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Want Prosperity and Stability? It's About Wages and Salaries

What caused the Great Depression? What caused the current...whatever it is?

According to James Livingston, the roots of both lie in shares of income. When not enough people are getting not enough wages and salaries--and when a large share of income is derived from financial investments, not work--we're in bubble land, and things fall apart.

(My explanation: because income is not widely distributed, aggregate demand cannot support productive industry, hence there are not enough productive investments available, hence financial assets seek out imaginary returns. We know the result.)

Here's what that picture looks like (BEA; data here):

The story this mirror-image picture tells: In 1929, the percent of income received in wages and salaries was at a historic low (see below for 1920s data). There was a strong (and volatile) correction during the Depression and war/post-war years, followed by a long period of stable and historic highs during The Great Prosperity.

Those highs started declining in the seventies, continued down under the sway of Reaganomics, and fell even further under Bush II. By 2008, wage-and-salary share had reached profoundly historic lows.

Did we see the same type of decline pre-1929? Yes—even more so. The BEA time series doesn't extend before 1929, and I haven't found a comparable/contiguous series going father back. But we can get a picture of the 1920s from tax return data. (Large scanned PDFs here [Table 196 p. 203] and here [Table 173 p. 173]). Here's what that picture looks like:

By this measure, in just a few years the wages-and-salaries share of personal income plummeted from the 50/60% range to less than 40%. '25 to '29 represented a truly profound historic low. (Wage-and-salaries' share snapped back after the crash, of course, because financial profits constituted a proportionally much smaller share of income.)

What about this time? It took a long time for those decades of decline to achieve their ill effects. There are many plausible explanations for this. Here are a few.

• The Fed got a lot more competent at managing the economy's volatility.

• There was much wider participation in the housing/asset markets/bubbles--maintaining the illusion was a larger group effort.

• Consumer credit became ever-more widely available, temporarily counteracting the declining/stagnating income share.

• Increasing government redistribution (15% of total income in 2008, up from 3% in 1945 and 9% in 1970) buoyed aggregate demand by giving people money to spend even while wage-and-salary share declined.

But the fact remains: both crashes occurred at a time of historically low ebbs in wage/salaries' share of total income.

Caveat: It must be admitted that total employee compensation (including benefits and employers' social insurance expenditures) has not shown quite as clear a picture as have wages/salaries alone:

Total compensation in 2008 was nowhere near the lows of 1929 (when there was no Social Security and benefits were quite limited). But even with those huge benefit boosts, it had declined to a level not seen since the '40s—well below the level that prevailed during the Great Prosperity.

This is perfectly in keeping with both a common-sense and an empirical behavioral view of economic incentives. The actual dollars people receive in their paychecks (and/or their transfer payments) every week or two provide them with a far more moving (if short-term) gauge and incentive than the uncertain, rarely perused, and long-deferred benefits that are (only implicitly) promised in boxes 4 and 6 of their annual W-2s.

When people are taking home good money from their paychecks, they spend it on goods and services. That demand supports productive enterprises. That provides truly productive investment vehicles for financial assets. And so the log keeps rolling.

Businesses Constrained by Lack of Investment? Oh, Maybe Not.

A while back I pointed out that in 2007, only 9 percent of U.S. privately-held businesses cited a shortage of investment money as a constraint on their growth. In response to a rather maniacal comment on that post, I went looking to see what things are like today.

Answer: about the same. The National Federation of Independent Businesses gives us this up-to-the-minute snapshot. (Update: yes that is a mislabeling--should be February 2009. It's from the March 2009 report and the other tables in that report are properly labeled.)

Just as in the 2007 survey (from another outfit) cited in the previous post, financing and interest rates come in dead last (selected by only 3% of businesses) among small businesspeople's concerns. Their problems, which should be obvious to anyone with eyes and a mind, are on the demand side.

Drill Here Drill Now! Oh....Wait...

It's now clear that the McCain/Palin shout-outs for more domestic drilling were not, in fact, tawdry and childish pitches to get votes from jingoistic know-nothings. They were, in fact, calls for an energy policy that would lead this country into a future of responsibility, prosperity, and well-being.

The free market is speaking...

Seattle's a Happy Place! Outstate Washington, Appalachia: Not So Much

Showing that great minds think alike, my friend Steve also noticed the new national survey of well-being from Gallup. Though he only seems to have read an article about it, and based on that he wonders:

» Would Washington be the “Happiest” State if Seattle Was Elsewhere?.

Research from Gallup puts Washington State near the top of states rated for happiness.

At the same time, Seattle is ranked by Business Week as one of America’s most “miserable” cities. ... one can’t help but wonder how the state would rank if Seattle was not a factor.

Maybe if the residents chose to fund schools and cops instead of monorails, trains, and nutty eco-nanny programs to eliminate plastic bags, the people would be happier.

He could have found his answer quite easily by actually visiting the survey site (a pretty remarkable survey indeed: talking to a thousand people a day, every day, asking people about their well-being).

 

Looks like they're pretty miserable in Portland, too. Must be the mass transit, bike lanes, zoning policies, crap like that.

Especially interesting: it's people in their prime family-raising years who are made especially miserable by all those pinko policies:

Meanwhile the national map...

...can't but remind you of another that we've seen recently:

(No, the well-being survey was not done after the election--mostly before.  It started in January 2008 and the data currently presented is aggregated through December. The survey's slated to continue for 25 years. Methodology here.)

I'm sure that profound well-being in Appalachia is a result of their excellent mass-transit systems, top-notch education, and progressive environmental policies.

Steve's right: the correlations here are obvious.

Finally! The Filibuster Explained

"Why doesn't Harry Reid make them filibuster? We've got a majority in the Senate. Why do we need a 60-vote supermajority? Reid should make Republicans pay the political price for obstructionism: standing up there reading the phone book before C-Span and the world. What's the gig?"

I've probably googled this question half a dozen times over the last years, and have never come up with any answer beyond "Harry Reid's a wimp."

Since he isn't--like really at all--that explanation has always seemed...less that satisfying.

My latest google foray finally turned up the following February 23 post by Ryan Grim at the Huffington Post, drawing on and reprinting a memo on the subject from Harry Reid's office.

Short story, they don't have to talk. That's only in the movies (and on The West Wing). The 'pubs can absent themselves, while one of their senators sits on the Senate floor saying "there's no quorum" every so often.

Now you can ask: would the C-Span visuals of a single 'pub senator obstructing Senate business play well with the public? I just don't know, but I gotta believe that Harry Reid asked himself that question a long time ago...

Here's Grim's piece, with an extract from the Reid office memo:

The Myth Of The Filibuster: Dems Can't Make Republicans Talk All Night.

The byproduct of the cloture rule changes in 1917 and 1974 is you need to invoke cloture to proceed to a bill. Senators don't have to speak to vote against cloture. If you can't get 60, you can't move it to the floor. On the motion to proceed, if a Republican chose to get up they can speak about any topic they want, or they can sit down and begin an endless series of quorum calls.

Home-Work: 25% of GDP

I wrote recently about the fact that non-remunerated work--anything that doesn't involve a money transfer--isn't included in GDP. So painting your mother's house, fixing your car, or cooking dinner isn't reflected in that key measure of our prosperity and well-being--even though that work quite clearly contributes greatly to our prosperity and well-being.

Which got me wondering: how much of that type of work do we do? And what's it worth?

The American Time Use Survey (ATUS), conducted by the U.S. Bureau of Labor Statistics, measures the amount of time people spend doing various activities such as paid work, childcare, volunteering, commuting, and socializing. (PDF) I extracted activities that most of us would call "productive."

2007 average hours per person (over age 15) per day
Housework    0.64
Food preparation and cleanup    0.52
Lawn and garden care    0.21
Household management    0.14
Purchasing goods and services    0.78
Caring for and helping household members    0.53
Caring for and helping nonhousehold members    0.2
Volunteering (organizational and civic activities)    0.16

Total hours per day    3.18
Total hours per year    1160.7

There are approximately 200 million Americans over age 15, meaning that we put in something like 232 billion home-work hours per year.

Value at different wage rates
At $5 an hour    $1.2 trillion
At $10 an hour    $2.3 trillion
At $15 an hour    $3.5 trillion
At $20 an hour    $4.6 trillion

This last--$20 an hour--was the median hourly wage in America for 2007 (not including benefits). Half the people make more, half the people make less.

Okay, the official GDP for 2007 was $13.8 trillion. Add $4.6 trillion and you get a total GDP of $18.5 trillion.

Home-work makes up 25% of that total GDP.

Now you have to figure that Europeans--with their shorter work weeks and long vacations--have a lot more time for home-work than we do. That may go a long way to explaining why the quality of life feels so gosh-darned good over there, even while their official GDP per capita hovers at 75-80% of the U.S.

If you truly believe in family values, those are some numbers worth pondering.

An Open Letter to Robert Barro

Robert J. Barro is Paul M. Warburg Professor of Economics at Harvard University, a senior fellow of the Hoover Institution of Stanford University, and a research associate of the National Bureau of Economic Research. He is the third-ranked economist in the world, according to RePEc.

Dear Professor Barro:

I'm compelled to write after following your writings for many years, in response to your recent article (PDF) in the Wall Street Journal, your interview with Conor Clark on the Atlantic web site, and your published email interchange with Clive Crook on his Atlantic blog.

In 2000 you demonstrated that in OECD and Rich countries, government consumption levels have no significant correlation to long-term growth rates. (PDF)

In their 2003 meta-analysis (PDF), Nijkamp and Poot demonstrated (with multiple references to your works) that in aggregate, dozens of your colleagues who have actually studied this issue support those results--in spades.

In prosperous, developed countries, smaller government does not yield faster growth. As you and your colleagues have demonstrated, that belief is a myth. (The U.S. has been taxing about 28% of GDP for decades--local, state, and federal combined. Europe has been taxing 40%. But growth rates have been the same.)

But you have constantly promulgated that myth--and you continue to do so--in your scholarly and popular writings, and public pronouncements. This is especially concerning because your statements receive widespread attention and credence regarding taxation and spending policies in the U.S.--which is a decidedly rich country.

Facts on the ground:

In your 2000 paper you broke out growth rates for a panel of Rich countries, of OECD countries, and of Poor countries (PDF: table 1.1, page 35). Results:

Correlations: Government consumption versus growth in real GDP per capita
Rich-countries: -.014 (.042)
OECD-countries: .015 (.040)
Poor countries: -.167 (.030)
All countries: -.157 (.022)

For prosperous countries the results are one positive (more government consumption, faster growth), one negative, neither even vaguely significant.

Only the poor-country panel shows significance. So the negative correlation for the overall sample is completely dominated by the poor-country results. (Not surprisingly: The correlation for poor countries is relatively large, and poor countries in the sample--which are weighted equally with rich countries--greatly outnumber the rich countries.)

As far as I can determine, your 2000 findings regarding rich versus poor countries have been completely absent from your other (widely-cited) works in the field.* Your conclusions in those works have been based on your full sample of approximately 100 countries, which is dominated by poor countries.

You consistently state that greater government consumption reduces growth rates, with some iteration of the following graph.

Even in your 2000 paper, you make no mention of your own findings therein, but rather make the following blanket--and importantly misrepresentative--statement (page 12).

Table 1, column 1 indicates that the effect of the government consumption ratio, G/Y [consumption as a percent of GDP --Steve], on growth is significantly negative. The coefficient estimate implies that an increase in G/Y of 10 percentage points would reduce the growth rate on impact by 1.6% per year.

Is that  true for prosperous countries like the U.S.? And is it wise to make recommendations about U.S. policy based on findings dominated by countries like Thailand and Mozambique?

Can you explain why you have ignored your own findings--seemingly swept them under the rug--and consistently made statements contradicted both by those findings and by the aggregate findings of your colleagues who have--like you--actually studied this issue?

Thanks,

Steve

* I've gone back through much of your work, but the key works on this subject are Determinants of Economic Growth (1998), "Recent Developments in Endogenous Growth Theory" (chapter, 2000), Economic Growth in a Cross Section of Countries (2001), and Economic Growth (2003).

Republicans, In Lockstep, Oppose Largest Tax Cut in History

Yeah, that's the one: the one Obama just handed them.

The compromise stimulus plan includes $282 billion in tax cuts over two years.

According to the Wall Street Journal, Bush's first two years of tax cuts amounted to $174 billion. A second batch in 2004 and 2005 cost $231. And those were thought to be bigger than the tax cuts offered by Reagan, Kennedy or others.

Sure, go ahead and correct for inflation. But still.

Exports Ended the Great Depression: Yeah, Right

A commenter tagged arogersb replied to one of my comments on Bruce Bartlett's Forbes article (see my previous post), reiterating a familiar canard:

True, the US recovered after WWII. But the reason of that recovery was not debt, it's that the rest of the world factories were destroyed and had to import from the US.

I'll spare all of us a thousand-word response:

Reagan Supply Sider on The New Deal: "Deficits were too small, not too large."

Forget "centrism." How about "sensible-ism"?

Bruce Bartlett displays it in spades in his new Forbes article. Just as he did--to some extent--in his book Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.

Bartlett also wrote Reaganomics: Supply-Side Economics in Action--which is decidedly admiring of that belief system--so you know where he's coming from.

His article limns an economic history of the Depression, the New Deal, WWII spending, and the ensuing Great Prosperity that's quite similar to mine. (i.e. "net fiscal stimulus '32-'39 was actually quite tepid.")

...John Maynard Keynes and other economists argued that in such circumstances, which economists call a liquidity trap, the federal government had to compensate for the falloff in private spending in the economy by increasing government spending. This was necessary to get the economy moving from a stationary position, at which point money would begin to circulate, Fed policy would again be effective, and prices would start to rise...

...there were those who nevertheless viewed any rise in prices as the first step on the road to German-style hyperinflation. Insanely, they argued that the government had no business compensating for any amount of deflation...

The critics were also totally opposed to deficit spending. As with Republicans today, they said that federal borrowing would simply draw funds out of productive uses in the private sector to be squandered on make-work government jobs, pork barrel projects of dubious value and welfare programs that would sap the dynamism of the American economy. Apparently, it didn't occur to these critics that the existence of vast unemployment, closed factories, abandoned farms and extremely low interest rates meant that much of the private sector's resources were simply idle. Borrowing them by running deficits didn't reduce private output because there were no alternative uses available.

Furthermore, an expansive fiscal policy was essential to recovery because without it monetary policy was impotent...

I've highlighted those passages because Bartlett highlights this point in responding to commenters on his article:

One of the points I have tried to emphasize, but I don't think is yet clear, is the essential connection between monetary and fiscal policy. I don't believe, as many Keynesians do, that fiscal policy is inherently stimulative. In this sense, Barro is right. But he forgets that there are times, like now, when we are in a liquidity trap, when fiscal stimulus is essential to make monetary policy effective. The monetary policy is what provides the real stimulus, but it needs fiscal policy to be operational.

Fiscal policy can make monetary policy work. This viewpoint isn't getting the discussion it deserves--at least not in those clear terms.

Even the most wild-eyed Keynesians will stipulate that monetary policy (Fed funds rate, money supply) has by far the greatest leverage--it sometimes seems magical. When Volcker eased in the early 80s, the economy started surging back within months. I heard Krugman make exactly that point in a lecture last week.

Supply-side monetarists, on the other hand (think: Tyler Cowen), make no concessions. They think fiscal stimulus--no matter how large--has no effect on anything except government debt. Bartlett is to be admired for bucking that blindered, faith-based intransigence.

Inflation in the early 80s was still high. That's why Volcker's move was so powerful, and its effects so immediate. Today, with Fed funds at zero and inflation threatening to go negative, monetary moves are like Superman on kryptonite.

Fiscal stimulus can give the Fed back its mojo. Unfortunately, fiscal policy doesn't have the leverage that monetary policy does. (Whatever reasonable multiplier you choose.) That--sad to say--is why you need lots of it.

"Branding Happens"

My ex business partner Steve has a new post asking why anybody uses glossy branding ads, when direct marketing is so much more cost-effective, and builds brand at the same time.

The weird thing about us was that we cared about conversion (vs “branding”) , and despite dozens of attempts to make ads pay, the ROI on print ads was always abysmal compared to direct mail. Despite our total neglect of “brand management” (we simply focused on getting people to our events, and then making their experience as close to perfection as possible) we developed a fabulous brand. ...

Our mantra was “Branding Happens.” Getting and keeping customers is the way to achieve that.

I used to wonder the same thing (think: Dell), but I remember hearing a big honcho Pepsi ad manager speak at one of our events, and her saying "you don't build a big brand with direct marketing." And for something like Pepsi, she's absolutely right.

We were pushing high-ticket, carefully considered purchases. Same as Dell. Most purchases aren't like that.

I went to Jonah Lehrer's (How We Decide) book-tour lecture last night at Town Hall in Seattle. He mentioned the studies done mimicking the Pepsi challenge. Give a Pepsi lover a Coke and tell them it's a Pepsi, and they love it. And vice versa. The brand association overrides any true direct experience of the product.

The same is true even with cars and other things that you'd think would be rationally considered purchases. Sadly, they aren't. (Even in politics--look how many people vote for Republicans!)

The rational mind parses information and feeds it back to the emotional system, sort of asking "how do I feel about this?" The emotional system responds with feelings. Firebird good! Camaro bad! It's ultimately The Decider. (Where else can "I want" come from?)

Branding ads try to bypass the front-brain parsing, and aim for a straight conduit into the emotional system.

If you're selling sugar water, or perfume (same thing)--where there is no real rational parsing to do--or overpriced watches that do the same thing as a $20 Timex (so you need people to avoid the parsing and analysis), branding is all you got.

And if you're selling something where the number of choices and choice criteria is large, beyond people's ability or willingness to sort through rationally (not doing the up-front work for the emotional system), branding wins.

Think: Sarah Palin.

Sarah, can you give us your thoughts on the battle between Lincoln and Chief Justice Taney over Lincoln's (and eventually Congress's) suspension of habeus corpus during the Civil War?

Women Rule! So Why Do They Tart Themselves Up?

I've always wondered: why do women go in for elaborate clothing, makeup, and all those other things that (along with certain innate characteristics) make them so alluring to us males, while men dress relatively drably? It's not universal, of course, but it's the rule throughout much of the world.

Among pre-agricultural peoples, primates, almost every mammal, and most animals in general, it's almost always males that go in for the elaborate decoration and displays to attract and convince mates.

The evolutionary reasons for males' displays are fairly simple: sperm are cheap and eggs are expensive. So females are more choosy about who gets to inseminate their valuable eggs. And in species where females carry or care for children, their investment is even higher. Now add: female humans--uniquely among primates at least--face an extraordinarily high chance of dying in childbirth.

Women have every reason to be choosy--to pick men who have good genes and/or can be relied on to stick around and take good care of them and their children. And males have every reason to engage in displays and competitions to overcome that choosiness, convincing women to mate with them. And women have reason to encourage that display and competition--so they can choose more effectively.

So why are women the flamboyant displayers (at least regarding physical appearance)?

I have a theory--one that I haven't found articulated despite quite a lot of reading about evolutionary psychology.

But first, the thing that got me thinking about this today:

As Layoffs Surge, Women May Pass Men in Job Force. Peter DaSilva for The New York Times. With the recession on the brink of becoming the longest in the postwar era, a milestone may be at hand: Women are poised to surpass men on the nation’s payrolls, taking the majority for the first time in American history... a full 82 percent of the job losses have befallen men

This is profound. Add the fact that 60% of college students (and graduates) are women, and they're predominating in many graduate and professional programs, and what we're seeing is not just an ameliorization, but an overturning of the social structure that has prevailed for ten thousand years of "civilization." (Taking place over just a century, and primarily over three or four decades.)

Put aside the many related issues. (Women have to work, families need two incomes, etc.) In the competition for success in the modern job market, women are winning. (At least when it comes to getting jobs, still not always getting paid as well.)

So here's my theory: women are innately just plain better at modern society. Now that the discrimination powered by men's direct and indirect physical coercion has been greatly tamed, that superiority is showing itself.

So when women dress up to attract men, they're doing it because there aren't enough good men--men who can thrive in decidedly non-savanna, non-hunter/gatherer conditions--and women have to compete for them.

As the father of two rather spectacular teenage girls (one of whom just got into University of Chicago early admission, despite the damnable gender imbalance in applicants, and despite the most competitive year--largest high-school graduating class ever--before or ensuing), I'm quite fond of this theory. I'd love to hear if it's been discussed elsewhere (undoubtedly in terms far more cogent and knowledgeable than mine).

Tyler Cowen: $10 Trillion in Stimulus Would Have No Effect

I heard him on an NPR show last night, and was pulling my hair out with frustration.

I admit that was partly because of comments by Cato's Chris Edwards, who acts as if Keynesians don't believe in monetary policy, calling them "childish." When in fact it's fundamentalist monetarists (read: supply-siders) who refuse to believe in fiscal policy. At all.

But Tyler: He's still on with his claims that government deficit spending during WWII (to the tune of 70% of GDP) had nothing to do with ending the Great Depression. His main argument is that life didn't get any better during the war--people weren't buying anything. So obviously, all that deficit spending had no effect at all.

People during WWII weren't spending for obvious reasons, of course--mainly that there was nothing to buy. Everything was rationed, even clothing; huge swaths of industry stopped making consumer products for domestic consumption; 50% of output was going to the military, largely overseas. (And talk about Higgsian regime uncertainty!)

Today, spending 70% of GDP would mean $10 trillion in stimulus. Obviously that would have no effect either.

So where did all that money go in WWII? Tyler forgot to mention one little thing:

So...yeah. People didn't spend the stimulus money in the war years. But as soon as all those war distortions went away...they did.

Tyler studiously ignores the massive scale of fiscal stimulus during the war--as if it were immaterial, and the Great Prosperity would have happened without it. Will he also ignore the spectacular, unprecedented (choose your adjective) amount of personal savings, and their subsequent dissolution?

We Need to Spur Business Investment. Yeah, Right.

Comes before the court: Floyd Norris to point out that the heady dividends delivered by corporations 2004-2008 were in many cases not profits, but recycled loans.

They borrowed the money, then paid it out to shareholders. Every penny in profits ($2.4 trillion) went out in dividends ($.9 trillion) and stock buybacks ($1.7 trillion), plus another $.2 trillion--seven percent more than they earned.

What's not to like? Shareholders are happy (just borrow the money and buy 'em off!), stock prices rise, and the execs are in clover--they get those unearned dividends (funneled from oh-so-familiar "creative" loans) on their shares, plus whopping bonuses to reward artificially inflated stock prices, and their troves of dividend- and buyback-inflated shares are worth even more. (Until the loans come due. Dividends are now being slashed everywhere.)

It's like the Republicans borrowing money abroad for the last 28 years, to buy votes here. Great minds think alike.

If investment capital was so crucial to growth, would these companies have been divesting themselves of capital for all those years? If investment capital was so hard to come by, would they have found it so easy to borrow, only to give it away again?

As I pointed out in an earlier post, only 9% of U.S. privately held companies cite a shortage of long-term capital as a constraint on their growth. According to the people who run those companies, long-term capital is the last thing they need.

But here comes the likes of Hal Varian in (surprise) the WSJ (with an approving link from Greg Mankiw) singing that same old song. And the Obama people seem to be listening (or, "caving")--they're talking about giving $150 billion--a third of the tax cuts (14% of the stimulus plan)--to businesses. This is presumably to spur investment that creates jobs.

But businesses obviously don't need more investment capital. (There are oceans of it out there, frantic to find actual productive uses delivering real returns). That's a faith-based, supply-side delusion. What they need is demand--people, companies, and governments who have money and want to buy their products and services.

Absent that demand--or prospect of same--how much do you think businesses are going to invest in expansion?

It's time to put aside childish supply-side voodoo and deal with the facts on the ground.

The Massive Missing Link in GDP: Home-Work

I've spilled a lot of electronic ink over the last few years arguing about what causes GDP growth (especially in developed countries like the U.S.), tacitly accepting that GDP per capita was a reasonably good proxy for prosperity and well-being. And it is--reasonably. It has the advantage of being widely and fairly consistently measured throughout the world, and most measures of well-being do correlate quite strongly with GDP per capita: life expectancy, child mortality, "happiness," material well-being, access to education and health care, absolute poverty levels, etc. So it's not crazy to look at this measure, and try to figure out what government policies increase it.

But there's always been something nagging at me, telling me that GDP has something missing--something big.

That something is home-work. GDP doesn't count any work that that isn't somehow part of the "market."

Suppose you buy some pasta and tomato sauce and cheese, and make lasagna for your family and friends. That doesn't count as "production." If you'd bought the lasagna ready-made at the supermarket, that would count (because people were "employed" making that lasagna). But your work at home doesn't count.

Now multiply that by 100 million households, 365 days a year.

Or suppose you spend your vacation painting your house. Does it count? No. (Except for the paint and materials you buy.) But if you hire a contractor to do it for you, that counts.

There have been many attempts over recent decades to more accurately measure countries' "informal sectors" (partly correlated with the "shadow" and in part illegal economy)--individuals working for themselves and in small groups--attempting to include this notoriously difficult-to-measure but huge sector in GDP estimates. (The IMF estimates that the shadow economy accounts for 12-15% of GDP in OECD countries, and 35-44% in developing economies.)

But even those studies don't attempt to measure what is undoubtedly a massive amount of production that has nothing to do with markets.

There's a nice writeup of this conundrum on page 79 of Norman Frumkin's Tracking America's Economy.

Says Frumkin:

In the 1970s, the Bureau of Economic Analysis began to develop estimates of such items that economists could use to modify the traditional GDP measures, but the project was discontinued for lack of funding.

This all leads me to wonder: when Europe builds a system based on shorter work weeks and long vacations, how much more home-work gets done as a result? If that work were included in GDP estimates, what would it say about economic growth, prosperity, and well-being in those countries? (This not even counting the inherent "good" of leisure time.)

I'm here to say that there are few things that contribute more mightily to a society's happiness and well-being than people cooking meals with and for their friends and families. Home maintenance undoubtedly contributes massively to the general prosperity.

Reading to our children and taking care of our elderly? You decide.

Depression Lessons: How Much Fiscal Stimulus?

There's lots of talk these days on upcoming fiscal stimulus--how much it should be and how it should be delivered. The NYT Economix blog offers recommendations from several economists, assuming a $500-billion package. Here's one that Greg Mankiw likes.

When it comes to the size of the stimulus--and as Krugman argues quite cogently, in this case size is what matters--the Great Depression, and our recovery from same, gives some pretty solid clues.

So first, a brief history. How did we get into the Great Depression, and how did we get out of it?

1. Technology and corporate capitalism pre-'29 delivered a huge productivity/efficiency boom.


2. Absent sufficient redistribution, a smaller percentage of GDP went to wages, and more to profits--there was more money, but it wasn't widespread.


3. This resulted in insufficient consumer demand to support the upward spiral, and excessive speculative investment from all those profits because there weren't enough productive investments available (because there wasn't enough demand). The log stopped rolling and things fell apart.


4. The government/Fed response was initially almost nonexistent. They never even touched the most powerful lever--monetary easing--until '31/'32. (Gotta let that creative destruction happen...)


5. By that point deflation had set in, making monetary easing largely ineffective.


6. Despite widespread notions to the contrary, net fiscal stimulus '32-'39 was actually quite tepid. In '36 Roosevelt even raised taxes and cut spending out of budget concern, and the still-latent depression surged back.


7. Starting in '39, orders from Europe increased demand, offering some relief, but with little or no effect on U.S. domestic consumer demand.


8. During the war years U.S. government (deficit) spending surged spectacularly. The federal debt when from 50% to 120% of GDP. Consumer demand remained low, but for reasons unrelated to monetary or fiscal policy. (50% of output going to the military--and much going overseas--and rationing on everything, right down to clothing.)


9. Personal savings (especially E Bills) did climb rapidly, and production spiked as government spending (read: demand) put unproductive capacity (plants, financial capital, and people) to work.


10. When the war ended--with the wheels of the economy rolling full-speed and wartime distortions removed--people started spending their savings and their wages (think: demand), and we entered the great prosperity.


11. Over the next 35 years that prosperity allowed us to pay down the debt that pulled us out of the Depression, bringing it steadily down, to 35% of GDP by 1980. (Then came Reagan; we're now back to 70%.)

Short story, it was the massive fiscal stimulus of wartime deficit spending that finally broke the Depression's back.

Now we're in the same situation (with the same causes--but with a worse debt position). The Fed has pulled out every monetary stop, and it's still not enough. Fiscal spending it the only shot we have left in the locker.

If we take WWII deficit spending as a model, how much fiscal stimulus should we provide?

If we do half of what we did we World War II--increase our government debt by 35% of GDP--we're talking something like 4 trillion dollars in government deficit spending. Since most proposals include big chunks of productive investment as opposed to mere government consumption (i.e., bombs and bombers), we can probably get by with far less. (Though investment spending takes longer to work.)

If that spending also serves to raise our ongoing government/redistributive spending and (especially) taxing to a responsible level at which a high-productivity economy has the aggregate demand to thrive without meltdowns, the resulting prosperity should allow us to pay off that debt in less than 20 years. (This assumes the kind of more-responsible government we had pre-Reagan.)

I think that puts the current proposals--for stimulus of $500 to $700 billion--in appropriate historical perspective.

Medicare: Government Does It Right

I recently had occasion to go through two years of my 84-year-old mom's medical and insurance statements, to be sure that everything was kosher and that insurers were, in fact, paying all the bills they were supposed to be paying.

You've undoubtedly attempted similar, so you can imagine that it was a daunting task--trying to cross-reference all the providers' bills against the insurance statements.

All I can say is, thank god for Medicare.

The bills and statements from private providers and private insurers were nightmarish--mostly just dollar amounts (often lacking dates of service) attached to cryptic codes--often providers' internal codes unrelated to standard practice codes. If I'd been relying on these private statements alone, it would have taken me at least week to sort through all the statements--searching the web to track down those codes, and spending hours on hold with all the providers and insurers.

Happily, the Medicare statements made it easy. They are clear, well-laid out, and fully informative (in plain English)--exactly the kind of statements I insisted on when I was running a company. I was able to cross-check all the private statements against the Medicare statements to figure out what those private statements were actually referring to, then determine if private insurers had covered their share.

Thanks to the Medicare statements, I got the job done in a few hours.

Then, this fall it was time to choose a Medicare drug plan for my mom. Guess what? Medicare has the best insurance comparison engine, hands-down, anywhere on the web. You enter the prescriptions you currently take or expect to take, and it throws up an easily apprehensible list of insurers, sorted by your total costs per year and including quality ratings for the insurers. You click deeper for details on each, compare them, or jump to their sites for more info.

No private entity is offering anything even approaching this site. Market incentives?

So when somebody tells you that you can't trust governent to do anything right...well, you won't convince them because it's a faith-based belief...but you can take comfort in knowing that they're just plain wrong.

Gates Saying All the Right Things

I first read Robert Gates' book several years ago, and re-read chunks of it last month. He's a seriously sensible guy. (He even managed to come through Reaganville/Iran-Contraland with his integrity mostly intact.) I've been touting him for SecDef for more than a year—ever since he started clamoring for more money and resources at State. (Do Pentagon chiefs ever do that?)

And he's still banging his spoon on the high chair--here, in the current issue of Foreign Affairs:

What is dubbed the war on terror is, in grim reality, a prolonged, worldwide irregular campaign -- a struggle between the forces of violent extremism and those of moderation. Direct military force will continue to play a role in the long-term effort against terrorists and other extremists. But over the long term, the United States cannot kill or capture its way to victory. Where possible, what the military calls kinetic operations should be subordinated to measures aimed at promoting better governance, economic programs that spur development, and efforts to address the grievances among the discontented, from whom the terrorists recruit. It will take the patient accumulation of quiet successes over a long time to discredit and defeat extremist movements and their ideologies.

I really like the bolded line, which is a direct quote from Petraus's congressional testimony.

I wish certain people had realized that six years ago.

As for killing and capturing (still necessary, of course), am I crazy, or do the (increasing) attacks in Mumbai, Kabul, and Islamabad offer Obama/Clinton an amazing opportunity to bring those three countries together with the U.S., putting aside squabbles, to collectively crush the crazies? All four governments are being directly, physically threatened by the same people.

Key question there: can the Pakistani civilian leaders remove the crucial impediment--the crazies in their military and intelligence arms? Can Clinton make the case that they have to, for the sake of their own existence?

Update 12/8: 1. Yes, the Pakistanis are trying. 2. It's nice to see that Robert Kaplan and maybe even Barack Obama are having similar thoughts:

The existence of terrorist outfits like Lashkar-e-Taiba that have links with the Pakistani security apparatus but are outside the control of Pakistan’s own civilian authorities is the very definition of chaos. ... We need a second special negotiator for the Middle East, a skilled diplomat shuttling regularly among New Delhi, Islamabad and Kabul. (There has been some speculation, in fact, that Barack Obama is considering Richard Holbrooke, the former United Nations ambassador, for just such a job.)

Why Prosperity Requires a Welfare State

I've been spending a lot of time lately pondering James Livingston's insights on how modern, high-productivity, post-industrial economies work, as expressed in two of his posts which I link to and encapsulate here.

What finally closed the loop for me was re-reading Ray Kurzweil and others on past trends, and what the future holds: exponential growth in productivity.

Note the logarithmic scale.

I think I can best encapsulate my conclusions by asking a question: What would happen if labor productivity increased a thousandfold? So creating a certain amount of stuff/goods/prosperity currently requires a thousand workers; suddenly, it only requires one.

Those 999 workers suddenly have no "legitimate" claim to any of that stuff, because they don't do anything to "earn" it. Those kind of claims are inscribed in both law and practice, so those 999 workers don't get any of that stuff/goods/prosperity/money. How could they? They're superfluous.*

Put aside for a few paragraphs the ultimately inescapable issues of fairness, equity, and "just deserts."** Can such an economy work?

No. Because those 999 people don't have any money to buy the goods that the one person produces. And there's no way that one person can purchase/consume all the goods produced. So they don't get purchased. So they don't get produced.

The economy--which is essentially a huge logrolling enterprise--stalls and stops.

This is a simplistic thought experiment. In particular, it assumes that the same amount of goods will be produced--ignoring the inevitable efforts of those 999 people to produce more goods, and get paid for them. (As productivity increases so the one guy can produce everything everyone "needs," they will be increasingly unsuccessful in doing so because their labor becomes steadily less valuable.)***

It's simplistic, but it still represents--accurately and increasingly--the state of modern economies since the industrial revolution. The spectacular efficiencies of technology and corporate capitalism make labor (especially low-skilled labor) increasingly valueless. So in the real world a few people make a lot of money and a lot of people make less money. Absent some intentional intervention, it's an inevitable result of rising labor productivity.

Left to its own devices, this system will inevitably grind (or crash) to a halt as more people fall off the log. That one person can't keep it rolling while all the others drown nearby.

So why does the log keep rolling? Because of redistribution in modern, prosperous economies. It maintains the necessary level of "aggregate demand" as productivity increases.

Free markets don't achieve that distribution or maintain that demand (as explained above, they work in the opposite direction), so government has to do it—for the good of all, including the one person standing there all alone on the stationary log.

It's no coincidence that:

1. Every thriving, prosperous, modern country has significant redistribution systems--social support services, infrastructure spending, wage laws, labor protections, and yes, welfare. There are no exceptions. (The relative merits and demerits of those systems require far lengthier discussion.)

2. The two great economic crashes of the past century occurred when social support systems were at a historically low ebb, and inequality (in wealth and income) was at an apogee.

A certain amount of government--and redistribution--is not simply desirable in a high-productivity economy; it's necessary for a modern economy to operate. The U.S.--taxing 28% of GDP compared to Europe's 40%--has been the epicenter of both of the the aforementioned crashes. The only modern economies (of any size) that tax less than the U.S. are Mexico, Japan, and (barely) Korea.

At 28%, the U.S. appears to be teetering at the bottom edge of the range in which a modern economy can prosper and thrive.

Or...it's already tipped off the edge—again.

* A semi-aside: who gets that one job? It looks decidedly like a matter of luck. Any number of the 999 could do the job just as well. Perhaps "merit" is the criterion, but merit is both widespread and difficult to gauge. Even if you use smarts and industry as the measures, let's face it: some people are just lucky enough to be born smart and industrious; others aren't. (And let's not even get started on the lucky-sperm contest for being born wealthy.) Meanwhile, most of those 999 people have no hopes of landing the one job; remember that by definition, 50% of people have an IQ below 100.

** The "fairness" argument has justifiable legs. That one person does all the work, so that person "deserves" all the returns for that labor. Counter: those 999 people are out of work (or receiving low wages while working hard) through no fault of their own; given the huge prosperity that productivity and efficiency provide, don't they "deserve"--just by merit of being alive--to live decent lives? See "luck" in the previous footnote.

*** Take this thinking further, to the world Kurzweil describes--in which computer-driven nanotechnology can take the wood in your house and reconfigure the atoms into latticed nanomaterials sufficient to build several skyscrapers. It can convert a pile of dirt into a thousand Thanksgiving dinners. Who gets "paid" for that? (If this future seems fantastical, imagine living in 1508 or 1808 and looking forward to the way we live today. And remember: that efficiency is increasing far faster today, and the pace of that increase is itself increasing.)

Investing: Government Knows Better

I know: that headline is hate speech. But the fact is that it's sometimes true.

Take education. Here's the kind of reliable payoffs we get from investing there:

And this doesn't even count the long-term aid to business that education spending provides.

Remember: few businesses are seriously constrained by a lack of investment capital (only 9% in the U.S.). Many are seriously constrained by a lack of skilled workers (35%).

Do the math. No private-market investor can expect those kind of returns. If rich people all gave a larger chunk of their (nonproductively-invested) incomes to government to invest wisely, everyone--including them--would be much better off.

Oh, hey: that's called progressive taxation! And surprise surprise, it results in more growth and prosperity. Whodathunkit.

Tyler Cowen Ignores the Elephant

Tyler Cowen's Sunday NYT discussion of The New Deal is getting all sorts of play in the econoblogosphere--pro and con.

What's not getting much discussion (except here) is the elephant that Tyler rather inexplicably fails to even mention: massive government (deficit) spending during the war. (It's not the war, stupid, it's the spending.)

The consensus opinion out there seems to agree that:

• Government response to the crash and depression was in retrospect actually quite tepid pre-war.

• Everyone--starting with Milton Friedman--agrees that monetary policy was way too tight. And once deflation began it was an ineffective tool in any case.

• Fiscal policy, net, was also not terribly proactive. Spending increased, but so did taxes. This especially in '36 and '37 when FDR tried to balance the budget, leading to the resurgence of the still-lurking depression.

It wasn't until the war that government made really big moves (necessarily, fiscal), with just-plain-mind-boggling deficit spending. U.S. government debt went from 50 to 120 percent of GDP.

(Yes, shortages continued/increased during the war, but for reasons unrelated to fiscal or monetary policy--notably the redirection of resources.)

The fiscal effect of war spending broke the Depression's back and got the economy moving, setting us up for the sustainable post-war prosperity boom.

That boom allowed us to pay down the resultant debt-to-GDP ratio over the next thirty-five years, bringing it to 32%.

Then...1980. The elephant landed with all four feet:

Do Wealthy Investors Create Growth and Prosperity? Not So Much

Here's the central tenet of supply-side/trickle-down/voodoo Reaganomics:

If rich people get (and keep) more money, they will invest it and promote economic growth, so everyone will prosper.

That would (perhaps) be true if a shortage of investment were an important constraint on businesses and on economic growth. But according to the people who run those businesses, availability of investment money is the least important constraint.

A company called Grant Thornton runs an annual survey (PDF) of privately held businesses worldwide, asking them among other things what constrains their growth.

In 2007, only 9% of privately-held U.S. businesses (21% worldwide) cited a "shortage of long-term finance" as a constraint on expansion.

Constraints on Growth Reported by Privately-Held Businesses
 

Presumably even fewer cite it as a "major constraint." Both domestically and worldwide, it ranks dead last on the list of business constraints.

(I can attest to this from personal experience. My partner and I had to make some small--low five-figure--personal loans while building a multimillion-dollar business. But we never tapped credit of any kind--though we could have, easily).

Understand: these are privately-held businesses being surveyed--not public corporations (which have far greater access to financing through debt and equity issues, and from massive global pools of private-equity and sovereign-wealth cash). These are the very hotbeds of entrepreneurship that supply-siders constantly tout as the innovative engines of economic growth.

A dearth of financing definitely isn't impeding their growth. Grant Thornton's 2007 study puts regulations and red tape at the top of the list, and it's been there for some years. But in 2008 (for which I can only find global numbers), that changed.

A shortage of skilled workers in now the #1 constraint. (35% of businesses cited it.)

This is completely in keeping with the economic view so ably explicated by James Livingston, which I summarize and link to here. The fact is that wealthy people can't find truly productive investments offering sufficient returns, so they turn instead to investments that don't have anything to do with production or productivity. (Think: MBSes, CDOs, CDSes, etc.)

Since the greatest constraint on growth is currently a shortage of skilled workers, the best path to prosperity seems to be taxing those unproductive dollars and investing them in the thing that every economist (and most people and politicians) agree is prosperity-producing: education.

Making sure that wealthy people have plenty of money is not the way to produce prosperity. That's a self-serving myth—one that needs to be soundly discredited.

Obama Deploys Radical Linguistic Coherence Strategy

I don't usually offer up whole posts from others, but Andy Borowitz pones this one. I can't improve on it.

Obama’s Use of Complete Sentences Stirs Controversy
Stunning Break with Last Eight Years

In the first two weeks since the election, President-elect Barack Obama has broken with a tradition established over the past eight years through his controversial use of complete sentences, political observers say.
 
Millions of Americans who watched Mr. Obama's appearance on CBS's 60 Minutes on Sunday witnessed the president-elect's unorthodox verbal tick, which had Mr. Obama employing grammatically correct sentences virtually every time he opened his mouth.
 
But Mr. Obama's decision to use complete sentences in his public pronouncements carries with it certain risks, since after the last eight years many Americans may find his odd speaking style jarring.
 
According to presidential historian Davis Logsdon of the University of Minnesota, some Americans might find it "alienating" to have a president who speaks English as if it were his first language.
 
"Every time Obama opens his mouth, his subjects and verbs are in agreement," says Mr. Logsdon. "If he keeps it up, he is running the risk of sounding like an elitist." The historian said that if Mr. Obama insists on using complete sentences in his speeches, the public may find itself saying, "Okay, subject, predicate, subject predicate -- we get it, stop showing off."
 
The president-elect's stubborn insistence on using complete sentences has already attracted a rebuke from one of his harshest critics, Gov. Sarah Palin of Alaska. "Talking with complete sentences there and also too talking in a way that ordinary Americans like Joe the Plumber and Tito the Builder can't really do there, I think needing to do that isn't tapping into what Americans are needing also," she said.

Okay, I can't resist:

President-elect Obama's radical linguistic policy hasn't gone unnoticed by current White House occupants. At a meeting of world leaders this week, President Bush sought out a hotel waitperson who seemed willing to shake hands, and commented, "Looking into your eyes, I can perceive your heartstrings and discernate that you know the difference between elocutionariness, that type of big-brow word stuff, and what real American people elected me and other presidents like Ronald Reagan here for."

Hat tip: Kitty (thanks!)

Who Says "Soft Power" Doesn't Matter?

World leaders won't even shake Bush's hand:

"Springboard," Not Safety Net

I wrote an email to economist Alan Blinder at Princeton last week (which he was kind enough to respond to), in response to his NYT piece addressing our current...issues.

“social safety net”...America’s is in tatters...we need both repairs and a new metaphor. Lyndon B. Johnson had it right when he called upon the government to provide a “hand up, not a handout.” The Obama administration should seek to create a new “social trampoline” that not only catches people when they fall, but also propels them back into productive employment. If properly designed, such a social trampoline would both ease the short-run pain of recession and facilitate the long-run adjustment to globalization.

This man was speaking my language, though not quite in my words. I sed:

Just to second your notion in the NYT of renaming the safety net. If I could give our new president one piece of advice, it would be that.

But..."trampoline" sounds decidedly...risky, unpredictable, unsafe.

How about "platform," or "springboard"?

Professor Blinder liked the language.

This may seem like nothing but rhetorical spin, but it's important. "Safety net" gives the impression of catching failures. "Springboard" is about encouraging achievers--giving them a little extra bounce on their way up.

Rhetorical advantages aside (it's a lot easier to sell Americans on opportunity than on rescue, as the Republicans demonstrated for thirty years), it frames the whole discussion as a way to make everyone more prosperous--a non-zero-sum game--and thus engenders policies and programs that pursue that goal.

Yes, social-support programs can give some people the incentive to screw off and game the government. But they can equally give people the stable platform they need to work their way up and into the greater economic system--to succeed.

Again, progressives need to stop playing defense in the prosperity game. It's not equity versus growth; it's equity and growth. The Republicans don't have the pro-growth policies. We do.

Kristol's Conservative Economic Cluelessness

Now that he's finished his series of columns giving sage political advice to John McCain (hey John, how'd that Palin pick work out for you?), Bill Kristol thinks he has some good ideas for a Republican party that is wondering whether it has any apparent reason for  continued existence.

To begin with, Republicans should:

...develop an economic agenda moving forward that seems to incorporate lessons learned from what’s happened...

Emphasis, mine. Reality slip, Kristol's. It pretty much embodies the conservative inability to distinguish between spin and reality.

He does acknowledge reality here:

...Republican ticket lacking any coherent economic message...

Then after an obsequious nod to faux humility ("I don’t pretend to know just what has to be done"), he proceeds to tell Republicans just what has to be done:

...free-marketers need to be less doctrinaire and less simple-mindedly utility-maximizing...

This from the decades-long doctor of doctrinaire. Now he's acknowledging that conservative economics is  simple-minded. (It's nice to know that there's such a thing as progress.)

Serious-minded utility maximizing, by the way--creating prosperity for all--is an obvious goal for everyone; the question is how to achieve it. Decades of postwar empirical econometrics demonstrate that progressives know the answers to that question. Conservatives have simplistic (he got that right) faith-based theories that aren't borne out by the facts on the ground. Which leads to:

...they should depend less on abstract econometric models...

He doesn't seem to understand that econometric models are rooted in data (though the analytic methods applied to this data are, of necessity, abstract). What conservatives have offered are napkin-scribbled economic theories and nostrums. When they use data, it's almost uniformly cherry-picked, short-term statistical slices and dices creating rhetorical heat, not illumination. (This presumably because the long-term, big-picture data shows that their theories deliver less prosperity, not more.) Does Kristol think that "econometric" makes him sound knowledgeable and sophisticated? He should look words up in the dictionary before he uses them.

What else should Republicans do?

...take much more seriously the task of thinking through what are the right rules of the road for both the private and public sectors. They’ll have to figure out what institutional barriers and what monetary, fiscal and legal guardrails are needed for the accountability, transparency and responsibility that allow free markets to work.

Notice his desperate avoidance of the "R" word (regulation). That aside, his advice here is excellent: Republicans should start thinking about creating good government, instead of destroying government.

In a final, frigid dose of reality, Kristol (while meaning something different) concludes his column by explaining the Republican party's gravest problem:

...conservatives didn’t govern.

Problem is, we've already elected somebody who's dedicated to doing that.

Maybe the Republicans can help?

Want Prosperity? Tax the Rich

The right-wing blogosphere has lately been touting a table that the Norquistina Tax Foundation cherry-picked from a recent OECD study, showing that the U.S. has the most progressive income tax system in the OECD--perhaps excepting Ireland.

This may well be true. But I'm not totally sure what they're trying to say—except maybe that the U.S. tax system should be less progressive? This is the exact opposite of their typical equality arguments, though: we're less equal, and we've grown faster (we haven't actually, but they like to think we have), so we should be even more unequal. If that argument holds, shouldn't we have a more progressive tax system?

In any case, it got me wondering: do more progressive tax systems in developed economies correlate with faster or slower growth?

Answer: more progressive = faster growth. The correlation is .13 (using either of the measures in the Tax Foundation table). Not a huge correlation, but it does show that a strongly progressive tax system does not hurt growth; if anything, the contrary is true.

There are no big X-axis outliers here (which tend to pull trend lines and correlation coefficients around inordinately), but it's worth looking at a subset of countries that are largely similar, in hopes of ameliorating the effects of lurking, confounding, or otherwise pesky variables that might be polluting the analysis.

If you exclude very small, eastern European, and non-European countries. (Leaving Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Sweden, Switzerland, United Kingdom, United States), the correlation goes up to .21.

If you also exclude Australia, Canada, and the U.S., leaving only the advanced European countries, the correlation hits .36.

So we can say that at least for developed European countries, the Tax Foundation data shows (by social science standards) a strong correlation between progressive tax systems and increasing prosperity.

Is this what the Tax Foundation was trying to point out?

This is a single statistical slice/snapshot from a huge data set, and many things could paint a different picture: the taxes being analyzed in this particular table by the OECD, the Tax Foundation's calculation methods based on those figures, the periods being analyzed (by the OECD and by me here, for growth), etc. I don't know of any serious regression analyses that seek to control for these variables. I'd especially like to find any surveys or meta-analyses of such studies.

A Land of Magical Thinking: Becoming a Millionaire

I saw mention of this statistic in a blog comment last week, and went looking. Here is the central faith-based delusion regarding The American Dream:

Belief: 45% of Americans think it is somewhat or very likely that they will become wealthy in their lifetimes.*

Fact: in 2005, 5.7% of households were worth a million dollars or more. (Source PDF. See Table 3.)

Understand: A million dollars isn't even close to "wealthy." It represents, say, $40K to $60K a year in income.

So:

Chance of being wealthy: One in twenty. At best. Only 1% of households had more than $5 mil.

Perceived chance of being wealthy: One in two.

This explains Joe the Plumber. He made $40K in 2006, but in 2008 he was big-talking to Barack Obama about how we was gonna buy the business he works for--for a quarter of a million dollars.

This also explains how Joe and his co-delusionists could believe, for thirty years, that we could increase tax revenues by cutting taxes. Or that prayer would have any effect on any of this.

* NYT/CBS poll, March 3-14, 2005, question 24: Looking ahead, how likely is it that you will ever be financially wealthy? Would you say it is very likely [11%], somewhat likely [34%], not very likely [30%] or not at all likely [22%]?

Bring Back the Philosopher Kings

Paul Light's proposal in yesterday's NYT should be receiving enthusiastic support from Fareed Zakaria and Bryan Caplan.

Light's proposal: Congress should create a federal commission to draw up reorg/efficiency plans for the U.S. government. The key rule that legislators need to include: those plans would be submitted to congress for an up-or-down vote, with no amendments allowed. (This is how Congress decided which military bases to shut down.)

To understand why this is A Good Idea, consider the concept of "political slack" that Bryan explores in The Myth of the Rational Voter. In my words: politicians have some amount of slack to ignore their constituents' wishes without being punished at the ballot box. (Many things can affect the amount of slack a politician has.)

They can use that slack in two primary ways:

1) To engage in corruption, malfeasance, cronyism, etc.

2) To implement sensible policies that their constituents aren't sensible enough to support.

Zakariah doesn't use the term "slack," but in The Future of Freedom he makes a very similar argument to Caplan's: democracy (a.k.a. majority rule) often results in outcomes that are decidedly less than sensible--that are in fact often directly contrary to the ideal of constitutional liberalism. (Think: Hitler. Hamas.) And he suggests the very type of commissions-with-up-or-down-votes that Light is proposing. It is a means of giving politicians the right kind of slack: the kind that tends to result in sensible decisions.

Since the tools of malfeasance and corruption are not in the legislator's hands, but rather in those of their assigned commissioners, legislators have less opportunity for special dealing. And they can go along with a commission's sensible-but-unpopular policies with limited backlash, because they can point their fingers at the commission. But--this is a democracy--they still have ultimate yea-or-nay authority, and responsibility to their electors for that choice.

Light points to the Department of Homeland Security as the kind of mess that results when legislatures attempt to actually craft re-orgs themselves. It's like trying to write a novel via amendments and voice votes.

I for one see Light's proposal as a potential way out of the eternal conundrum: do we trust the vote of the people and the wisdom of the masses (or their elected representatives)--despite their frequently demonstrated lack of wisdom? Or do we assign philosopher kings and subvert ourselves to them?

How about: trust the people to select the representatives, who then assign philosopher kings (temporary duty only)? The representatives then vote on whether those philosophers' proposals are so wise after all.

And let the people decide whether their representatives are good judges of the philosophers' wisdom.

"Cheering Germans Will Not Send More Troops to Afghanistan"

The Economist gets this one utterly wrong—explaining, perhaps, why that august newspaper tragically endorsed the war in Iraq (and has yet to acknowledge the tragedy of that endorsement).

They don't understand true power.

True power--its sine qua non--is the ability to get people to do what you want them to do (with the least possible effort on your part).

If people in other countries respect, admire, and want to emulate and support the United States, they will elect people who feel likewise. And those elected officials are far more likely to cooperate with us--to do what we want them to do.

Now it's true that if your moral standing with potential partners--your legitimacy--is low, "soft" power isn't going get you much. That's when you have to unclip the holster. Hardly the easy or inexpensive way to wield power.

And that's the point we came to under BushCo, after witnessing the most precipitous decline in American power since...well, it's actually hard to think of any decline in power that even vaguely compares, in all of American history.

Think Hamas: would it have won the Palestinian election absent Bush and Iraq? You can never know, but it's not crazy to suggest it might not have.

Think Chavez: would he have pulled off the election he did in 2006 (with the Venezualan economy plummetting) absent a visceral anti-Bush groundswell in the country and the region?

Think Turkey: would its leaders be in a stronger position to support U.S. initiatives--or even be pressured to do so--if their electorate hated us less?

With 200,000 Germans in the street celebrating a not-even-elected-yet American president, does it seem likely that that electorate will choose leaders who support that president's policies and positions—and give those leaders the political slack to do so?

Will those leaders be willing and able to support us by sending troops Afghanistan? It's not crazy to suggest that they will.

Extreme Thinking: Dangerous? Or Just Irrelevant?

A recent Bryan Caplan post finally crystallized for me why I find so much libertarian thinking and commentary to be irrelevant:

The philosophically insightful breakdown, rather, is the "statist-libertarian" spectrum.

Here's the best way to sum up my outlook: The endpoints of the political spectrum are not the "far left" Michael Moore and the "far right" Rush Limbaugh, but the totalitarian Josef Stalin and the anarcho-capitalist Murray Rothbard.

There is no real prospect of our society or government going anywhere near either of those extremes. (The same cannot be said for the Moore/Limbaugh endpoints.) So discussions that invoke those extremes as arguments for particular policy positions are decidedly unconvincing. They constitute idle theorizing, unengaged with the messy democratic business of policy-making within the margins of real political possibility.

It's that messy policy-making that actually affects people's lives.

Conservative "Intellectual" "Ascendancy"

Brad DeLong appropriately derides a WSJ piece by Mark Lilla, who bemoans the decline of conservative intellect.

The key Lilla line:

For the past 40 years American conservatism has been politically ascendant, in no small part because it was also intellectually ascendant.

Wrong. It has been ascendant because it promised and delivered lower taxes.

It's a simple strategy: Borrow abroad (or from future generations, same thing), and use the money to buy votes.

Yes, they wrapped that strategy in a bunch of intellectual-sounding glitter-tissue. But the window-dressing isn't what achieved or maintained their ascendancy.

What's With Arkansas (and Tennessee and Oklahoma)?

I was looking again at the maps of which way voters swung from 2004 to 2008, and noticed an odd anomaly: a hard line at Arkansas' northern, southern, and eastern borders (and to a lesser extent at Tennessee and Oklahoma borders).

At Arkansas' eastern border, well, there's a big river there. But elsewhere, wouldn't you expect a more gradual fade?

Aside from vague and hardly-convincing psychological surmises (strong conservatives prefer living in northern Arkansas to southern Missouri?), the only explanations I can imagine for this are election-related. Is there something about registration and/or voting in Arkansas and Tennesee that causes this abrupt statistical shift at the borders?

The "Patriotic Pugnacity" Platform

The most striking anomaly in the recent election, to my eyes, was the strong Red countermovement among Appalachians and Okies:

These areas swung even harder right this year, while almost every other part of the country went left (excepting McCain's home state).

Steve Sailer (he of the quite convincing "affordable family formation" thesis), explains this in a comment to a post by Andrew Gelman (he of the equally convincing Red State, Blue State, Rich State, Poor State):

John McCain did best relative to Bush in 2004 in Scots-Irish states like Tennessee, Arkansas, and Oklahoma. McCain is Scots-Irish himself and is very much in the Andy Jackson Scots-Irish tradition of patriotic pugnacity.

Is that, essentially, the only ammo left in the Republican shot-locker?

It's worth noting that Appalachia also reared its geographic head in the primaries, with a decidedly racial implication. Counties voting >60% for Clinton over Obama (Kentucky and Illinois hadn't voted when this map was made):

Put aside the New York home-state effect and the heavy pro-Clinton hispanic vote in southern Texas (and the huge post-Katrina population move affecting Louisiana), and you're looking at a very similar map.

Update: I see that Sailer discusses this a bit more on his blog.

Yes We Did. Yes We Will.

A government of the people, by the people and for the people has not perished from this Earth.

Making Voters Rational: Mail 'Em a Ballot

I can't believe I haven't posted about Bryan Caplan's The Myth of the Rational Voter, a book that I spend a lot of time thinking about (and frequently disagreeing with). You can get the gist of it over on Amazon; I'll just say that it greatly advances the discussion regarding the (de)merits of democracy. Cf. also Zakaria's The Future of Freedom on the distinction between democracy (a.k.a. majority rule) and constitutional liberalism. (They're not the same thing, and the former can seriously interfere with or even destroy the latter.)  And check out Greg Mankiw's long-ago post pointing out that people who don't vote (or don't vote every item on a ballot) are probably "rationally delegating the decision to their better educated neighbors."

But as a Washington State resident I can unequivocally endorse a method to make all voters more rational: voting by mail.

For more than a decade, you've been able to sign up here to have a ballot and voter pamphlet automatically mailed to you for every election. They simply arrive at your door, every time, a couple of weeks in advance.

Then when you have a free hour you sit at your kitchen table with your ballot (and your spouse/children/friends) and go through the pamphlet, reading the positions, pros, cons, and state auditor reports. You can jump on the web to see what people are saying, call or email friends who might have considered an issue more than you, and generally take the time to make reasoned, rational decisions.

You might still skip some items on the ballot, because you don't feel you have a cogent opinion. I always do. (King County Superior Court judges?? Why are we electing them?)

But the votes that you do make are grounded much more firmly in the front brain, because you have time to actually use the damn thing. (Since I'm spending a large portion of my bodily resources supporting it, I like to take it out for a spin every now and then.)

Finally, it's just a damned pleasant way to vote.

Update: I note that Greg Mankiw has linked to an alternate view by Tim Fedderson, suggesting that the masses are indeed wise (in aggregate). Bryan Caplan's co-blogger Arnold Kling points out that this is a "most un-Bryanesque column." In any case I still think that voting by mail can make voters wiser.

Economist Readers: Obama Landslide

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

Republicans Create Opportunity? Yeah, Right.

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

Mankiw's Right: Money's Not the Incentive

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?

As of today, electoral-vote.com 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

I've been meaning to post about this great two-part 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

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

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

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):

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.

Pro-Growth Republicans III: Yeah, Right.

Following up on previous posts here, here, and here, yet some more debunking of this myth:

Various have shot spitballs at this chart, but add it to all the others in previous posts—showing that over the long haul, Democrats deliver prosperity and Republicans don't—and the notion that Republican policies promote growth is nothing short of lunacy. The idea is just completely contrary to "the facts on the ground."

Fareed Zakaria for President

I just came across Fareed Zakaria's The Future of Freedom: Illiberal Democracy at Home and Abroad at my mother's house, read it, and came away wildly impressed. His basic thesis is that what we want is constitutional liberalism (classic sense of liberalism, as in Milton Friedman's usage, though not necessarily via his prescriptions)—not a priori, always, greater democracy. Democracy--in the fundamental sense of majority rule--gave power to Hitler and Hamas, both inveterate enemies of constitutional liberalism. It's also, fundamentally, what allows for government-by-lobbyist.

As of this moment he's my nominee for Most Pragmatic Realist, regarding both domestic and foreign affairs.

And I'm happy to see one paragraph in his latest Newsweek column that could almost be substituted, wholesale, for the description of this blog, above.

In a world of competitive capitalism, you need not big government or no government but smart government. We are not in a race to the bottom, on wages, regulations, or anything else. But we are competing against other countries to come up with the government policies that most effectively foster growth, innovation, and productivity. It's a time to figure out what works, not what ideological mantras to keep repeating. It's the age of Michael Bloomberg, not Margaret Thatcher.

I'm Patriotic: I Pay Taxes

Don Pedro says it better than anyone else I've heard, with this woulda-coulda-said-it response for Biden:

“Governor Palin, if paying taxes is not considered patriotic in your neighborhood, who is going to pay for the body armor that will protect your son in Iraq? Who is going to pay for the bailout you endorsed? If it isn’t from tax revenues, there are only two ways to pay for those big projects — printing more money or borrowing more money. Do you think borrowing money from China is more patriotic than raising it in taxes from Americans?”

That is not putting America first. That is selling America first.

McCain's Big Stick

Sad. What a missed setup:

Senator McCain, I'm glad you mentioned that line from Teddy Roosevelt. Because that's exactly the point. The reason we can't address the problems in Afghanistan, the reason we can't act in desperate moral situations like Darfur and Congo, is because, quite simply:

The big stick is in use.

And because of all the big loud talk of the last eight years, those countries simply don't trust us when we want to send in troops to help. And our allies aren't willing to join in with us. They've seen what happened in Iraq, and a lot of the people in those countries think we're just trying to grab territory—and oil.

Everyday Americans don't want that territory. But with a Halliburton CEO running our presidency, it's easy to understand why people in Sudan don't think they can trust our government.

We've had eight years of 'talk really loud, swagger, and swing the stick around.' It's time to take Teddy's advice.