Heartiste’s Questions

1. How is the present automation and productivity conundrum qualitatively different than ones from the past (for example, the classic case of the auto replacing the horse and carriage)? If you do not believe it is qualitatively different, explain how we escape the “zero marginal productivity” worker trap, especially in an era when human capital is shrinking due to a combination of dysgenic birth rate differentials and mass migration of unskilled poor? Note: “Humans are fungible” is not an acceptable cop-out.

The present automation and productivity conundrum is not qualitatively different from the past. The zero marginal productivity trap is escaped by the fact the fact that human demand always exceeds supply, broadly speaking. As such, there will always be demand for more…something, anything, and everything.

Of course, the broader assumption—that automation and productivity will continue apace without interruption—is wrong. In Neurodiversity, the author noted that dysgenics and/or small populations lead to technological stagnation and regression. Furthermore, the history of progress is not exactly linear. Thus, we may be in for a stretch of devolution for a while, as “society” becomes too stupid to maintain its current level of wealth. It’s happened before (that’s why it was called “The Dark Ages”). Let’s not be so arrogant to suppose it won’t happen again.

On a more optimistic note, it may be the case that technology becomes more idiot friendly, which enables the less intelligent to capitalize on intelligence without actually possessing any. Simplified UIs should do the trick, they it will be a while before they are common. I’ve written on this before.

2. If, say, most of the profits go to the top 10% in society, while the bottom 90% are unemployed or marginally employed, how is it exactly that those top 10% will be able to extract profits from a customer base that doesn’t have the income stream to afford more than the basic necessities?

It helps to keep in mind that money is dynamic. It is a medium of exchange, after all. Income is usually spent, which is how the wealthy extract profits from it. The poor earn money then turn around and spend it. Rinse and repeat. The key is to differentiate between wealth and income. Income is what you earn; wealth is what you keep. The wealthy will keep, in a sense, the labor of the poor (beyond that which is necessary for survival, of course). Since poor people don’t want to starve to death, they will continue to work as long as they can provide for their needs. And the rich will exploit them in the meantime. Assuming, of course, that the poor don’t get pissed off and kill the wealthy and the elite, as has been done in the past.

Consumer Demand is Not the Whole Picture

See if you can spot what’s missing:

Businesses aren’t investing in the United States because of a lack of consumer demand, International Paper CEO John Faraci said Friday.

“I think this was all about consumer spending and demand. You know, the problem we have is there’s inadequate demand to create jobs. We know how to respond when there is demand,” he said on CNBC’s “The Kudlow Report.”

The U.S. Commerce Department estimated that gross domestic product expanded at a 2.2 percent annual rate in the first quarter, falling short of analysts’ expectations it would grow 2.5 percent and slowing down from the fourth quarter’s 3-percent rate.

The more correct way of saying this is that there is a lack of consumer demand for products at profitable prices. There is plenty of demand for cheap goods (for example, imagine what would happen to iPad sales if the price dropped to $150 each). The problem is that cheap goods often have very thin profit margins.

Also overlooked in this admittedly shallow Keynesian market analysis is that purchasing power has declined. It’s not that demand has disappeared or necessarily reduced (who doesn’t want stuff?); it’s that people don’t have the ability to act on their demand. Put plainly, people don’t have money, regardless of whether we’re talking cash or credit.

Thus, saying that demand has declined is a rather shallow way of addressing the problem and thus begs a shallow solution (quantitative easing, e.g.). The deeper issue is that people’s real income has declined, alongside their ability or willingness to use credit to purchase things. Therefore, the proper solution is not a short-term stimulation of demand, but rather an attempt to fix the structural flaws that have caused a decline in real income. The causes for such a decline are various: free labor, inflation, free trade, and so on. Fixing these things won’t be easy—in fact, they’ll be quite painful in the short-term—but they will lead to a long-term fix. Unlike a stimulus.

Compensation by county

So before you read further… quickly guess at what county in Southwestern Pennsylvania has the 2nd most lucrative jobs in region?  Allegheny County has been #1 for some time, if not as far back as it matters.. but #2 is………..

Just a random factoid the Bureau of Economic Analysis which came out with just before the new year with data on compensaton by industry in 2010.  Below is what it says for regional counties in terms of average compensation per job.  Follow the link for more on the definitions of compensation, which includes more than just wages received.  Also note this is compensation per job by place of work, which is different from most labor force stats you see which are complied by place of residence.  That makes a big difference when you look at differences across counties within the metro region.

Total Average Compensation Per Job, 2010
Allegheny, PA $60,374
Armstrong, PA $45,799
Beaver, PA $47,757
Butler, PA $51,208
Fayette, PA $40,891
Greene, PA $59,411
Indiana, PA $46,941
Lawrence, PA $44,567
Washington, PA $52,585
Westmoreland, PA $46,423

So what will be interesting will be to see when the next round of data comes out for 2011 is if Greene County edges past Allegheny County for the highest average compensation in Southwestern Pennsylvania. The gap between the two counties, which have been #1 and #2 in this list for the last decade, has converged quickly over the last 4 years.   Lest anyone jump to conclusions thinking it is somehow all or even mostly shale gas related… if you look back over the decade in this specific data set, which goes back to 2001, you will see that even in 2001 Greene County was solidly #2 in this ranking of highest average compensation among the 10 counties in the region.  So it isn’t really a new pattern at all, even if it is surprising.

and did you guess right?

Still No Sympathy for the Poor

Here’s Bryan Caplan:

What about the “losers”? Bite your tongue. When you call lower-income people “losers,” you’re falsely assuming that we’re all racing for the same finish line: material success. But to a large extent, lower-income people are just racing for other finish lines. Leftist outrage over income inequality is therefore deeply misguided. To a large extent, incomes differ because priorities differ. And if the poor don’t consider their lack of riches a big deal, why should anyone else?

As I wrote before, most poor people are where they are because of the choices they’ve made in their life. In fact, it is fair to say that, all things being equal, they don’t want to be rich. They would rather have whatever they have instead of wealth.
Note that this isn’t some deep psychological analysis, but rather a tautology: by their fruits ye shall know them. You can tell that most poor people want to be poor (or, more accurately, have what they have instead of wealth) by the mere virtue of the fact that they are poor. At this point in time, the markers of poverty are fairly well-known, and so only the astonishingly ignorant do not know what is needed to avoid poverty.
Thus, most poor people know that their past actions would likely lead to poverty, yet they made them anyway. Since they knowingly made those decisions, they are no more deserving of anyone’s pity than child who sticks his finger on a hot stove after being told not to do so.
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Interesting History

Walter E. Williams, on the federal income tax:

During the legislative debate before enactment of the 16th Amendment, Republican President William Taft and congressional supporters argued that only the rich would ever pay federal income taxes. In fact, in 1913, only one-half of 1 percent of income earners were affected. Those earning $250,000 a year in today’s dollars paid 1 percent, and those earning $6 million in today’s dollars paid 7 percent. The 16th Amendment never would have been enacted had Americans not been duped into believing that only the rich would pay income taxes. It was simply a lie to exploit American gullibility and envy.

I believe it was either last year, or possibly in the spring of this year, when conservatives got their panties in know over how 49% of all taxpayers paid no income taxes (though, funnily enough, all taxpayers still paid their FICA and other payroll taxes). The theory was that there would arise a class of professional voters, who would simply elect officials to pay take money from the rich and give it to the more-deserving poor, of which said professional voters just so happened to be a part.

The reality appears to be a bit different, at least historically speaking. When the income tax was first enacted, it only applied to the rich, who comprised 0.5% of the population. Thus, the percentage of the population paying the income tax increased 100-fold over 98 years to 51%. If the theory of professional voters were true, the percentage of taxpayers should have at least remained stable (or even decreased) while the tax rates should have remained stable or increased. Reality, as it were, is markedly different.

In spite of all the attempts at class warfare in the last one hundred or so years, the poor still get screwed over by the rich. This is probably because there is a strong correlation between a general form of stupidity and poverty,* as well as a strong correlation between wealth and general intelligence. In essence, the wealthy are generally intelligent enough to figure out how to make things work to their advantage (hence their wealth). If one is cunning enough to convince people to buy something they don’t need, it seems plausible that one could also sell someone a political policy that works to their disadvantage.

The historical norm has been that poor people pay quite a bit in taxes, and the wealthy are often the beneficiaries of those taxes (think of the feudal system as a general model of this). The idea that those who are intelligent enough to become quite wealthy won’t also be intelligent enough to protect their wealth is, quite frankly, absurd, and the idea that somehow the poor will manage to “reappropriate” wealth from the rich is even more absurd.

* Two quick notes: a lack of education generally correlates to stupidity, which in turn correlates to lower income (as evidence by the myriad statistics showing that high school dropouts earn less than those with a high school diploma, bachelor’s degree, etc.) Also, shorter time horizons also correlate to stupidity as well.

What the 'Long Tail' used to refer to

More back to the future in a way.  Income, poverty and general distribution issues used to be bigger topics in both academic research as well as the media and public discourse.  I once had a whole class just in how to measure poverty.  Seems to be a resurgence in the whole topic.

American Community Survey income distribution for households in the Pittsburgh MSA looks like this:

HOUSEHOLD INCOME IN THE PAST 12 MONTHS (IN 2010 INFLATION-ADJUSTED DOLLARS)

Universe: Households

2010 American Community Survey 1-Year Estimates

Pittsburgh, PA Metro Area
Estimate Margin of Error
Total: 978,959 +/-8,063
Less than $10,000 75,445 +/-4,207
$10,000 to $14,999 60,079 +/-3,254
$15,000 to $19,999 62,736 +/-3,285
$20,000 to $24,999 65,678 +/-3,660
$25,000 to $29,999 55,960 +/-3,892
$30,000 to $34,999 58,099 +/-3,570
$35,000 to $39,999 47,868 +/-2,885
$40,000 to $44,999 48,436 +/-2,846
$45,000 to $49,999 41,672 +/-3,031
$50,000 to $59,999 83,244 +/-4,605
$60,000 to $74,999 100,043 +/-4,547
$75,000 to $99,999 115,755 +/-5,690
$100,000 to $124,999 67,399 +/-3,740
$125,000 to $149,999 33,898 +/-2,113
$150,000 to $199,999 32,787 +/-2,388
$200,000 or more 29,860 +/-2,590

2000 Words

Consider these charts:

As can be seen above, having a college degree is becoming worth less. And the cost continues to increase. Worst of all, one cannot default on student loans, so those who take on massive loans to fund their education will find that they are essentially slaves to the banks for life if they cannot find a decent-paying job.

I hope we can finally stop with the utterly worthless advice to go to college and pursue a career. The former is becomingly increasingly less correlated with the latter, and we are only doing a disservice to young people if we say otherwise.

Also, my experience has taught me that most of what passes for higher education is nothing more than drivel. Most of what is taught is obvious, wrong, or pointless. If you want to be smarter, go to the library and find good books to read. If you need help getting started, use a search engine to find classics of the western canon. Then imbibe deeply.

In the meantime, forget college.

Jubilee?

Freakonomics asked if forgiving student loans en masse was a good idea. Here was their conclusion:

1. Distribution: If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades. The group who has been hurt over the past few decades is high school dropouts.

I guess it would help to define “high income.” Everything I’ve seen suggests that college grads generally start with relatively income when joining the workforce and that it eventually increases over time. And, once you adjust for inflation, grads today are earning less than grads of, say, thirty years ago, on the average. The only way the above claim is true is if one compares the college grads to those with less education. Also note that income growth, though a trend, is not promised to continue indefinitely. Also note that going to college is the recommended course of action, while dropping out of high school is not. In essence, those who have played by the rules, so to speak, are in a tough bind because they have played by the rules. It is cruel to argue that they don’t deserve consideration because they are still better off than those who didn’t follow the rules.

2. Macroeconomics: This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.

Can we get rid of this whole nonsensical stimulus thinking? All money circulates. Ceteris parabis, the money will be spent at some point. The only concern is over timing, not necessarily net effect. And there is no objective reason to prefer immediate results to delayed results. This point, though technically true, is irrelevant.

3. Education Policy: Perhaps folks think that forgiving educational loans will lead more people to get an education. No, it won’t. This is a proposal to forgive the debt of folks who already have an education. Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?

This is simply asinine. No one thinks that forgiving loans makes education more desirable. People think that the student loan system is fraudulent (i.e. people were talked into loans under false pretenses). The reason most people support loan forgiveness is because they see it as a reasonable redress to the outrages of the system. Also, note that the current system does a remarkable job of subsidizing marginal students, which is the problem in the first place.

4. Political Economy: This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.

Don’t or can’t? How many grads have to take on subpar jobs because they can’t afford to wait for better jobs or undertake risky ventures? These kids have been sold a lie, and many they have no recourse (and I mean this literally as they can’t even default out of their loans). The government guaranteed repayment of student loans, and, in order to prevent getting hit in the shorts, has made it impossible to discharge this debt through bankruptcy. As such, banks have little incentive to ensure the loan’s recipient’s ability to repay. In short, the government has created the mess, under the guise of helping the underprivileged. They have turned the underprivileged into slaves. Shouldn’t the slaves be able to lobby their master? Or is that too much to ask?

5. Politics: Notice the political rhetoric? Give free money to us, rather than “corporations, millionaires and billionaires.” Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative. Instead, they’re comparing it with the worst alternative. So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty?

This is simply stupid. The 15% of the population in poverty already receives money. To the tune of billions of dollars per year. How much more do they need? You’d think hundreds of billions of dollars would be enough to cure poverty, but apparently the federal government sucks worse at charity than it does at disaster relief in a chocolate city after a hurricane.
This is nothing more than a grossly ignorant appeal to emotion. The poor already get money from the federal government. And why are corporations more deserving of billions of dollars? The government has already lined the pockets of their Wall Street cronies through student loans. Shouldn’t this be redressed?

Conclusion: Worst. Idea. Ever.

More like: Worst. Rebuttal. Ever.

However, I don’t find the idea of student loan forgiveness all that appealing, in part because students still deserve to face the consequences of their (admittedly stupid) decision to go to college instead of getting a real job. In order for a lie to work, one party must tell it and another party must believe it. If you believe a lie, you need to live with the consequences. But if you take advantage of those who have believed a lie, then you deserve the consequences thereof as well.

My proposal, then, is very simple: allow grads to default on their student loans. Grads’ credit scores will take a hit, which is a reasonable consequence t their decision to essentially waste four years of their life. And banks would be forced to write a bunch of bad loans, killing their profits, which is a reasonable consequence to their decision to loan money to people that didn’t deserve it.

The current system is broken and remarkably unfair to those it purports to help. Correcting this problem doesn’t require forgiving all students of their loans. Allowing grads who find that a college degree is worthless to default on their loans should be sufficient to clear the market.

Does the OECD's 'better life index' sound like fun?

I am not sure the OECD’s better life index is meant to be fun. But I have had some fun playing with it. The index is interactive. The fun comes from giving different weight to 11 different criteria (or topics as they are described by the OECD) and then observing how this affects rankings of well-being of OECD countries.

The criteria used in the index are: housing, income, jobs, community (individuals’ perceptions of the quality of their support networks), education, environment (air pollution by tiny particulate matter), governance (voting and transparency), health, life satisfaction, safety (assaults and homicide) and work-life balance (working mothers, total hours worked and leisure).

Under the default setting, with all criteria being given equal weight, the countries that come out on top are Australia, New Zealand, Canada and Sweden. If you suppress all criteria other than income, Luxembourg is a long way ahead of the field, followed by the United States and Switzerland. The income measure used in the study (reflecting household financial income and wealth) has Australia in 14th place and New Zealand in 25th place.

The substantial difference between the outcomes of these weighting systems is interesting. In a previous post I observed that all well-being indicators tend to tell similar stories about well-being levels in different countries. The two observations are actually consistent. My research covered a larger number of countries, including many poor countries as well as the wealthy democracies of the OECD. Well-being indicators tend to tell a similar story when wealthy countries are compared with poor countries, but can tell different stories when wealthy countries are compared to each other.

Equal weighting of a range of indicators and a focus on income alone seems to me to be equally arbitrary approaches to well-being comparisons. Well-being is obviously affected by factors other than income, but it would be difficult to argue that all relevant factors are equally important. Value judgments have to be made to determine appropriate weights. An appropriate weighting system might be derived by conducting surveys to obtain weights reflecting the values of people in different countries. Alternatively, surveys could be used to obtain weights reflecting the values of people with different political views in particular countries, or across the whole of the OECD.

In the absence of such survey evidence, I have looked at the rankings for three somewhat extreme political groups drawn from my own imagination: Scrooges, Socioholics and Warm Fuzzies. As I imagine them, all three groups perceive governance and safety as being important to well-being. The Scrooges add income as the only additional factor. The Socioholics add housing, jobs, education and health in addition to income. The Warm Fuzzies exclude income and all the additional factors added by the Socioholics, but replace those factors with community, environment, life satisfaction and work-life balance.

So, which countries come out on top of the welfare rankings according to the values of these three political groups?

Scrooges: The countries that come out on top are Australia, Luxembourg and the United States. New Zealand is placed about 8th, behind Sweden, Austria, Canada and UK.

Socioholics: Australia and Canada come out on top, followed by New Zealand and the United States.

Warm Fuzzies: Australia, Denmark and Sweden are on top, followed by New Zealand, Canada and Norway.

What do I get out of this? My main observation is that Australia seems to come out fairly well, whatever coloured political lenses you use. The well-being of New Zealanders also looks fairly good, particularly if you adopt either a Socioholic or Warm Fuzzy perspective.

Having had some fun, the more serious question that comes to mind is whether a focus on the OECD’s well-being indicators (and other similar constructions) is likely to distract political attention away from much-needed economic reforms to improve the economic strength of some economies. For example, if well-being indicators suggest that people in some lovely country (New Zealand comes to mind) tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government of that country to become complacent about establishing conditions more favourable to further improvement of living standards.

Does Big Government Result in More Housework?

I found this to be the most interesting question explored in ‘Government Size and Implications for Economic Growth’, by Andreas Bergh and Magnus Henrekson. Before I explain, however, I want to provide some comments on the author’s conclusions about the effects of size of government on economic growth.

Government Size and Implications for Economic Growth

Bergh and Henrekson base their conclusions about the effects of size of government on economic growth on a review the recent econometric literature using panel data for high-income countries. They conclude: ‘In rich countries there is, indeed, a robust negative correlation between total government size and growth’ (p.30). They qualify this conclusion by noting that, as with many other econometric studies, the issue of causation has not been completely settled (p.33). They explain the ability of the Scandinavian welfare states to maintain modest economic growth despite big governments in terms of relatively strong performance of those countries with respect to other aspects of economic freedom. These conclusions are consistent with my own review of the relevant literature (background paper for the NZ 2025 Taskforce) and modest econometric efforts.

The reservation I have about the review of the literature by Bergh and Henrekson is somewhat technical – so some readers may prefer to skip this paragraph. My reservation concerns the authors’ enthusiasm for Bayesian Averaging of Classical Estimates (BACE), a technique used to deal with possible sensitivity of parameter estimates to the inclusion of different control variables in regression models. A recent paper by Antonio Ciccone and Marek Jarocinski suggests that margins of error in international income estimates are too large for such agnostic growth empirics to be reliable. In any case, in my view the economic reasoning that tells us that the economic costs of taxation rise approximately in proportion to the square of the tax rate provides a more powerful case against big government than the results of cross-country econometric studies. (The authors appear to attribute this insight to the Swedish economist, Jonas Agell (p.17), although it should more appropriately be attributed to much earlier work by Arnold Harberger, or possibly even to Alfred Marshall.)

It is well known that the economic cost of high tax rates arises in part from the substitution of leisure for income. Some would argue that this is beneficial because many people obtain more happiness from spending time with family and friends than from working. One reason why the argument is spurious is because it may be rational for individuals to sacrifice some current happiness to provide their children with a better education, fund early retirement or pursue any number of other objectives that are important to them.

Another reason why the argument is spurious is that what economists talk about as a choice between income and leisure is often actually a choice between time spent on paid work and time spent on unpaid household chores. It is doubtful whether people obtain much more pleasure from housework, weeding the garden and childcare than from working for pay. Bergh and Henrekson make the good point that high rates of labour taxation provide an incentive for consumers to produce such services themselves in the home rather than to work longer hours in order to purchase them in the market place. The authors suggest that this explains why hours of unpaid work are substantially greater in Sweden than in the US and hours of paid work are correspondingly lower in Sweden than the US.

The authors also provide a graph comparing average hours worked per person in Sweden and the US over the period 1956 to 2003. It shows that average hours worked in Sweden were substantially lower than in the US during the 1950s, when Sweden’s tax rates were much lower, the situation has been reversed in recent decades.

Over the last couple of centuries the ancestors of the vast majority of people in high-income countries have managed to obtain the benefits of participation in a market economy – the benefits of exchange and specialization on the basis of comparative advantage, resulting in much higher living standards and providing greater opportunities for skill development and incentives for further innovation. High taxes associated with big government provide the opposite incentives – encouraging people to shun the market and to produce services for themselves. Self-sufficiency is not without its attractions, but I doubt whether many people would freely choose the poverty experienced by their ancestors, even if that was the only way they could ensure a supply of fresh, organically-grown vegetables.

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