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

Peltzman Effect

If you look at the data on traffic deaths it is obvious that we are doing something right in the US.
As far back as the data goes traffic deaths have been falling at a -3.2% annual rate.


But if your source of information was economics you would be hard pressed to know this. It has been long shown that driving/riding in a small car was dangerous and led to more deaths. But now we have a new study at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1080911
where Michael Anderson found that driving a large SUV led to the same results — more deaths.

It is as if economists found that living was bad for your health.

The approach that I’ve long had troubles with is the Peltzman Effect that concludes that seat belts cause more deaths. Peltzman agrees that wearing a belt and having air bags sharply reduces the changes of death if you are in an accident. He does question the government estimate that these reduce your chance of death by 50%. Rather Peltzman argues that wearing a seatbelt makes you feel safer and so drive more dangerously and this causes more accidents
that offsets the gains from wearing seatbelts. They conclude that one should ignore the direct evidence that seatbelt use and traffic deaths have a -0.9 correlation.

Rather they model traffic deaths as a function of real income, demographics, crime, race, congestion, and other similar developments and develop models where seat belt use has a positive rather then a negative sign.

Of course if you look at the -3.2% trend and regress it against almost any real economic variable it would show up as a powerful variable that is likely to swamp other variables. But I’m not going to get into that now.

However, there are studies that use the same approach and find a much weaker impact and even find no evidence for the Peltzman Effect. On is a study by Alma Cohen and Liran Einav,
THE EFFECTS OF MANDATORY SEAT BELT LAWS ON DRIVING BEHAVIOR AND TRAFFIC FATALITIES at http://www.stanford.edu/~leinav/pubs/RESTAT2003.pdf.
Cohen and Einav even suggest an alternative thesis that the act of putting on a seat belt makes a driver think about how dangerous it is on the road and leads to them driving more carefully–
just the opposite of the Peltzman Effect.

I’m not going to go in to the econometric arguments behind these two opposing thesis. Rather I’m going to take a different approach.

The Peltzman Effect contents that sealtbelts cause more accidents. But when I look at the accident data I find that the data shows falling accident rates. The first data series is a very old series on the number of accidents from the National Safety Council — I found it in the Statistical Abstract. It shows that accidents have fallen since sealtbelts were first started to be widely used in the early 1960 and really fell sharply after laws were passed at the state level in the 1980s making sealtbelt use mandatory. That is when seatbelt use also jumped sharply.

The second set of data is a new series from the National Highway Traffic Safety Administration
that shows traffic crashes since 1989. It can be found at http://www.nhtsa.dot.gov/people/injury/SafetyBelt/OPIPT_FinalRpt_07-17-03.pdf

The people doing the Pelzman type studies think that the accident data is unreliable and do not use it in their studies. Maybe, but if it is biases, it probably has the same biases year after year. For example both data sources could easily under-report minor fender binders that are never reported to the police.

But I have now found two independent sources of data that clearly show that since 1964 when sealtbelts were first required to be installed in new cars or since the early 1980s when state laws requiring sealtbelt use became widespread that the traffic accident rate has been falling. This data or evidence directly contradicts the Peltzman Efeect thesis that depends on rising accident rates.

So, for all the people who believe in the Peltman Effect and are teaching their students that seatbelts cause more deaths then they save I have two questions. One, why should I ignore this evidence that traffic accidents have been falling? Two, where is your evidence of more accidents.

If Peltzman is right, it should not be hard to find evidence of a sharp rise in accidents that the thesis implies, right?

So where is it?

P.S. I failed to point out that the accident data is based on data collected by the insurance industry while the crash data is based on police reports to the Transportation Department.
So they really are independent data.

PPS.. Several people have raised he issue of demographics. this Chart shows that in the mid-1960s when seatbelts were required to be installed in cars their should have been a big jump in deaths due to young drivers. But it barely happened — the jump in the early 1960s precedes seatbelt installation and should have continued into the mid-1960s to the late 1960s. this data implies that seat belts actually prevented higher deaths in the 1960s due to baby boomers starting to drive — again jus the opposite of the Peltzman Effect.

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Supply-side Silliness: Faith Based Economics Devoid of Reality

Louis Uchitelle has yet another article on how John McCain has adopted the religion known as the Laugher (excuse me – Laffer) curve. Louis starts well:

Since then, supply-side economics, as it was called — first with derision but then as a label embraced by its supporters — has become a central tenet of Republican political and economic thinking. That’s despite the fact that the big supply-side tax cuts of the 1980s and the 2000s did not work out as advertised, as even most supporters acknowledge.

But then he allows Kevin Hassett to get away with this:

But advocates see broader economic benefits from lowering tax rates, which is one of the reasons the concept has reappeared as a point of contention in this year’s election campaign, in an amended form. What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.” Even with a growing economy, however, the promised boon in tax revenue never materialized. Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues “rise dramatically” when tax rates are cut.

I’m not sure what Louis means by “broader economic benefits” since Kevin claimed – without citing the evidence – that real GDP grows faster with lower tax rates than it does without higher tax rates. It is beyond the reach of economic science to explain WHAT happens – Kevin? Let’s recap something we’ve written here many times and most students of economics know already. Real GDP, which had grown at an average rate of 3.5% per year from the end of World War II to 1980, grew by only 3 percent under Reagan-Bush41 and has grown by an average rate of 2.5% under Bush43. Yet during the higher tax rate Clinton years, it grew by 3.7% per year. Assuming Kevin Hassett is not a complete idiot (he’s not), he’s being very disingenuous here. Ah but Louis does present some data for us:

In the 1980s, though, during the initial era of supply-side tax cuts, per capita revenue from personal income taxes, adjusted for inflation, rose an average of just 0.7 percent annually throughout the Reagan presidency, according to the White House Office of Management and Budget. That was far below what turned out to be an average annual increase of 6.5 percent in the eight years of the Clinton administration, when tax rates at the high end of the income ladder were raised. Since 2001, the annual per capita revenue from income taxes fell 1 percent under President Bush even though tax collections picked up sharply starting in 2005. The budget surplus Mr. Bush inherited turned into a deficit.

There’s two reasons why tax revenues grew faster during the Clinton years – higher tax rates AND faster real GDP growth. Alas – Louis fails to mention this second reason. And until the press learns to call the supply-side liars on their lies, what is the incentive for them to tell us the truth?

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Bruce Webb Reads the Social Security Trustee’s Report

Bruce Webb looks at the Trustee’s Report…

One of my very first posts at my Social Security website was What is the Low Cost Alternative which I put up on November 20th, 2004. In it I made the observation that since 1997 Low Cost, purportedly the upper end of a possible range of economic outcomes, in fact always gave the same result: fully funded Social Security through the 75 year actuarial window with a steady reserve. It consistently returned what I call Baby Bear results, the porridge never being too hot or too cold. I discussed the implications of this in my 2006 Post Goldilocks and the Three Social Security Bears. Well this held up excellently through the 2005, 2006, and 2007 Reports each of which gave the same basic Baby Bear outcome. Which made 2008 kind of a shock. For the first time the Trustees present a Low Cost model that would officially have Social Security over funded after mid century. Low Cost is outcome I in the following figure Figure II.D6.—Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions [Assets as a percentage of annual cost] A constantly rising Trust Fund is a long range menace to Social Security, there is a point when having too much in reserve becomes a bad thing, something I expand on some in Interest on Interest: a Threat. There is only one way to flatten the tail after 2041 to get Social Security back to long term Baby Bear status. And that is some combination of cutting revenues or increasing future benefits. Which is to say exactly 180 degrees reversed from pretty much universal policy positions. To say the least, not at all the kind of crisis people are envisioning.

The policy implications are quite interesting. While of course Low Cost outcomes are not guaranteed, outcomes better than the standard Intermediate Cost model are more likely than not. People who insist that sooner is better than later may well have a point. If you delay those revenue cuts through reduction in FICA or diversion of interest into other asset classes for too long things spiral out of hand.

This one is by Bruce Webb.

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Oil Going Up? Cost of the Tar Sands

In the final analysis, the price of oil has nowhere to go but up. The easiest, most profitable extractions of this precious commodity have already been done. Gone are the days when a little drilling would release a gusher. Take, for example, the tar sands, our latest and perhaps most costly extraction, as I pointed out in a recent post, Frankel and Rapier*.

Extracting bitumen will not be easy. In fact, as elsewhere, the easiest extraction may already have occurred. Eighty per cent of all tar sands bitumen lies too deep in the ground for open mining. The cost for deeper extraction may well exceed anything we might have expected, in terms of retrieval, water usage, and, of course, pollution.

Bitumen is truly messy stuff. Think of something akin to heavy molasses or soft tar. When it lies on the surface, you can push a finger into it. Walking on it, you may well leave a footprint. Bitumen has to be separated from the sands themselves. For each cubic meter of bitumen rescued, we have five cubic meters of toxic tailings. Already the tailing ponds are so vast that they can be seen from outer space. In fact,

The Syncrude Tailings Dam is deemed by the U.S. Department of the Interior to be the world’s largest dam by volume of construction material. The pond, built in 1973, covers 22 square kilometres and holds 540 million cubic metres of water, crud and sand. When China completes the Three Gorges Dam this year, Syncrude will surrender the record.

Nixen has mining operations south of Fort McMurray, the Long Lake project. A report from Nexin itself should give us pause:

Our estimates for performance and recoverable volumes for the Long Lake project are based primarily on our three well-pair SAGD pilot and industry performance from SAGD operations in like reservoirs in the McMurray formation in the Athabasca oil sands. Using this data, our assumptions included average well-pair productivity of 900 bbls/d of bitumen and a steam-to-oil ratio of 2.5. In order to test operating parameters, we built a three well-pair SAGD pilot, commenced steaming the reservoir in May 2003 and commenced production in September 2003. The pilot is currently producing at a rate of about 400 barrels of bitumen per day per producing well-pair and an average steam-to-oil ratio of about 4.2. Since September 2003, the pilot has recovered less than 3% of the original bitumen in place. While we expect actual performance to improve as we commence commercial operations where SAGD drilling has confirmed higher quality reservoir conditions, there can be no assurance that our SAGD operation will produce bitumen at the expected levels or steam-to-oil ratio. We have addressed this risk by drilling additional wells and adding steam generating capacity to allow for a steam-to-oil ratio of 3.3, however, if the assumed production rates or steam-to-oil ratio are not achieved, we might have to drill additional wells to maintain optimal production levels, construct additional steam generating capacity and/or purchase natural gas for additional steam generation. These could have a significant adverse impact on the future activities and economic return of the Long Lake project.

Initially, the steam-to-oil rato was to be 2.5: Two and half barrels of steam for every barrel of oil. Now it is 3.3 barrels of steam…and possibly rising. Steam requires energy; energy is a quantifiable cost. But energy costs in turn have there own costs.

In 2008, the Kyoto Protocol will come into effect in Canada. The Long Lake project does emit green house gases, possibly adding as much as $0.40 to each barrel of oil extracted.

But the real cost has yet to be fully assessed–and it might be staggering: Already there is substantial risk that ground water will become polluted. And those giant tailing ponds are not “settling” out as expected. Initially, everyone hoped that the tailings would settle into hard clay at the bottom of the ponds. Sorry. It isn’t happening.

As the team leader on the subject at Natural Resources Canada’s CANMET Energy Technology Centre in Devon, Alberta, Mikula calls the tailings waste problem a “frightening” and vexatious issue. Engineers originally thought that the tailings waste would quickly settle, leaving clear water on top. But that never happened, thanks to what Mikula calls “the bad behaviour of clays.” He suspects the waste won’t settle to solid form for thousands of years. “So something has to be done.”

One suggestion has been to use giant centrifuges to separate out the tailings.

A better solution might be a sort of “brute force” centrifugal approach, says Mikula. It involves spinning the material to create something dry and stackable that could eventually be reclaimed—while recovering water at the same time. Both Syncrude and Suncor have begun pilot projects. “We could reduce water usage from four barrels to two [per barrel of oil] or maybe less, which means less water withdrawn from the Athabasca,” says Mikula.

That certainly will not be cheap. The cost of tar sands oil keeps rising.

And I have yet to mention that water is not exactly an abundant commodity in the McHenry region. Even without peak oil, the cost of oil just keeps rising….

Flight to commodities? You have to be kidding if you think guys in back room betting parlors determine the cost of everything. I bet not one of them has visited a tailing pond.

*As one commentator observed, I inverted the conventional EROIE ratio in that post. An acronym describing my ratio should have been ERIOE. Nonetheless, all subsequent explanations hold true based on my use of the ratio.

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Financial Meltdowns – A Look Back

Thinking back on periods when there’s been a major financial problem in this country, I’ve noticed something odd – they tend to happen when there’s a Republican President, and in particular, when there’s been a Republican President for at least four years, if not more.

The Great Depression, which often gets blamed on FDR, began under Hoover, who in turn followed fellow Republican Calvin Coolidge in the White House. (FDR, conversely, oversaw the fastest real growth rates of any administration during the period of time for which the BEA NIPA tables provide data.) Stagflation, though it often gets blamed on Carter, began in 1973 or 1974. (During the Carter administration, real growth was faster than for any Republican President since 1929 except Ronald Reagan.) In 1987, after most of Reagan’s term had gone by, we saw the S&L scandal. Now, we have this.

This was off the top of my head, and maybe I’m missing a meltdown or two (the does the dotcom crash qualify?) but I would guess that most of the big meltdowns we’ve seen in the past 100 years or so in this country have occurred when the White House had been in Republican hands for a while. My guess as to the reason – lax regulation.

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Iraq Civil War: Iranian Brokering Peace Deal

Leila Fadel reports:

Iraqi lawmakers traveled to the Iranian holy city of Qom over the weekend to win the support of the commander of Iran’s Qods brigades in persuading Shiite cleric Muqtada al Sadr to order his followers to stop military operations, members of the Iraqi parliament said … The backdrop to Sadr’s dramatic statement was a secret trip Friday by Iraqi lawmakers to Qom, Iran’s holy city and headquarters for the Iranian clergy who run the country. There the Iraqi lawmakers held talks with Brig. Gen. Qassem Suleimani, commander of the Qods (Jerusalem) brigades of Iran’s Revolutionary Guard Corps and signed an agreement with Sadr, which formed the basis of his statement Sunday, members of parliament said. Ali al Adeeb, a member of Prime Minister Nouri al Maliki’s Dawa party, and Hadi al Ameri, the head of the Badr Organization, the military wing of the Islamic Supreme Council of Iraq, had two aims, lawmakers said: to ask Sadr to stand down his militia and to ask Iranian officials to stop supplying weapons to Shiite militants in Iraq. “The statement issued today by (Muqtada al Sadr) is a result of the meetings,” said Jalal al-Din al Saghir, a leading member of the Islamic Supreme Council of Iraq. “The government didn’t have any disagreement with the Sadrists when it went to the city of Basra. The Sadrist movement is the one that chose to face the government.” “We asked Iranian officials to help us persuade him that we were not cracking down on the Sadr group,” said an Iraqi official, who asked for anonymity due to the sensitivity of the subject. He described the talks as successful but said hard-line Sadrists could goad the government into over-reacting and convince Sadr that the true aim of the Iraqi Security Forces is to destroy the Sadrists. “I will not be surprised if the whole thing collapses,” he said.

I see three takeaways from this news. First, it was the government that blinked and not Sadr. Secondly, the Iraqi government turned to Iran and not the US when it needed diplomatic help. Lastly, there is no guarantee that the battle between the government and the Sadr forces is not over. So tell me again – why do we leave US forces in the middle of this mess?

Update: Juan Cole makes several observations as to this recent news but his title really captures the essence:

Iran Brokers Call for Ceasefire; Bush reduced to Irrelevancy in Iraq; Fighting Continues

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Middle Class in Manhattan and Impoverished in Beverly Hills

Dean Baker beats the press in the form of something about my neighborhood by Robin Shulman:

The Washington Post reports on a new trend for middle class white families with children to live in cities. The fourth sentence tells us that: “In the national imagination, it [Manhattan] was a place of artists, musicians, socialites, Wall Street bankers — or of hustlers, runaways, addicts, murderers. But it was not on the radar of the typical white, middle-class couple as a place to raise children. Those who read a bit further will find that the median income for a white family with children living in Manhattan was $280,000 in 2005, roughly $300,000 in today’s dollars. That’s enough to place this family well up into the top 2 percent of the country’s income distribution.

It’s pretty clear to me as I walk towards the subway on the Upper East side that these families are affluent and Robin admits this. So let’s move onto Felix Salmon watching Ben Stein as Ben complains about how poor he has become:

Fourth, plan for living more frugally. This is not easy for some of us. “What were once vices are now habits,” as the Doobie Brothers once said. This is true for millions of us, but we simply cannot escape the logic and power of arithmetic. We cannot live forever on more than we have in principal and interest (or earnings) and pensions. If that means no more second homes, or no more third cars, so be it. No comfort is worth putting yourself in genuine fear of poverty. For me, your humble scribe, this is a vicious problem, but at some point, it must be solved. But look on the bright side. My pal and investment guru Phil DeMuth and I have shown repeatedly that the best returns for stocks come after periods of extreme pessimism. It is just when the horizon seems darkest and cloudiest that we find above-par returns. And it is just when hopes seem dimmest for the United States that the economy starts to rally. If you have enough liquidity, if you are well diversified, now would be a good time to start back into the buying pool, in the most diversified way imaginable.

Ah Ben – most people don’t have stock portfolios to fall back home. Many people don’t own even one house – let along a house in Beverly Hills. Some in my city don’t one own car and must take public transportation to work – assuming they have a job. But let’s give the microphone to Felix:

Stein is becoming a sick and unfunny joke at this point, and the NYT, by association, is the butt of that joke. Nick Kristof and many other reporters do a very good job reporting on real poverty for the New York Times; I hope they’re barraging their editors right now with complaints about how Stein is trivializing an extremely serious problem. Given the level of intellectual honesty that Stein displays in his new film, it shouldn’t be too hard at this point for the NYT to kill his column permanently.

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21st century economics just starting

Mark Thoma carried a post on a piece The sting of poverty, by Drake Bennett, Boston Globe on a fresher look at the reasons poor people are ‘irrational’ in neo-liberal economic terms regarding diminishing returns of marginal utility.

Many familiar names are in the comments. It is a great start to bringing economic theory out of the limits of a mechanistic approach that purports to explain human behavior but includes little of any other science in explanation.

While the article looks at some kinds of decision making for the poor, I also will have other works and ideas about ‘fair’, ‘wealthy’, ‘rich’, and ‘value’, ‘responsibility’. I do know our pithy sayings just don’t describe much. So it is well worth going over.

That can be the first admission of some kinds of ignorance, and a chance to take another look into the more real world of humans and their apparent messiness.

Update:

[Charles] Karelis, a professor at George Washington University, has a simpler but far more radical argument to make: traditional economics just doesn’t apply to the poor.
When we’re poor, Karelis argues, our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where … bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The … poorer one is … the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems.
Poverty and wealth, by this logic, don’t just fall along a continuum… They are instead fundamentally different experiences… At some point between the two, people stop thinking in terms of goods and start thinking in terms of problems, and that shift has enormous consequences. …

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Iraq: Does Sadr Have the Upper Hand?

We may have good news with respect to the fighting in Iraq from AP News but let’s first turn to a round-up of recent events provided by Juan Cole:

Iraqi Police surrendering to the Mahdi Army in Baghdad … Aljazeera English does a report on the fighting between the Iraqi government and the Mahdi Army. The video shows that the Mahdi Army is still in control of its Basra neighborhood strongholds … The Iranian foreign ministry called Saturday for an end to the fighting, saying that it strengthens the US hand in Iraq and may have the consequence of prolonging the US presence. Iran tends to back the Da’wa Party of Iraqi PM Nuri al-Maliki, and the Islamic Supreme Council of Iraq of Abdul Aziz al-Hakim, so it is significant that Tehran is criticizing this push by those two to destroy the Sadr Movement. I take them at their word. They are genuinely afraid that al-Maliki’s poorly conceived campaign will backfire and that Bush will use it to insist on keeping troops in Iraq.

Let’s see. The Iranians believe that this Maliki assault on Sadr’s forces is backfiring on the Iraqi government and will be abused by the Bush Administration to prolong the US presence in Iraq. It also appears that the government assault is not working all that well. So what is AP reporting?

Shiite cleric Muqtada al-Sadr said Sunday that he was pulling his fighters off the streets nationwide and called on the government to stop raids against his followers and free them from prison. The Iraqi government quickly welcomed al-Sadr’s apparent move to resolve a widening conflict with his movementparked Tuesday by operations against his backers in the oil-rich southern city of Basra. Al-Sadr’s nine-point statement was issued by his headquarters in the holy city of Najaf and broadcast through loudspeakers on Shiite mosques. It said the first point was: “taking gunmen off the streets in Basra and elsewhere.” He also demanded that the Iraqi government stop “haphazard raids” and release security detainees who haven’t been charged, two issues cited by his movement as reasons for fighting the government.

It seems Sadr is brokering a peace but with a price – that the Maliki government back off. Kevin Drum notes:

So apparently Sadr remains willing to continue his cease-fire, but only if Maliki stands down. In the meantime, he has no intention of giving up his weapons and has demanded the return of captured Mahdi Army fighters. Overall, this sounds likes it’s an offer to Maliki to declare victory and then leave town.

If Maliki accepts this deal, his government will look weak. If he declines this deal, no telling what will happen in Iraq. Forgive me – but this looks like a lose, lose situation for the Maliki government. But President Bush thought the Maliki decision to invade was a great decision:

“I would say this is a defining moment in the history of a free Iraq,” Bush said at the White House.”The decision to move troops, Iraqi troops, into Basra talks about Prime Minister Maliki’s leadership.”

Yes – we are ruled by an idiot.

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I’m converting dollars. (In order to save the rustbelt)

With all the discussion about our plight money wise I thought it would be interesting to see just how distorted our view can become depending on what factor we choose as a comparison. Also, I find this site fun.

So, just how do we compare today to the fondly remembered yesterday? I am very grateful to you for asking. Let’s see, we need a base. Let us use Social Security (OASDI to be complete) as a base dollar source. There have been suggestions that we need to raise the wage cap. OK, maybe, but what should it be? Using this OK, but what should it be? Using this pdf chart I picked 3 different years as starting points. 1937, because “In the Beginning” there was poverty. 1966, because the beginning went so well, we added more. And 1983 because we became enlightened .

Using the Measuring Worth site I produced this chart:

The 6 factors are explained at the Measuring Worth site. My short hand is: C Bundled = Consumer Bundle, Unskilled = Unskilled Wage. The N in NGDP stands for nominal.

So, what number do we pick? The one that shows the current cap is set way to high, so we obviously are covering too much in OASDI as compared to the past. Or the one that shows the current cap is too low, so we obviously are not covering as much in OASDI as in the past.

I vote for the one which shows that the $94,200 cap is about the proper income to be earned by the Unskilled Labor force allowing such a person to have maintained their standard of living based on the Consumer Bundle. Yet even at that, their share of GDP would be historically rather low.

Anyone recall me presenting an argument that we have pushed the cost of the American Dream up to the point that one has to be in the top 10% of income earners to have it? It also takes 2 people working to do it.

In fact how uncanny that the median household income in which the wife is not working, for 1967 (couldn’t find a number for 1937) converts to an Unskilled Labor income of $48,353 and the Consumer Bundle is $51,019.

Maybe we shouldn’t feel to bad. Based on Measuring Worth’s President George Washington example, the current President George is getting screwed by about $100K. But, this does not include the benefits received by the present George. Guess we are getting the short end compared to being president.

Saving the rustbelt goes beyond a geographic area. Saving the rustbelt is referring to a demographic group.

Update: Link American Dream

Update: fixed the chart link paragraph missing before the chart.

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