Cowen on the Austerity Facts Foofaraw

I don’t wish to respond point-by-point to some of the writings in the blogosphere, but given the above, Ryan Avent also is not looking deeply enough.  Both he and Brad Plumer did not see that the posts in question clearly distinguished between spending cuts and “austerity” (Brad did issue what is arguably a correction.)  I admire both bloggers and read them regularly, but these two posts both fail; here are some comments from Veronique.  I would say there is a dominant narrative, repeated many times in not always precise language, which people find it very hard to think outside of.

Most of the time “austerity” is a misleading word and more precise concepts — readily intelligible I might add — are available.  There really are some times when we should relabel austerity as “mostly tax increases,” but many people are reluctant to do so.

via Economic growth is not contractionary, and other confusions about stimulus and spending — Marginal Revolution.

Veronique de Rugy on Austerity Facts

Vero's austerity chart

First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems. Some spending cuts have been implemented in a few countries. Also, if this data were adjusted for inflation (which I would prefer but the data isn’t available) it would possibly show a slight decrease and certainly a flatter line for all countries. However, the overwhelming take away from the European experience is that a majority of governments haven’t really implemented spending cuts, large or small, and some have even continued to grow.

via Show Me the ‘Savage’ Spending Cuts in Europe, Please – By Veronique de Rugy – The Corner – National Review Online.

I suspect the entire debate hinges on a difference in assumptions about the relevant spending baseline. If your theory prescribes significantly ramping up spending during recession, low or flat spending growth can look perversely “austere,” even if absolute spending as a % of GDP is very high.


Veronique sends an updated PPP-adjusted chart:

She adds (via email):

I am not denying that spending has been cuts in Greece, Italy and Spain. But I don’t agree that the spending cuts were savage or that’s all that’s going on in Europe. For instance these guys never talk about the impact of tax increases. Yet, Avent is willing to say that VAT props up inflation. That makes any cuts, even the smallest ones much more painful. I think there is a misplaced obsession with spending cuts and spending cuts alone being the source of all EUzone problems.

Austerity Facts?

Russ Roberts wants the facts:

Which nations in Europe have slashed government spending? I suppose “slash” is an ambiguous term but when you write  that the experiment has been tried, don’t you have to show that spending has at least been cut or reduced, right? Maybe some European states have slashed the growth rate in government spending? Is that what he means? If so, shouldn’t different words be used? And either way, should there be some facts on this “experiment.” The word implies something scientific. But it all appears to be going on in the mind of the writer rather than in the real world

I’d like some facts. I have seen many articles on austerity. I can’t remember seeing any that suggest that government spending in any European country has actually fallen. Yes, there is talk of spending cuts or cuts in growth rates. But I’d like to see the data that shows the cuts have actually been implemented.

Me too. Where should I look?

Standing Up for GDP

Joseph Stiglitz is right. GDP per capita is an inadequate measure of a country’s prevailing standard of living for many reasons. If you want one number, something like median real consumption would be better. But I’m willing to stand up for GDP per capita as a rough and ready indicator of well-being within the bounds of nation states. Why?

First, as an indicator of well-being, it doesn’t get much intuitively wrong. That is, GDP per capita tends to correlate positively with most of the things most of us think are constituents or side effects of well-being and negatively or not at all with most of the things most of us think are corrosive to well-being. (I go through some of this data around p. 29 of my happiness paper [pdf].)

Moreover, alternative rankings such as the UN’s Human Development Index, which accounts for things like health and education, correlate so closely with rankings of per capita GDP, it’s pretty clear that income levels are doing most of the work. As Justin Wolfers put it:

For all the work that goes into the Human Development Index, it just doesn’t tell you much that you wouldn’t learn from simple comparisons of G.D.P. per capita.

And don’t forget that the link between GDP per capita and self-reported happiness is positive and strong! Here’s a reminder of what the relationship looks like this:

As you can see, the doubling in GDP per capita from $1000 to $2000 has about the same effect on average self-reported life satisfaction as the doubling from $16,00 to $32,00. It was this finding that led Daniel Kahneman last year to say:

The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago.  We have been wrong and now we know it.  I suppose this means that there is a science of well-being, even if we are not doing it very well.

But I think the most neglected argument in favor of GDP per capita as a measure of well-being is its neutrality. Here’s how I put it in my happiness paper:

Many people seem to think that a government’s emphasis on measurements like GDP indicate a kind of collective affirmation of materialist goals, encouraging a narrowly materialist attitude at war with more exalted values. But this is simply a mistake. The very function of money is to serve as a neutral medium of exchange. It is a shape-shifting embodiment of almost any value. The same $100 can be spent on a prostitute or donated to an HIV/AIDS clinic. The relative value neutrality of money is precisely why the measurement of per-capita wealth is well suited to pluralistic liberal societies; it doesn’t beg many questions about competing concep- tions of the good life. Money can’t be converted into  anything that someone might value, but it is of the nature of money to be convertible into a phenomenally broad range of values. Societies with high levels of average income and wealth are societies in which people have more resources at their disposal to achieve their aims, no matter what those aims might be, which is why it should be no surprise that, other things equal, people with more money are more satisfied. By measuring GDP, household wealth, and the like, government is not affirming one set of values over others. It is, in fact, embodying an ideal of liberal neutrality by measuring something that is valuable in varying degrees to all of us.

Because of their neutrality, economic measures are excellent inputs to public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values. There are lots of candidates for alternative indicators or progress and well-being, but most are transparently motivated by ideological antagonism to the kinds of policies known successfully to promote income growth. These are obviously not very well-suited for use in public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values.

The demand for alternatives to GDP resides predominantly in certain quarters of the environmental movement. It’s easy to see why. Many environmentalists demand policies that, if implemented, would show up as unmitigated damage in economic measures like GDP per capita. I think it’s difficult to overstate how huge an impediment this is to much of the environmental movement — especially since these measures do track the elements of well-being pretty well.

Some enviromentalists, like Thomas L. Friedman and Van Jones, go the congruence route and jump into the business of retailing fantasies about pro-growth green central planning. But this kind of “and a pony!” no tradeoffs stuff is a pretty hard sell. Anybody really serious about saving the world from the peril of a more livable Canada is going to have to argue for policies that will indeed gut-punch world income growth. That argument is a lot easier to make if you can first persuade governments and journalists to shelve standard economic measures and replace them with new figures that make a virtue of green-tinted impoverishment. It’s hard to fail when you’ve redefined success.

That’s why I’m ready to hold onto my wallet when luminaries of the left like Stiglitz say they’re eagerly awaiting the September 14th publication of a report by Nikolas Sarkozy’s Commission on the Measurement of Economic Performance and Social Progress. But it probably won’t be that bad.

Here’s my predication. Good ol’ GDP per capita will be found (perhaps rather annoyingly to this congress of authors) to do better as a measure of social progress than one might have thought, for reasons similar to those detailed above. Chief among the problems with GDP-like measures will be that they fail to capture the value of environmental sustainability. Also, the value of economic equality. But not the value of economic liberty. That GDP fails to capture the value of, say, policies that reduce the probability of a future in which tens of millions die due to a massive flu pandemic, or due the availability of portable nuclear weapons, will go unmentioned. Less severe but equally indeterminate environmental threats will get many pages.

Surprise me Commission on the Measurement of Economic Performance and Social Progress!

The Illiberal Liberalism of Charter Cities

I think it’s an idea worth trying, though I share some of Tyler Cowen’s concerns.

Romer says good rules make countries rich. But countries with bad rules, because they have bad rules, often have no clear path to good rules. Romer says what countries with bad rules need are new rules for generating better rules. His proposed solution is to give up on both the purely endogenous development of better rules and the attempts of the global Lords of Poverty to bribe rulers into imposing better rules. Instead, Romer wants to try to get rulers of countries with bad rules to cede to better rulers effective (but limited) political authority over small, largely unoccupied bits of state territory. It strikes me that there’s still an obvious problem here. Why won’t the bad rules that have impeded endogenous development also impede the adoption of a higher-order rule-reforming rule? I don’t really see the loophole that Romer needs to get started. Anyway, the idea is that the rulers of screwed up countries will be so impressed by these zones of high economic performance that they will seek to replicate them in the territory they haven’t leased to Canada or Belgium or whomever.

Hong Kong and it’s effect on China is Romer’s big example. Alex Tabarrok says that Hong Kong’s reintegration into China really marked China’s integration into Hong Kong. I think this is too hopeful. China remains authoritarian, illiberal, undemocratic and not at all enamored of the distinctively English spirit of laissez faire behind the Hong Kong experiment. I think it’s interesting that these facts are clearly assets to the Charter Cities project. What the example of Hong Kong communicates is that authoritarian, illiberal, undemocratic regimes need not feel threatened by semi-independent city states with working “liberal” market institutions. It says to rulers that their countries can get rich without granting their subjects real freedom.

What should we make of this message? Should we encourage it? Is Romer trying to encourage it? Does Romer believe it? Or does he believe that high growth rates sooner or later lead to broader liberalization. Maybe it’s OK to let this cat out of the bag as long as the pace of liberalization is slow enough that current illiberal rulers are never really threatened by the liberalizing externalities of charter cities. But is there any way to credibly make this assurance?

I’m convinced that it would probably be better for both the liberty and welfare of the Burmese people, for example, if the junta tried to go the Singapore/China market authoritarianism route rather than hold free elections and establish a democratic government. I’m not happy with this conclusion. Unlike many of my libertarian friends, I do not think democracy is incidental to liberty. But suppose it turns out that democracy is incidental to economic growth — that it is correlated with but unnecessary to growth. Suppose further that illiberal rulers will welcome isolated experiments in the institutions of growth as long as they don’t come bundled with democratic institutions. If economic liberalization eventually has liberalizing political spillovers, promoting democracy directly could turn out to be self-defeating. Could it turn out that liberal democrats do the most for liberal democracy by promoting market authoritarianism? Would this make Naomi Klein right or wrong?

Gregory Clark Uses Computer over Phone, Predicts "Economic Redundancy" of Working Class

Gregory Clark’s basic assumption would seem to be that some people are born idiots. His argument in this Washington Post op-ed goes something like this: real wages of idiots have not increased because the demand for idiot labor has fallen due to the rise of the machines. Soon, the machines will be able to do anything an idiot can do for less than it costs to pay idiot subsistence wages. So idiots will be left “socially needy but economically redundant.” What will we do?! “There is only one answer,” Clark says. “You tax the winners — those with the still uniquely human skills, and those owning the capital and land — to provide for the losers.”

What to say? Tim Worstall says a good deal of it. This diagnosis by Bruce Wilder in Mark Thoma’s discussion thread seems to me in about the right neighborhood:

[In his book Farewll to Alms] Clark could find few institutional differences between 12th century England and 20th century Britain. In his mind, Henry II laid down the law of equity securing property rights, and nothing else much mattered. If anything, he regards the 12th century, with its low tax rates, as much more amenable to economic growth and innovation than the burdensome 20th century welfare state. So, I’m not surprised that he doesn’t credit institutional changes for changes in income distribution over the last three decades.

So, the shape of his fears that machines will soon displace the near-cretins serving him hamburgers at McDonald’s form a unitary theme. He sees his class burdened by taxes to support the no-account lower classes, who are even more useless now than in centuries past, but, perhaps, can reconcile himself to it as his paternalistic obligation.

Here is what I said some time ago at Free Exchange about Clark’s baseless truculence toward institutional explanations in economics.

Here’s what I think about Clark’s op-ed.

First, technological innovation over the past two centuries has been incredibly rapid, and workers have been repeatedly displaced by technology only to move on to different kinds of jobs. Why hasn’t technological change so far created much higher rates of unemployment? Does Clark think this is a historical fluke? Why does he think this pattern is about to be broken? Why does he think technological change is finally reaching a tipping point? His failure to address this obvious point at all is glaring. Is this whole conjecture really built on his experience with an automated phone call to United Airlines?

Second, I think that Clark wrongly accepts that real wages toward the bottom of the distribution have not risen. This is, to my opinion, an artifact of mistaken measurement techniques. See Broda and Weinstein. There is no reason to believe that the market forces which have improved standards of living for the poor will not continue to do so. Indeed, Clark’s assumptions about the efficiency gains from future technology provide us reason to think the real prices of many goods will continue to decline.

Third, insofar as wages have stagnated toward the bottom, a decline in hours worked for low-skilled workers explains a good deal of it. Doesn’t this show Clark is right?! No. It shows that badly structured welfare policy has provided an incentive for many low-skilled workers to work fewer hours in order to qualify for transfer payments. Because experience (hours worked at a task) is a main determinant of skill level, and skill level is a main determinant of wage levels, an incentive to reduce hours worked is an incentive to remain at a lower level of skill and thus wages. See Deere and Welch ($$$).

Fourth, Clark’s theory of blood-born idiocy leads him to conclude that there are little or no gains to be had from improvements in education. Here’s what he says:

Others see education as a way out of this dystopia. The root problem is, after all, the widening of the income gap between the skilled and the unskilled. Can expanded education give the poorest the tools to resist the march of the machines? I’m skeptical. Already, much of the supposed improvement in high school and college graduation rates has come by asking less of graduates. We can certainly arrange to have everyone “graduate” from high school, but whether they will have the skills needed to make it is doubtful.

This is maddeningly dense. Clark apparently believes the only way to make graduation rates go up is to devalue diplomas by giving them to irremediable idiots. That is to say, idiots are idiots and education can’t do anything about that. A more plausible view is that so many young people graduate high school (or don’t) with such poor abilities because the American public education system has failed disastrously to provide a minimally acceptable level of training to children who grow up in poor, predominately minority neighborhoods. The best explanation for this failure is an institutional explanation. The political forces in control of public schools in low-income neighborhoods have strong incentives to resist almost every potentially effective reform. There are no competitive markets in educational services for low-income families because such markets are, in effect, against the law. Were low-income families to have access to a competitive market in educational services, there is every reason to believe the quality of training would rise, the real level of ability of high-school graduates would rise, and the portion of high-school graduates prepared to benefit from higher education would rise.

The fundamental bone of contention here is over the fixity or flexibility of the human capacity to gain and improve economically relevant skills. Here is Cato Unbound’s issue on IQ.

Fifth, the piece is short-sighted. If robots can crowd out all low-skilled workers, there is no reason they cannot also crowd out all high-skilled workers. See Hanson. Would this be bad? Growth would proceed so rapidly that the returns to even small amounts of capital should be outrageously high. The gap will be between those with income from capital gains and those with none. To prevent this, some version of Clark’s recommendation might be desirable. I’d recommend Charles Murray’s scheme for replacing the United States’ social insurance apparatus with basic income grants and mandatory retirement and medical savings accounts. In a world of doubling-every-fifteen-minutes Hansonian robot growth, the portion of GDP necessary to fund universal grants sufficient to ensure a modestly lavish level of consumption would be so trifling that no one would even notice. For now, we should try to hasten the arrival of this post-human economy, in which case we should try to optimize incentives to innovation and growth. Higher taxes and higher levels of welfare spending is about the opposite of that.

Urban Farming

This idea is hilarious here in Iowa, where we wonder if some city folk have ever seen real farms. “The reality is that farming is an inherently space-intensive enterprise,” as even Manhattan native Matt Yglesias can recognize86 percent of Iowa is farmland (down from over 90 percent just a decade ago). That’s a bit shy of 30 million acres. That’s about 2000 Manhattans. The mind-blowing productivity growth in agriculture over the 20th century stands as one of the great achievements of human history. It involved immense strides in pest and weed control, farm machinery, bioengineering, and economies of scale. All this has made it possible to feed a rapidly increasing population with decreasing amounts of land and labor.

(Aside… No doubt Happy Planet Index-type people in 1909 were pointing out the physical impossibility of our one finite planet supporting 7 billion people.)

It’s nice to have a garden. But didn’t seem nice when I was a kid, when my family had a huge garden plot (a quarter acre, maybe?) on the property of a farmer who went to our church. That much garden in a city would seem like some pretty serious urban farming. Set in the vast scale of cultivated central Iowa, it seemed like what it was: almost nothing. Later, as a teenager, I detasseled corn and walked beans. If a field is big enough, and the curve is right, from the middle you can’t see anything else.

If not for the massive subsidies it receives, the percentage of land under cultivation in Iowa would decline even more rapidly than it has. But it would remain one of the best places in the world for growing stuff. An unsubsidized Iowa would grow a different mix of stuff, and would traffic in a different mix of animals. Greater heterogeneity would reduce some economies of scale, but the scale of the actual farming–the kind that keeps humanity fed–will probably remain inconceivable to many rooftop basil growers.

UPDATE: People we’re  justly complaining about the junk chart. It’s the only one I could quickly find that had the time-scale I wanted. Here’s a better one that goes back just 60 years.

John Galt and the Billion Tweaks

My colleague Jason Kuznicki nails this:

Ayn Rand hated F. A. Hayek, but in a weird way, the Hayekian idea of the entrepreneur — a little guy who happens to stumble onto a tiny, useful bit of knowledge, and who finds himself free to employ it — is a better fit to the relatively more sophisticated view of Rand’s work, which holds that Atlas is just a metaphor, not a blueprint for world takeover. Schumpeter’s heroic entrepreneur is, I think, empirically wrong, but better suited to a literal reading ofAtlas.

Who is John Galt? An ephemeral process. And if you could follow that, well, you get the libertarian gold star for today.

I get the gold star! Saltative, game-changing, lone-genius invention does happen, but not very much. Sustained growth is driven primarily by an accumulation of tiny productivity-enhancing innovations. Part of the problem with Obama’s Ecomagination Industrial Policy is that it’s looking to finance a quantum leap. Like the dominoes-of-democracy best-case scenario for Iraq, the dreamy upside could be huge, sure. But the smart money is on lower than average returns to investment. The problem isn’t that we’re going to get some wasteful Project X instead of Galt’s motor, because all our Galts went MIA. The problem is that we’re going to get Projects A-Z, most of which will be a bust, instead of some significant number of the billions of tweaks that make innovation and growth happen. 

A couple sentences from Robin Hanson for your consideration:

Small differences in growth rates eventually overwhelm most other considerations, so the clustering and innovation externalities that create growth differences deserve far more public attention. Unfortunately most people yawn at growth theory; they prefer stories about conflict, status, moral fiber, heroes, and epic changes.

That is, people prefer romance. Here’s one way to understand the “going Galt” dramatics. Obama is causing a lot of Rand fans to completely flip their lids in part because Obama and his devotees are Bizarro World Randian romantics in the grip of an adolescent faith in the generative powers of the state.

Why Obamanomics Will Hurt Innovation

The Manhattan Institute’s Jim Manzi has written a great column lucidly explaining why the economic policies of the Democrats under Obama threaten entrepreneurship, the ultimate source of innovation, productivity enhancement, and economic growth. Here’s his conclusion:

Like the college students who stayed up late to hear Obama’s campaign speeches only to find his first significant action to be a stimulus program that will transfer about $1 trillion from them to the Baby Boomers, Silicon Valley Obama supporters may find themselves in an uncomfortable environment. A government-dominated economic era may not be an auspicious one in which to start companies that threaten big, incumbent corporations with lots of political clout.

The concept of “animal spirits” recognizes that not all economic decisions are made entirely with spreadsheets. Some people start companies because they’re driven by a dream that transcends rational economic calculation. But most successful entrepreneurs are pretty serious about comparing risks with opportunities. Higher tax burdens raise the price of entrepreneurship. When you raise the price of something, then, all else held equal, you usually get less of it. Given that something like 7 million people in the U.S. work in companies that are or were venture-backed, including a majority of the employees in high-growth sectors of the economy like computers and software, this is likely to matter a lot in the long run.