Relevant and even prescient commentary on news, politics and the economy.

Banishing Racism From Racism

In the last few months I have gotten accused of racism a few times at this blog. I don’t think I am misrepresenting my accusers by stating that their claim is based primarily because of my views on a) immigration and b) the differences between the economic performance of different countries. The two issues actually collapse into one. I have stated repeatedly that I believe that culture is a key factor affecting the difference in economic outcomes (and many social outcomes) between countries. Furthermore, I have stated that people carry culture with them when they move, so a wise immigration policy would select immigrants whose culture is both compatible and likely to generate positive economic results and limited friction.

I claim no credit for these ideas, mind you. Outside of some quarters, the idea that culture is a driver economic growth is widespread, long standing, well established and supported by data. I find it stunning that anyone would question the importance of culture in driving growth and the assimilation of immigrants.

But it is important to always be willing to question one’s beliefs, so I am going to do that here and now. So… how would we show that culture is not a determinant in how well a country does? I can think of a few possible tests but I want to avoid data at this time and just talk it through.

If we do that, we could start by defining “countries that do well.” In general, these would be countries that are stable, pleasant to live in, and relatively wealthy. Over the past few decades, if someone were to make a list of such countries, it would probably look more or like this (in no particular order): the US, Canada, Northwest Europe, Switzerland, Scandinavia, Australia, New Zealand, Japan, South Korea, Singapore and, until China began applying a heavier thumb, Hong Kong. Those also happen to be the countries that would attract the most foreigners interested in being citizens, so this quick and dirty list should pass a basic smell test. (If some of these nations don’t have much of an immigrant population and don’t rank on high on the destination of potential immigrants, it is because they are very selective about the who they let in as opposed to being shunned by would be immigrants.)

So what do these places have in common? It isn’t natural resources. Just ask the Japanese. (Plus, in countries outside of the list above, being blessed by nature somehow correlates with suffering from the “Resource Curse.”) It isn’t Democracy as we know it. That’s a relatively new thing for South Korea, Hong Kong was ruled by foreigners for most of the last century, and then, of course, there’s Singapore. It isn’t coming into the post-WW2 period wealthy; quite a few countries on the list were in miserable shape in 1945. It isn’t a matter of exploiting other countries (which Americans of a certain bent are always fond of claiming is the US’ secret) – South Koreans will proudly tell you that the country has never invaded anyone in well over 2,000 years. Switzerland, too, is proudly neutral. The Scandinavians have also been pretty pacifist for well over a century as well. Small government? As much as libertarians like to claim Singapore for their own, ignoring the massive government participation in the economy (think Temasek, Singapore Airlines, Mediacorp, Singtel, Singapore Power, etc.). Nor did Japan, Inc. qualify. Something about about geography and environmental factors that these countries have in common? Nope and nope.

To be blunt, there doesn’t seem to be a factor or group of factors that can be applied to these countries but not to countries that are “developing.” I also hesitate to go with supernatural explanations, particularly since, as I learned about four decads ago (long before the stupid movie was made), Deus é Brasileiro. Besides, there is no such thing as empirical theology. For completeness, I should also say the Guns, Germs and Steel explanation got a few things right about the past. However, unless I missed something, Papua New Guinea is not is not putting out the performance you’d expect from the world’s smartest people in the Internet Age, which should go some way toward invalidating Diamond’s hypothesis.

On the other hand, I can describe a few cultural factors that distinguish these countries from others. For instance, these countries have (or had) reputations of being the home of people who were, on average, diligent, frugal, studious, and punctual among other traits. I presume those traits are largely learned, I might add.

And just like that, I slipped back into my sinning ways. So let us assume that like Winston Smith, I really would prefer to believe something that presently I don’t. Perhaps my reasons are not as noble as Smith’s. Maybe I am only concerned because I know that cultures change, and I wonder about the direction in which ours is currently headed. But regardless of my motives, how do I convince myself?

Tell me, please, what are the factors that explain economic and social performance so well that we can dispense with culture entirely as an explanation?

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Nineteen Ninety-Six: The Robot/Productivity Paradox

For nearly a half a century, from 1947 to 1996, real GDP and real Net Worth of Households and Non-profit Organizations (in 2009 dollars) both increased at a compound annual rate of a bit over 3.5%. GDP growth, in fact, was just a smidgen faster — 0.016% — than  growth of Net Household Worth.

From 1996 to 2015, GDP grew at a compound annual rate of 2.3% while Net Worth increased at the rate of 3.6%.

Responding to an editorial in the New York TimesJared Bernstein reprised a theme that Dean Baker has been stressing for a while — that productivity and investment measures don’t support the “robots are stealing jobs” story. I agree with Jared and Dean that it is policy, not robots that are stealing the jobs. But I am skeptical about using productivity numbers as evidence against the role of labor-saving technology in displacing people from employment.

The reason for my skepticism is that labor productivity is a ratio between two very broad aggregates — GDP and hours worked — that lump together a myriad of disparate economic factors. Here is the argument I made to Dean back in December. He was not persuaded:

The difficulty I have with the evidence you [Dean] use for your argument has to do with the changing composition of the aggregate measures that make up the productivity calculation and the possibility that confounding variables in each of those aggregates may be “compounding the confounding” when used for year-to-year comparison.

As Block and Burns pointed out, the National Research Project that developed the original productivity estimates argued that “no such thing exists in reality” as the productivity of a group of diverse products. Instead they presented two calculations of productivity, using different weighting, to show that the “measurement” depended in part on the weighting of the variables.

The shift from physical output to GDP measures obscured the fact that there is “no such thing” as the productivity of a diverse collection of products. Monetary value converts those diverse products into so much “leets” — to use Joan Robinson’s sarcastic term. Obviously the mix of goods and services that make up the GDP differs from year to year. The GDP deflator is intended to adjust for price changes and quality improvements but doesn’t deal with distributional changes and product substitution.

The government services component of national income has been a particular issue, the critique of which goes back to Kuznets’s 1947 criticism of the Commerce Department’s GNP and Kaldor’s statistical appendix to Wm. Beveridge’s Full Employment in a Free Society. Kuznets argued that much of government services should be treated as intermediate goods rather than final consumption goods. Kaldor considered the inflationary affects of government deficit spending, arguing that some of that “inflation” simply reflected the increased share of collective consumption. Warsh and Minard offered a critique of “inflation” in the 1970s that could easily have referenced Kuznets’sand Kaldor’s arguments. Their idea was basically that as government expenditure increases as a percentage of GDP, much of the taxation to pay for it is passed on to the consumer in the form of higher prices. It is an argument about the incidence of taxation.

Finally, there is the question of the “productivity” of hours of work themselves. Presumably there is an optimal length (or innumerable optimal lengths) of the working day, workweek or year and variation above or below that optimum will result in lower output per hour. Aggregate hours of work and average annual or weekly hours do not reflect changes in the dispersion of hours of work that may in turn be affecting the productivity of hours. Computationally, this injects a circular reference into the measurement of productivity. If you tried to do this on an Excel spreadsheet you would get an error message. It is only by ignoring the feedback effect of changes in hours and changes in dispersal of hours that productivity can be calculated as GDP/Hours.

By definition, new technology introduces changes in product mix and changes in work arrangements. But also, by definition, the two components of the productivity calculation assume “no change” in product mix or work arrangements. So I’m having trouble seeing how a ratio that relies on an assumption of no change could be adequate to measure the effects of change.

When Jared posted his commentary, I wanted a quantitative illustration of the point I was trying to make. I had already been wondering about the question raised by Bill Gates about taxing robots and the idea that wealth creation might be “bypassing” income, so I looked up the net worth statistics.

After a bit of number crunching, I am astonished at what I see in the numbers. It is not just the discrepancy between GDP and net worth that impresses me but also the long period prior to 1996 during which the two numbers grew at a very similar rate. In the chart below, I have indexed both series to 100, with 1996 as the reference date. The smooth curve is actually two trend lines based on the 1947 to 1996 trend for each series:

Logically speaking, and using the plain language meaning of the terms, wealth is something that is produced. So increases in wealth presumably are predicated on increases in production. It makes intuitive sense that over the long run there would some sort of stable relationship between the growth rates of GDP and of wealth. I was not anticipating, however, such a close fit between the two series from 1947 to 1996. It only accentuates the disjuncture between GDP growth and growth of Net Worth after 1996.

The above chart only goes to the end of 2015, so it doesn’t include the recent stock market boom. Nevertheless, it presents an unsettling picture.

Returning to the puzzle of productivity, the point that I was trying to illustrate is that the comparability of the productivity measure requires a good deal of faith in the proportional stability of the economic relationships over time. If there are significant shifts in employment by sector, technology, resource availability, trade arrangements and/or consumption tastes, then comparing productivity between periods is futile. There is too much noise in the component aggregates to begin with — but using a ratio between them amplifies the noise.

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Wages and household income vs. housing

by New Deal democrat

Wages and household income vs. housing: which leads which?

Sometimes I look into a relationship that doesn’t quite pan out, but it’s still useful to flesh out the process. That’s the story of real wage growth vs. housing.

In the last few months I ‘ve pointed out that real wage growth has been slowing. In January, it went negative YoY.  Since, all else being equal, having less money to save for a downpayment, or to pay the montly mortgage ought to lead to fewer new housees being built, So has that been the case historically?

Well, first of all, here are real wages (blue, left scale) vs. housing permits (red, right scale):

It’s hard to see any consistent relationship.  If anything, it might be that housing permits turn before real wages.  So let’s look at the YoY relationship, below:

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Fool me once again?

From the Roosevelt Institute comes this graphic on the overall reality of macro policies:

The Republicans’ underlying assumption—that corporations invest more and create more jobs only when they are relieved of burdensome tax rates—is false. American businesses already enjoy a historically low cost of capital, and they have more than enough cash on hand to invest, raise wages, and create jobs. Corporations are choosing to make dividend payments and stock buybacks instead of investing because they face a lack of competitive pressure—itself the result of power and wealth shifting toward rich shareholders. Another tax cut for the rich will only make the problem worse.

FoolMeOnce_MythvsFact

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Saint Janet Yellen: The Best Fed Chair Ever?

by Barkley Rosser  (originally published at Econospeak)

Saint Janet Yellen: The Best Fed Chair Ever?

OK, so the immediate reaction of many to this title might be to laugh, but I challenge anybody reading this to name another Fed Chair who was clearly better than she is.  I do not think you can.  However, one reason why one may not think much about her is that things have been so inconsequential since she has been Chair.  Nothing much has happened.  She continued the Quantitative Easing for awhile started by Bernanke and then stopped it.  Inflation has remained below 2% mostly.  Growth has not been dramatic, but it has been steady and higher than in most other advanced market capitalist economies.  There has not been a recession since 2009.  There have been no bubbles and no crashes.  Nothing dramatic has happened and certainly nothing bad, even if lots of deep problems of the US economy such as inequality remain.  But that one is not the Fed’s responsibility anyway.  So, bottom line, she has been doing a great job even if everybody is quite certain Trump will replace her, with all kinds of candidate names being thrown around.  But none of these will be better than she has been.

So, going backwards her most serious rival might be her immediate predecessor, who  looks to have played a substantial role in the save of September, 2008 that involved buying a lot of eurojunk from the ECB, only to roll it off over the next six months or so.  Of course some of the more innovative things done then were coming out of the NY Fed, but Bernanke did an excellent job when the crisis hit.  At the same time, Janet was around during that period, initially as San Fran Fed president, and then later as Vice Chair.  But where Bernanke looks not so good is the runup to that crisis, where he seems really not to have seen it coming.  Who saw it coming and as far back as 2005 sounding the alarm about the housing bubble?  Oh, right. Janet Yellen.

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“Nothin’ but ‘blue skies’ do I see”

A little Ella Fitzgerald for you today. Kind of fits with what is going on in the US today.

Over at Vox, Matt Yglesias has an interesting article on the Trump Transition Team ordering government economists to cook up rosy economic forecasts. With his far reaching economic “it will be great” promises during the election, delusional Trump has laid out a “blue skies” future which is likely unobtainable with the past economic growth of less than 2%. Trump intends to get there with increased spending on military and infrastructure, tax reform, cuts in regulations, etc. and never touching Randian Paul Ryan’s favorite target of cuts to Social Security and Medicare. Still, The Fed and CBO are forecasting growth at less than 2% going forward.

The Transition Team has a plan . . . “a regulatory rollback and tax reform unleashing growth, driving a recovery in productivity, sending business investment higher, and drawing idled workers back to the labor force.” Trump asserts faster growth to be the result of regulatory rollback and tax reform and will result in economic growth soaring to 3 to 3.5% . . . well above the CBO and Fed’s reasoned estimates. All of this and no Fed interest rate increases forecasted as foreign funds will flock to the US to invest and fund this growth (think of the mortgage market pre-2008 attracting all the foreign money looking for safe haven after Greenspan nixed Fed Rate increases).

The Wall Street Journal’s Nick Timiraos suggests the numbers arrived at for growth were not arrived at by any process at all; instead, “the transition team gave CEA staff the growth target the budget would produce and told them to fill in data supporting the target and necessary to make it happen.” The logic could work if the end result, the target, is realistic. As Matt points out the deficit would be larger; but the economy would be 17% larger and the deficit as a part of GDP much smaller (hmmm, deficit growth . . . sounds like Reagan and Bush II all over again).

So, Trump has an overly optimistic budget based upon phenomenal growth which defies what every one else believes will happen and he will pass the budget to Congress. Watching everything else which has happened over the last 30 days; if Congress balks or does not find a way to make Trump’s budget proposal happen, similar accusations will be forth coming from The White House as to how Congress failed (think Appeals Court) to make things happen which impacts every citizen in the US. Everybody’s fault except his. Then too, Trump was left quite a mess . . .

Expect another week of listening to Trump complaining about how everyone failed him.

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The shallow industrial recession is fading in the rear view mirror

by New Deal democrat

The shallow industrial recession is fading in the rear view mirror

A year ago the “shallow industrial recession” induced by the strong US$ and imploding oil patch was bottoming.  At that time I described the historical pattern:

Typically new orders turn positive first (red, left scale in the graph below), followed by sales (green, right scale), and finally inventories (blue, right scale):


At that time I concluded:

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The C-Span Ranking of Presidents

C-Span just released a ranking of US Presidents based based on a survey of historians, journalists and other scholars. Obama came in 12th.

Here is the survey’s description of the process used to generate the rankings:

C-SPAN’s academic advisors devised a survey in which participants used a one (“not effective”) to ten (“very effective”) scale to rate each president on ten qualities of presidential leadership: “Public Persuasion,” “Crisis Leadership,” “Economic Management,” “Moral Authority,” “International Relations,” “Administrative Skills,” “Relations with Congress,” “Vision/Setting An Agenda,” “Pursued Equal Justice for All,” and “Performance Within the Context of His Times.”

Surveys were distributed to historians and other professional observers of the presidency, drawn from a database of C-SPAN’s programming, augmented by suggestions from the academic advisors. Ninety-one agreed to participate. Participants were guaranteed that individual survey results remain confidential. Survey responses were tabulated by averaging all responses in a given category for each president. Each of the ten categories was given equal weighting in arriving at a president’s total score.

I looked through the overall rankings and some of the rankings by category. Having co-authored a book on ranking Presidents, I have a lot of quibbles with the rankings. But many of them would be controversial. So I thought to myself – is there a simple way to decide whether this list has merit?

Here’s what jumps out at me. Take a gander at the list by economic management. Note that Teddy Roosevelt came in 4th place in that category. (First, second and third were Washington, Lincoln and Clinton. I find that to be borderline insane in and of itself. However, since Washington and Lincoln are names the public can recognize and Clinton was recent, I will not discuss them so as to avoid controversy.) TR also came in 4th in that category in the two previous surveys in 2009 and 2000 so it seems that ranking is pretty stable.  The, ahem, experts surveyed seem to be pretty sure TR belongs right up there.

Now here’s the problem. TR was President from September 1901 to March 1909. He did some effective things on the economy – some of his Square Deals, the Trust Busting, regulation, etc.  But… his outcomes were not very good. For instance, there was a fly in the ointment – the recession from September 1902 to August 1904. That would seem to cast doubt on his economic performance. But… that isn’t the problem with ranking TR as fourth best on the economy. There was another recession from May 1907 to June 1908. And that was no ordinary recession. The Panic of 1907 occurred in October of 1907, close to the middle of that recession. And who saved the day? Was it TR and his administration? Was it their policies? Nope. It was JP Morgan. Yes. That JP Morgan.

And the aftermath of the recession wasn’t pretty either. Data from that era isn’t great, but by all accounts, there was a big spike in unemployment, bankruptcies, etc.

The US economy is not worse than that of Zimbabwe in 2017. And yet, something along those lines would need to be true if TR turned in the fourth best economic performance among all US Presidents. I am no historian, but to me, any survey placing TR in fourth place for economic performance is indistinguishable from parody. It is enough for me to conclude that those responsible for this nonsense simply have no idea what they are doing.

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Industrial production: We’re DOOO …. oh, wait, it’s the global warming hoax

by New Deal democrat

Industrial production: We’re DOOO …. oh, wait, it’s the global warming hoax

At first blush yesterday’s negative industrial production print gives the lie to the proposition that the economy has left last year’s “shallow industrial recession” behind, as it looks to be going mainly sideways:

But a closer examination shows that is not the case.  Industrial production is broken up into three groupings: manufacturing (by far the biggest), utilities, and mining (including oil and gas).

So here is the information for manufacturing (blue. left scale) and mining (red, right scale):


Although the trend is modest, manufacturing has broken out to new highs.  And the energy patch is clearly seeing a rebound.

Which means that the *entire* reason for the decline is utilities:

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