The Peltzman Effect: Why Economic Growth Has Slowed in the US Over Time
by Mike Kimel
(Update: Naked Capitalism notes Mike’s post is the top read of the day in ‘links’)
In recent years, there have been a number of studies showing that generational income mobility is particularly low in the US. To quote this 2006 study by Tom Hertz:
By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.
Hertz provides this handy chart:
Most of the “big government” countries that compare favorably with the US on intergenerational mobility also do pretty well on measures of entrepreneurship. The following snapshot comes from this paper by Acs and Szerb:
(GEDI = Global Entrepreneurship and Development Index)
While studies are, no doubt, imperfect, I’ve seen similar results before and they seem credible to me.
The studies note, essentially, that the US is not, for many, the land of opportunity it is touted to be, and is now being beaten out by countries like Denmark and Canada. Big government countries, countries where Americans seem to believe people aren’t motivated to get off their duff, are actually quite entrepreneurial and offer offer their citizens a lot of opportunity.
Meanwhile, one other thing to note… growth, real economic growth, has been slowing for decades in the US. George W Bush’s term, even prior to the start of the Great Recession, compares unfavorably with the 1970s. The highly touted Reagan years, for instance, saw much slower growth than, say, the big government LBJ administration or the even bigger government New Deal years.
What is going on here? Is it really the catch-up effect, whereby wealthy countries like the US necessarily grow more slowly than other countries? Or is there a Great Stagnation going on? And if so, why?
I think one explanation for this is the Peltzman effect. Sam Peltzman once noted that, in response to some types of regulation, people can have a tendency to change their behavior in ways that counteracts the intended purpose of the regulation. For instance, some bicycle and motorcycle riders will take greater risks when forced to wear helmets, assuming that the helmets make them safer and more impervious to accidents.
Now, economic advance depends on creative destruction, and creative destruction requires people to take risks. Come up with a great idea for a super duper new widget and it has zero effect on anything if you don’t go out and try to market the thing.
But take two people, both of whom independently came up with the same idea for that super duper new widget. One lives in the US, the other in Denmark. Which one gives up his/her job to start a new company? The American or the Dane? My guess is the Dane will, precisely because the Dane, unlike the American, retains a safety net. The Dane doesn’t give up health insurance for herself or her family, and has more social programs she can rely on if the new business fails. My guess is that isn’t just true for Danes and Canadians, but also for people in a whole host of countries with a stronger safety net than the US. If the US still scores higher than on entrepreneurship than these countries, it is for historical reasons. Attitude is part of the ranking, after all, and Horatio Alger stories are still in our DNA.
If my guess is correct, there are things we should expect to see in US data:
- The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by foreign born people relative to native born people has been growing. (I.e., native born Americans are becoming more risk averse when it comes to starting companies.)
- The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by native born people who were born wealthy (and thus have their own built in safety net) relative to those founded by native born people who weren’t born wealthy has been growing. (I.e., non-wealthy Americans are becoming more risk-averse when it comes to starting companies.)
Note that I am trying to distinguish between a “business” and a business that requires some substantial commitments by their founders. There is a big difference between someone leaving their existing employer to start a new business based on an idea they have been toying with for a while and someone who was fired six months earlier deciding that they have no choice but to start something, anything, to put food on the table. I don’t have that data, but I would be surprised if it 1 and 2 weren’t borne out. Unfortunately, I think the direction we are taking, politically, is just going to reduce entrepreneurship in this country more and more. There are only so many wealthy people, and only so many foreigners coming to our shores. The land of opportunity, we will find in the long run, is the one with a safety net.
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Notes:
- The first paper cited was put out by the Center for American Progress, which leans left. The second paper was commissioned by the Small Business Administration, but its authors are both at George Mason U, which has a definite libertarian bent. –
- Consider this a companion piece to Why Don’t Tax Havens Become Economic Powerhouses? and A Simple Explanation for a Strange Paradox.
“My guess is the Dane will, precisely because the Dane, unlike the American, retains a safety net. The Dane doesn’t give up health insurance for herself or her family,”
Dean Baker has written quite a bit on this. OECD figures do show that small business start ups are indeed rarer in the US and Dean attributes this to health care insurance issues.
I think it’s right in a way but also not right in another. I’ve no actual evidence for the nest, only personal experience.
Americans are less likely to start up a company, yes. But they’re more likely to, if they do start one up, start one up as a proper company. With several people, with the aim of employing more, with the idea to do something new and build it into a large company.
The thing is that entrepreneurial finance of that type is much easier to get in the US than it is in the UK or other parts of Europe. And with that sort of finance comes the possibility of health care insurance of course.
Europeans are I think more likely to set up on their own. What is perhaps better called “self-employment” although we might well use a company to do it.
And as far as I’m aware the statistics on new company, new business, formation don’t in fact distinguish between these two cases.
As I say, I can’t prove this and say that it’s more personal observance from having lived and worked on both sides of the Atlantic rather than anything else. Even though I’m sure there’s more than a germ of truth in it.
“Now, economic advance depends on creative destruction, and creative destruction requires people to take risks.”
And to change the subject entirely, I would want to point out that it’s the destruction which is the really necessary part of it. Failures need to be shut down, cleared up and their assets put to other uses, that’s the real driver. And recent decades have seen a sad reduction in the disappearance of failures. And I don’t just mean GM and Chrysler (the latter twice). Every legacy airline has been in and out of Chapter 11 at least once. Few have gone to Chapter 7.
We need more failures in Chapter 7 and fewer efforts to keep them out of it.
Were Howard Hughes and Ross Perot entrepreneurs?
No know what else these nations don’t have? Walmarts. http://www.slideshare.net/anshul408/walmart-competing-in-the-global-market look at slide number 7.
Slide number 8 also shows their dollar size compared to the other top retailers world wide. Walmart is 3.16 times larger than #2 Carrefour SA.
What I’m suggesting here, is that maybe along with having a safety net, these other nations also have a more competitive market environment? That is less tendency toward consolidation and monopolizing like trends as they chase the efficiency of money?
I showed in the income data of Seaz that entreprenuership rose on 3 occasions. All appear to be related to times when the overall environment was wide open because of a major event. First was the industrial revolution. Second was WW2 and third we got a blip up in the early 90’s as the computer age matured to a consumer product.
Maybe in the other countries, they have been able to keep a market environment that resembles those 3 times. Thus, no Walmarts.
Tim Worstall,
I’m not sure I agree that Europeans are more likely to set off on their own. Its just the US is a big market with a single language. If someone is successful in Idaho, there is reason they might be successful in neighboring states. It takes more work & luck to successfully expand out of the Netherlands than it does to expand out of Idaho, I would imagine.
I do agree with the destruction.
Ah… one more thing… we need to end the Fed subsidy to banks. I have friends in the nat gas drilling industry. It seems every few years there is a boom and a bust… and the banks fund everyone throughout. Somewhere along the way keeping the existing banking structure is doing a lot of damage, and not just in the obvious 2007 – present meltdown.
I think Hughes was more of a Bill Gates type – he was born into a wealthy family and he used the family connections and tools to great effect. He wouldn’t have been remotely successful if he wasn’t talented, but he also probably would have died a wage slave if he hadn’t been born rich. My guess is Ross Perot can be described similarly.
LBJ heated up the economy by getting 58,000 guys killed for no particularly good reason.
Not a good plan.
Daniel Becker,
Interesting point.
The combined populations of Canada and Denmark are about the size of New York state as I remember.
And if Canada were not cheek-to-jowl with the US its’ economy might not be so dynamic.
The problem is in-breeding. We have the dumbest aristocracy on the planet. An occasional outcross to a Hooters waitress doesn’t really do much for the gene pool.
“And if Canada were not cheek-to-jowl with the US its’ economy might not be so dynamic.”
True, but when I point out that’s also true for Hong Kong there’s usually hell to pay.
The ruling class in America would rather kill the economy than loosen their grip. In another generation or two they hope to have peerages and titles. Daddy Warbucks rules! Sometimes understanding the stereotypical personality of a nation can be so helpful. Until we can change the scripts that the post-Reagan ruling class has been feeding us, the sheeple will continue to tolerate the destruction of most everything good about America.
See http://animalspiritspage.blogspot.com/2009/06/on-coming-neo-feudalism.html
While there is something to be said for destruction, the concept needs to be tempered a bit. Chrysler emerged from its 1980-81 crisis a strong, dynamic, growing company with exciting produst that was making a lot of money. They government loans were paid back ahead of time. It attempted to put some of that money away so that product development could continue during the next down cycle. What happened instead was that they got conquered by Daimler and bled white. What happened under frankly idiotic Cerberus mangement was even worse. Now that Fiat is running the company there is hope – Marchionne understands the car business, which Cerberus emphatically did not; and seems to actually car about the success of Chrysler, which Daimler emphatically did not.
And now Chrysler is profitable. This was not a company that needed to die. I wsa a company that got kidnapped and sold into slavery.
Cheers!
JzB
If I remember correctly the only thing Daimler wanted was Chryslers design department both for it’s creativity and it’s computer applications.
I recall when Chrysler had a $5 billion dollar cash fund and some major share holders were calling for it to be distributed vs saving it for a rainy day.
Ah the 80’s corp raiders. Pretty Woman anyone? Other People’s Money?
My experience, in Europe there are still family owned hotels and restaurants and family owned bakeries and other corner stores where we have nothing but chains. They are well managed and well maintained, don’t look as if they are hanging in there barely surviving, that includes drug stores and pharmacies just gleaming with chrome and class interiors. That is my impression and maybe things have changed a lot in the last few years.
Small business does not have much of a chance against big chains and corporations, the little once would need some protection to survive.
Daniel –
They also wanted Chrysler’s Financial division, which was also making lots of money at the time. Cerberus got that also, and sold it jusy a year ago to Toronto Dominion Bank.
The biggest motivator for the whole thing, though, was Jurgen Schrempp’s empire-building ego.
Cheers!
JzB
Go North, young man, go North!
Or to Europe. 🙂
i have no idea what anything is like in Europe. What Daniel and Lysistrata said reinforces my idea that in the U.S we no longer have capitalism. We have corporatism, which is quite a different beast. Even worse, it’s trans-national mega-corporatism. Citizens United gave U.S. citizenship rights to non-human economic entities who have no shred of loyalty to the U.S., it’s people, or its institutions.
Great for a small, privelidged elite. Not so good for the rest of us.
JzB
Benign:
I believe you understand the task at hand. “Daddy Warbucks rules!”
The issue has never been what we tax society with today. It is still a basic guns or butter dilemma. Paul Kenndy wrote a nice synopsis of what was wrote with countries who invested to haevily into the military call “The Rise and Fall of the Great Powers. A short critique:
“It can be easily summarized: The more states increase their power, the larger the proportion of their resources they devote to maintaining it. If too large a proportion of national resources is diverted to military purposes, this in the long run leads to a weakening of power. The capacity to sustain a conflict with a comparable state or coalition of states ultimately depends on economic strength; but states apparently at the zenith of their political power are usually already in a condition of comparative economic decline, and the United States is no exception to this rule. Power can be maintained only by a prudent balance between the creation of wealth and military expenditure, and great powers in decline almost always hasten their demise by shifting expenditure from the former to the latter. Spain, the Netherlands, France and Britain did exactly that. Now it is the turn of the Soviet Union and the United States.
THE over-extension of American commitments and the baroque gigantism of the American defense budget have been a matter of such general concern over the last few years that Mr. Kennedy may be accused of the fault against which historians warn their pupils: seeing the past through the perspective of the present. It is none the less true that contemporary concerns often alert us to aspects of the past that previous historians have overlooked; and indeed it is this very accumulation of perspectives that keeps the past continuously alive. In the hands of a political pamphleteer seeking evidence to prove a case such an approach is a corruption of history, but when a scholar as careful and learned as Mr. Kennedy is prompted by contemporary issues to re-examine the great processes of the past, the result can only be an enhancement of our historical understanding and a fresh enlightenment of the problems of our own time. Further, when the study is written as simply and attractively as this work is, its publication may have a great and beneficent impact. It is to be hoped that Mr. Kennedy’s will have one, at a potentially decisive moment in America’s history.” http://www.nytimes.com/books/98/12/06/specials/kennedy-powers.html
respectfully, I disagree. In my experience with biotech startups in the boston area, they occur either because someone lost their job and was desparate (we all know the odds on startup success; only a crazy person would try it)
or, they are people who are, politely , monomaniacal; they are gonna do a startup, come hell or high water
in a safety net country, you take out the first class; not sure about the second
The 70’s economic boom was far underrated. If it hadn’t been for the dumb arabs, it would have been another 60’s.
Most of the 70’s problems was mental. They believed the economy was worse than it really was, due to the final death rattle of victorianism. It took them time to adjust. Likewise, the 80’s/90’s economy was overrated. Especially the 80’s.
The chart displayed from the Hertz study is a flawed measure of mobility amongst different nations for one obvious reason; not all nations have identical income distributions (nor is there equal distance between quintiles).
In the US and UK the income distribution is wide; in the Nordic countries the income distribution is more compressed.
Hence it is easier to do what Hertz is measuring (jump income quintiles) in a poorer country with a narrower distribution than in a country with a wider distribution, even if the percentage change in income is exactly the same.
The U.S. income distribution figures in the Hertz paper show the top quintile beginning at $96,000 — the numbers I’ve seen for Denmark and Sweden are much smaller.
Americans are less likely to start up a company, yes. But they’re more likely to, if they do start one up, start one up as a proper company. With several people, with the aim of employing more, with the idea to do something new and build it into a large company.
Exactly right. America produces far more SuperEntrepreneurs;
http://super-economy.blogspot.com/2011/06/superentrepreneurs-and-how-your-country.html
If one is trying to establish a link between entrepreneurship and economic growth it is important to know how many entrepreneurial firms actually grow rapidly and become mature firms, rather than measuring which nation produces the most entrepreneurs.
Hello Mike, your observation of declining real GDP growth rates for the US can also be extended to the European Union (EU). The growth rate of real GDP can basically be decomposed into a growth rate for labour productivity, plus a growth rate for the labour force. In the EU, trend hourly private sector labour productivity growth has been falling steadily ever since the early 1970s. The decline more or less stopped during the 1990s, but resumed as of 2000. Demographics then add to the problem as EU population is now rapidly ageing.
In urban areas in the US, particularly “immigrant” neighborhoods there are plenty of small shops and independents. When you get to rural or suburban areas, it seems there is significantly more dominance by chains. Many cities are actively hostile to the walmarts of the world, with zoning restrictions that quite specifically keep them out.
When I was in Spain/France last summer Carrefour was everywhere. Didn’t take much looking to find one, sometimes very close to large residental block complexes, sometimes out in the “new” areas of cities. The quality level there seemed to be generally better, except clothing, which was of poor quality. More Meijer then Walmart.
Seeing so many startups from MA get bought up and moved to California hasn’t helped the entrepreneurial spirit. The ones that are interested in high tech manufacturing often also find it difficult to get investment to build facilities in the US. Knowledge starts are easier than manufacturing starts. It will be interesting to see what effect the commonwealth’s new business planning policies have over the next 5 years.
Mr. Kimel-If I remember correctly your family came to the U.S. from South America. Why not Scandinavia or Europe?
The story about Perot (I’ve seen it written somewhere, once, but this is computer industry gosspi more than anything else) was that he made his first real chunk of money as a salesman’s bonus at IBM. A university wanted an email system (Minnesota maybe?) na dhe sold them the largest mainframe IBM made at the time.
Several years later, after a lot of shouting, the system they actually needed, very much smaller, was actually installed. Buy which time Perot had cashed his bonus check and left IBM.
Don’t know that the story is true but I’ve heard it often enough that, in my opinion (gotta watch those libel laws!) it might be.
Look to Hughes’ link to the military’s nascent interest in aviation.
The tech side of the military industrial complex began with socialized science projects between the wars.
Between movie money and money from Dayton Ohio Hughes could keep crashing airplanes.
Just in case this was a real question — Scandinavia and most European countries have significant controls on immigration in order to protect their local labor force. In addition there are significant language barriers, most people interested in migrating know at least *some* English, but rarely know French, Dutch, or some other non-English European language, which adds an additional barrier. A French-speaking friend with specialized expertise in Unix and “X” Window System was hired by a French company to manage development of one of the first Unix workstations. A *YEAR* later, he finally got his work permit. That was many years ago, but the situation today is not far different — it is quite difficult to get permission to work in a European country if you are not already a citizen of a European country.
In short, ease of immigration to America is one of the things that has kept the U.S. economy from entirely stagnating. I will say that I have not run into many startups here in the Silicon Valley lately that were being created by native-born Americans… they’re primarily being created by Indian immigrants, and the primary reason for Indian immigrants creating them here rather than in India is official corruption and poor infrastructure in India. As India’s infrastructure improves and the government gets cleaned up due to pressure from the now-wealthy business classes who made their money the honest way, it’s unlikely this will continue…
Hmmm…I wonder how you can factor those issues into an income mobility model?
Good question. I’ll note that Britain, another nation at the bottom of the income mobility scale, also has significant in-migration of immigrants due to Commonwealth rights. One reason why there are so many Paki and Indian immigrants in Britain (to the point where curry has replaced fish’n’chips as the stereotypical British food) is because of those Commonwealth rights. You would expect immigrants to drive down wages for the locals, which in turn would cause increased economic disparity between top and bottom and the further you have to climb, the further you have to go to get out of whatever class you’re born in… the question is whether this effect outweighs other factors regarding income mobility.
they’re more likely to, if they do start one up, start one up as a proper company. With several people, with the aim of employing more, with the idea to do something new and build it into a large company.
The original point would be moot if your company succeeded. In the current climate, your company could fail (the vast majority of them do) and if you couldn’t find a job quickly, you’d be left with nothing.
Another factor is that many of us already have large debt burdens, due to college, mortgage, illness, etc. Banks have tightened credit significantly since the meltdown. If you need capital and can’t get a loan, you’re stuck.
Not sure how a “proper” company differs from other types. If you’re selling your paintings out of your trunk, you may not be a proper company, but you’re still an entrepreneur.
“What is going on here?”
Hint: Energy.
An economy built on cheap energy can not grow when energy is expensive.
http://industrializedcyclistnotes.com