and platform for tens of millions to move into more productive pursuits.

If this notion holds any water, as you’ve pointed out, the EITC could be the best vehicle for that redistribution. Friedman’s “negative income tax” with a big improvement: incentive to work. (You’ve shown in your work that more employment is key to more prosperity.)

(Should also do a campaign teaching EITC recipients that they can receive their payments on their regular paychecks. Only about 1% do. This would increase “salience,” increasing the incentive effect.)

If the EITC was sufficient to provide a guaranteed income for all who work (and especially if all had guaranteed health care [and to some extent education]), we would have much more freedom to implement more economically efficient labor and trade policies that would otherwise be draconian — at least locally (temporally and geographically).

Your work does much to put in question some key truisms of neoclassical macroeconomics — truisms that may not be truths, but that I nevertheless find lurking in, haunting, and in my opinion sometimes misdirecting your work and your conclusions.

Think of the Earned Income Tax Credit as equivalent to the turbocharger on a car — recirculating hot, volatile waste gases (i.e. financial profits on borrowed money) back into the carburetor.

Canadians Flooding Over the Border for Health Care! (Not)

January 11th, 2011 3 comments

Health is priceless. Given that, and given the widespread meme that Canadians wait months for crucial, life-saving tests and procedures, you’d expect them to flood into the U.S. in large numbers to buy health care services.

Do they? Apparently not. Like really, really not. In fact, an astonishingly small number do.

You guessed it: somebody went out and counted. Facts on the ground and all that.

Relative to the large volume of these procedures provided to Canadians within adjacent provinces, the numbers are almost indetectable.

Here’s just one data slice, for a two-year period:

Canadians Receiving the Service, 1997-98, in:
British Columbia Quebec Buffalo, Detroit, and Seattle %
CT Scan/MRI 80,000 375,000 640 .14%
Eye Procedures 25,000 44,000 270 .39%

Of the relative handful of Canadians that do receive health care here, a huge preponderance is emergency care for Canadians who happen to be here for other reasons.

When the market delivers this kind of valuable information, it’s usually worth listening to.

Read it and reap the benefits:

Phantoms In The Snow: Canadians’ Use Of Health Care Services In The United States — Health Aff.

A nice short summary, but longer than mine, here.

Line of the Week: “A better world is by definition not the world we live in.”

January 9th, 2011 1 comment

Will Wilkinson

This is a gem, IMO. It utterly undercuts the (a?) central premise of most “conservative’s” creed: the presumption that wherever we are now is where we should be — because it’s the best we’ve managed to work out so far, right?

I can only say that I’m extraordinarily happy that the British parliament of 1807, Abraham Lincoln, and Lyndon Johnson didn’t adhere to that creed.

Black Americans, I’m gonna guess, are a hell of a lot more happy about that than I am.

What Conservatives Should Ask Themselves Every Day: What Would Dwight David Eisenhower Do?

January 9th, 2011 2 comments

These posts by Arnold Kling and Will Wilkinson prompt me to write up a post I’ve had in mind for a long time.

I don’t want to write a history paper here, so I’ll just share a few facts, and some quotes from Wikipedia to highlight the differences between Eisenhower’s prudence and responsibility,  and the past thirty years’ radical disciples of Reaganism.

The top marginal tax rate when Eisenhower came to office was 91% on incomes above $400K (about $3 million in today’s dollars). He didn’t change it. The tax rate for the lowest bracket did decline — from 22 to 20%. The effect: you basically couldn’t make more than $3 million a year during Eisenhower’s presidency. Anything above that went to the public good. We’ve seen the disastrous effect that had on GDP…

Eisenhower didn’t feel the need to radically dismember the New Deal that America had agreed on, or kowtow to right-wing wack-jobs:

Instead of adhering to the party’s right-wing orthodoxy, Eisenhower instead looked to moderation and cooperation as a means of governance.[74] This was evidenced in his goal of slowing the growth of New Deal/Fair Deal-era government programs, but not weakening them or rolling them back entirely.[74]

Eisenhower did not end New Deal policies, and in fact enlarged the scope of Social Security, and signed the Federal-Aid Highway Act of 1956.

A la Lincoln, he invested huge government sums in public infrastructure — perhaps the most important single contributor to ensuing decades’ prosperity boom:

His subsequent experience with German autobahns during World War II convinced him of the benefits of an Interstate Highway System. Noticing the improved ability to move logistics throughout the country, he thought an Interstate Highway System in the U.S. would not only be beneficial for military operations, but be the building block for continued economic growth.[48]

He didn’t use his pulpit as he should have to denounce the despicable “you’re a traitor” tactics of McCarthyism (think: Tea Party), but he had the sense to know that they were despicable.

Eisenhower was criticized for failing to defend George Marshall from attacks by Joseph McCarthy, though he privately deplored McCarthy’s tactics and claims.[73]

He coined the term for, and deplored and warned against, the “military-industrial complex” that has dominated the American economy ever since:

“Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.” [78]

The very model of a modern major general, and of a true American conservative?

Sarah: On Target

January 8th, 2011 1 comment

Economic Growth in Postwar America: Looking At GDP

January 7th, 2011 14 comments

I wanted to bring a discussion from comments into a post so we could see all the pretty pictures.

Jazzbumpa: “since roughly 1980 … GDP growth has been in decline”

Chris T: “It’s true annual growth rates have slowed, but so has the decline in GDP during recessions (at least prior to the most recent one).”

Chris shares the following graphs. (I’ve tweaked slightly — titles, axis labels.) They look pretty much the same:

Which prompted me to create the following, because GDP/capita is really the salient measure. (I thought bars better represented the discrete nature of the data points.)

First, annual changes:

It looks generally higher at the left, but Chris is right: look at all the negatives. Between ’84 and ’07, there’s only one negative. That’s partially because inflation was so tame. (Remember, these are inflation-adjusted figures.)

Here it is smoothed using ten-year rolling averages:

This gives the same immediate impression as Chris’s graphs: growth was generally faster in the first half of the post-war era, especially 1963-74.

I’m not a big fan of writing stories based on eyeballed time-series graphs, but here I go:

Jazzbumpa’s not really right about GDP growth having “been in decline” since 1980. It’s just been generally lower (until recently).

There’s that huge trough for roughly ’73-’83. It’s partially because these are all inflation-adjusted numbers, and inflation was high then, devouring nominal growth.

If I could choose when to be born based purely on this graph, I’d choose ’64. Fast growth for the next ten years, and when you hit the job market in ’82 or ’85, things are poised for quite reasonable growth.

Bleg: What Changed in the Late 70s?

January 3rd, 2011 26 comments

Gentle readers will be aware that I look at (and graph) a lot of data sets, slicing and dicing them every which way to try and suss out how the world — or at least the economy — works.

One thing I and many others keep running across is what seems to be a fundamental shift in the late 70s. The economy after that period seems to work differently than it did in the post-war years. You see big moves in the data ’75-’80, and a lot of historic highs and lows since then — often sustained at those high and low levels (though often with more volatility around the average).

At least one profoundly important indicator has been steadily increasing ever since that time — the duration of high unemployment during and expecially after recessions:

Look at the purple, black, brown, and red lines — ’81, ’90, ’01, and ’07, in that order. What’s going on here?

I’ve pointed out several items over the years that had their inflection point in 1981 (notably the increase in the federal debt starting then, following 35 years of decline), and attributed those direction shifts to the rise of Reaganomics. I still believe that, but there are a lot of other changes that seemed to begin in the Carter years. Some of those 1981 inflection points (not including the federal debt runup) could be attributable to whatever changed in the preceding five years.

Again, lots of other people have noticed this, across a lot of different data sets and analyses. It seems like the economy changed fundamentally in the late 70s — the before seems to be structurally different from the after. The economy acts differently now.

Here’s my question: what changed? Here are some possibilities off the top of my head.

The first thing that comes to mind is inflation/stagflation. That was the defining economic reality of those years, not tamed until ’83/’84. Maybe people got scared of that syndrome, and started acting differently as a result. But: for 20 years post-’85, inflation was as tame as it’s ever been. Would people keep reacting to the fear of stagflation even after all that time? (Yes, the righties are still waving that flag as a way to dismiss all ideas vaguely Keynesian, but…)

Then there’s OPEC. Could the conscious and intentional manipulation of world oil prices since its inception have caused what we’ve seen? Maybe, but the truth is OPEC has pretty limited power. Supply and demand still overwhelm their price-fixing ability. They can only tweak prices at the margins.

Technology? Globalization? International or domestic monetary or trade policies?

You can probably tell I’m flailing here. But as far as I can tell I’m not alone. I haven’t found a single convincing explanation for the phenomenon. My only inkling of an explanation for the above graph is this, and I’m hard-pressed to relate it specifically to the late seventies. (The rapid decline in the cost of computers?)