Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”

But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.

Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.

How can the reality and the image be so different? And can the United States learn from Japan’s experience?

It is true that Japanese housing prices have never returned to the ludicrous highs they briefly touched in the wild final stage of the boom. Neither has the Tokyo stock market.

When the talking heads speak of a decline, what they really mean is a loss of stock portfolio value. Or, more accurately, a decline in the prices of stocks, bonds, real estate, and other forms of capital. The wealthy abhor this potentiality because it would effectively destroy their wealth. While this concern isn’t altogether problematic (why shouldn’t they be self-interested, just like everyone else in the world?), the proposed solutions are.

Preventing “decline” is largely contingent on keeping capital prices afloat, which is itself contingent on leverage (which, it should be noticed, will be subsidized by taxpayers in some way), debt, and/or inflation. This is the only way. Capital asset prices are already significantly overvalued; the only way to keep it this way is to continue the policies that enabled this in the first place.

The only alternative is to let capital asset prices crash and then recover. This is the optimal strategy, in the sense of doing what’s best for the most people, for this strategy only requires non-intervention in the economy, which is unsurprisingly cheaper than intervention and bailouts. The reason why the talking heads never propose this is because the timeline for recovery is fuzzy at best.

Quite simply, once the market crashes and capital prices return to their pre-malinvestment valuations, it will be some time before those prices go back up again. This poses a problem to the wealthy employers of the talking heads, for said employers have spent their lifetime accumulating this imaginary wealth and, now that they are beginning to look at retiring, they do not want to see it simply vanish.

Therefore, the mainstream argument against decline—which is prevented only by bailouts and leverage—is entirely founded on the assumption that maintaining capital asset prices is desirable. Given the costs of doing so, and given that the result only benefit wealthy crooks, it seems clear that the best course of action is to welcome decline with open arms. This way, as is seen in Japan, living well will not simply be the privilege of the wealthy.

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?

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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.

Hausmann argues that to succeed economically, humans have learned how to specialize. Someone who’s marvelous in one area is likely mediocre at others – consider Michael Jordan’s ill-fated attempts to play professional baseball. Some tasks require a full human’s worth of knowledge – a person-byte – to carry them out successfully. Others require much more knowledge – building a complex product like a computer might require a kilo-person byte or more – the highly specialized knowledge and skills of a thousand different people. “Modern man is useless as an individual. Making a computer is a team sport.”

By understanding how much knowledge and coordination different economies are capable of, we might understand their economic growth potential. In the US, the average employee works with 100 coworkers. In India, the average employee works with 4 coworkers. Hausmann explains that’s not coincidental – the difference in wealth and income between the nations is closely related to the ability of firms to take on complex tasks. This also helps explain recent disappointment with the limited impacts of microlending – those loans go to small firms that are limited in terms of personbytes. They’ve only got so much knowledge they can apply to producing complex and high value products.

We might characterize economies in terms of those where lots of people do very simple work – he illustrates this with a marvelous Edward Burtynsky photo of assembly line workers processing chicken in China – and those where individuals do complex things in consort, like the players within a symphony orchestra. Hausmann shows us a “map” of the world, a complex graph that represents nations and what products they produce. Most nations produce a few things, and a few produce many different things. Some products are made everywhere, while others are made in very few places.

There’s an underlying pattern to this. The nations that make only a few things all tend to make, more or less, the same things. Basically, we can divide the world into two sets of countries – those that have sufficient personbytes of knowledge to produce a wide range of goods, and those that can produce only a few simple things. The places that make everything make things that few others make. Hausmann explains that products require a specific set of personbytes to produce. When you gain additional personbytes of skill, it’s like getting new letters in Scrabble – you can produce a new set of words, but only within the constraints of the letters (skills, knowledge) you already have.

“Poor countries make few things, and things that everyone makes. Rich countries make unique things. And this is true for municipalities as well as for countries.” He shows a graph of manufacturing in Chile that looks curiously like his graph of the world – on the top is Santiago, where people manufacture all sorts of things… on the bottom “is where there’s nothing but penguins” and capacity for manufacturing is very low.

Global economics, Hausmann explains, is a little like the BCS scoring in college football. It’s not just about who you beat, it’s about who they beat as well. What do you make, and what does everyone else make? What do you make that no one else makes? What new products could you manufacture based on what you already make?

Why pay attention to this idea, the “economic complexity index”? It’s a very good tool for explaining the classic question of “Why are some countries rich and others poor?” Specifically, it explains 73% of the variances of incomes across nations. And where the predictions economic complexity theory offers differ from reality, it’s possible that reality is wrong. The index suggests that India should be richer and Greece should be poorer, which suggests that error in the index is predictive of future growth. If you want to bet on economies that are undervalued, Hausmann suggests you invest in China, India, Thailand, Belarus, Moldova and Zimbabwe. (On the last, he suggests that Zimbabwe’s main economic problem is a single persistent individual, but that there are many personbytes of knowledge ready to produce goods once the political situation changes.)

Is economic complexity actually measuring another phenomenon, like education? Probably not. We can look at investment in education and economic growth, and education appears to correlate more weakly than economic complexity. He suggests we look at Ghana, which has invested heavily in education since 1975, and Thailand, which hasn’t invested as heavily. Ghana hasn’t moved far from a largely agricultural economy, while Thaliand has moved from producing jute and sugar to becoming a major manufacturing center. They’ve accumulated many personbytes even if they didn’t invest heavily in education.

This raises a tricky question – how do you become a watchmaker in a country without watchmakers? The answer is that you move from what you currently produce to products that require only a fractional increase in personbytes, from one product space to a closely related one. The question for economic success may be how close you are to good products from what you already know how to make.

I find Professor Hausmann’s theory fascinating, in part because I’ve had the chance to play with the gorgeous visualizations César has built of economic progress in different parts of the world based on economic complexity. What I still don’t understand is how Thailand kicked Ghana’s butt economically. How do you get from jute to microcircuitry? And why couldn’t Ghana get from aluminum production to more complex manufacturing. Looking forward to reading his papers and understanding a bit more, as the core concept of complexity is a very compelling one.

What is the biggest single drag on the beleaguered global economy? Opponents of globalisation might point to the current crisis, which shrank the world economy by about 5%. Proponents of globalisation might point to the remaining barriers to international flows of goods and capital, which also serve to shrink the world economy by approximately 5%. That sounds like a lot.

But the truly big fish are swimming elsewhere. The world impoverishes itself much more through blocking international migration than any other single class of international policy. A modest relaxation of barriers to human mobility between countries would bring more global economic prosperity than the total elimination of all remaining policy barriers to goods trade – every tariff, every quota – plus the elimination of every last restriction on the free movement of capital. [Emphasis added.]

I’ve addressed the stupidity of the “free trade” advocates before, so I won’t do it again here.  However, I will address the problems with the concept of free labor.

First, the economic models used to demonstrate the wisdom of free labor often ignore the simple fact that the conditions facilitating trade in the first place are predicated on culture, and that allowing people from one culture to interact with the trade-oriented culture will diminish the support for the very conditions that allow for trade in the first place.  In other words, all cultures are different.  Some are pro-trade, others are not, and some are only pro-trade when the benefits are staggeringly obvious.  Expecting radically different cultures to interact with one another without also expecting a change in the cultural institutions that harbored that interaction in the first place is astonishingly stupid, and, indeed, ignorant of basic human nature.

This mindset, that the free market will be enough to ensure that all people from all cultures will behave rationally and interact peacefully with one another, is predicated on the wholly fallacious assumptions that people are inherently rational, that all cultures are equivalent, and that cultural biases and prejudices are easily overcome.  Of course, the real world differs significantly from this model.  People are not rational creatures; they are rationalizing creatures.  And, shockingly, people still hate people from other countries simply because they’re from other countries!

Economic growth is rarely (perfectly) linear and never guaranteed.  Furthermore, the conditions for growth are vast and complex, and so it is the height of arrogance to think that models that inaccurately measure a few irrelevant variables are going to make for a compelling argument.  Yet, this is precisely what economists are doing when they argue for free labor.

Second, free labor (and, come to think of it, free trade) advocates tend to ignore the very simple fact that wealth is not based on being able to buy things at lower prices.  Lower prices are the effect, not the cause.  Quite simply, economists ignore fundamental microeconomic principles, leading to this wacky macroeconomic theory.

Wealth, fundamentally, comes from producing something of value, whether for yourself or someone else.  As long as you value that which you’ve created in the quantity in which you’ve supplied it, you have created wealth.  If you create something that someone else values in the quantity in which they value it, you have created wealth.

The standard macroeconomic theory posits that people are effectively wealthier when they can consume more products at identical or lower prices.  Of course, this thinking extends to labor, with the argument being that cheaper labor enables one to produce more with less (in essence, the decreased cost of inputs means that cheaper labor translates to greater economic activity).

This argument is technically true, but irrelevant.  Lower prices as a result of cheap labor does not make consumers wealthier because consumption is, by definition, destructive since one is using up a resource.  What makes consumers wealthier is their own personal production, not lower prices.  Lower prices, in a sense, give the illusion of wealth because they make it easier for poor people to have the things that rich people once exclusively enjoyed.  Note that this is not to condemn lower prices in and of themselves, but rather to clarify that lower prices are no substitute for production.

And so, the argument made by free trade and free labor apologists is largely irrelevant.  Lower prices do not make people inherently wealthier.  Instead, they reveal how other people have become wealthier by improving their means and methods of production.  Confusing cause and effect is a fundamental error, and one that is often overlooked in this debate.

In sum, the argument for free movement of labor completely ignores human nature, as well as basic economic principles.  As such, it does not merit any further discussion, nor should it be taken seriously.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

I think I can do Mr. Buffet one better. How about a tax on all billionaires named Warren Buffet wherein all their assets are confiscated and liquidated and all future income is taxed at a rate of one hundred percent. Furthermore, all billionaires named Warren Buffet will be prohibited from leaving the country at any point in the future, which ensures that any and all assets that they’ve socked away overseas will either be taxed eventually or left unused. Finally, anyone who receives an inheritance from all billionaires named Warren Buffet will have their inheritance taxed at one hundred percent as well. I think that this will ensure that all billionaires named Warren Buffet will certainly share in the sacrifice.

As an aside, I generally oppose tax increases, at least given the current tax rates. However, if rich people want to pay more in taxes, I see no reason to say no. It is difficult to find people willing to pay taxes. And so, if there are people who are willing to do so, I see no reason to stop them.

After all, if a man thinks the government is better at managing money than he is, he’s more than likely correct.

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.