Planet Money recently did a report on the difficulty of maintaining high economic productivity in southern Italy. I won’t rehash the specifics of the story, but, I think it is important to get a visual sense of just how large the contrast between the south and north of Italy is. Too often we speak of nation-states. Nation-states are real, and they are important, but they are often not comparable. Just like comparing the USA to Sweden is only marginally informative, so comparing a small nation like Ireland to a more substantial one like Italy is deceptive. Here is a 2008 regional GDP map with sub-national breakdowns. Though some of the values are certainly lower now (basically, everything outside of Germany and Sweden), the relationships still hold.
Finally the social bubble seems to be bursting. Do remember that in 2000 there was backlash against Amazon as well, and it’s still around. Still, global oil demand level is low. Most people seem to agree that some of the “fixes” to the 2008 financial crisis were only band-aids, and the fundamental structural problems were put off for another day. Is that day now? Pessimism is cheap, but if you feel it, why not share it? I mused about a possible recession in May of 2007, and some of the comments were kind of funny and tragic. I’ll quote, with names removed to protect the guilty:
Economic forecasting is a mug’s game. There are simply too many unknowable factors that affect “the economy” for anyone to make accurate predictions. The Fukushima earthquake and nuclear disaster, for instance, had a noticeably negative macroeconomic impact around the world, and nobody knows what lurks inside the hearts of central bankers. Plus, if I did possess the secrets to the future, I’d be making a fortune as a speculator, not telling you about it.
There are plenty of financial types who have funds where investment is contingent upon expectation of macroeconomic conditions. You know what they think because you know how they invest, and they’ll tell you what they think as well. What’s the point of journalists and academics even offering predictions if they don’t have “skin the game”? You can basically just say anything to be contrary, perhaps like in a publication such as Slate.
The right questions to be asking aren’t “why does Silicon Valley create so few jobs;” it’s “why doesn’t everyone move to the Bay Area” (the rent is too damn high) or “how come there’s only one high-tech cluster.” After all, if industrial age capitalism had just created the prosperity of the Detroit area in its heyday, we’d look on it as a huge bust. But we had lots of industrial production clusters, of which the Detroit automobile industry was just the most famous.
I think there’s a standard geographical reason why capital intensive production of material goods exhibits polycentrism: the cost of transport matters. Many of the early industrial nuclei were located relatively close to the inputs for manufacturing. Additionally, once the goods were produced they had to be distributed as cheaply as possible, so location was another essential fixed parameter. Big eastern industrial centers loom large in the public imagination, but the same logic applies in other regions of the nation. Cheap electricity and abundant clean water is why many tech-oriented manufacturers are based out of the Pacific Northwest. It isn’t as if you could just relocate the Columbia river.
This article in The New York Times focuses on cash in terms of paper currency, but the lessons are generalizable to coinage as well, which pre-dates paper currency by 1,500 years. Some fascinating numbers:
…In 1970, at the dawn of plastic payment, the value of United States currency in domestic circulation equaled about 5 percent of the nation’s economic activity. Last year, the value of currency in domestic circulation equaled about 2.5 percent of economic activity.
…Indeed, cash remains so pervasive, and the pace of change so slow, that Ron Shevlin, an analyst with the Boston research firm Aite Group, recently calculated that Americans would still be using paper currency in 200 years….
… Thanks to technological advances, the average dollar bill now circulates for 40 months, up from 18 months two decades ago, according to Federal Reserve estimates….
…. In 1989, the Fed replaced 46 percent of returned dollar bills. Last year it replaced 21 percent….
Bhutan famously espouses “gross national happiness”:
The term “gross national happiness” was coined in 1972 by Bhutan’s former King Jigme Singye Wangchuck, who has opened Bhutan to the age of modernization, soon after the demise of his father, King Jigme Dorji Wangchuk. He used the phrase to signal his commitment to building an economy that would serve Bhutan’s unique culture based on Buddhist spiritual values….
Apparently the nation has recent switched from absolute to constitutional monarchy:
Bhutan’s political system has developed from an absolute monarchy into a constitutional monarchy. In 1999, the fourth king of Bhutan created a body called the Lhengye Zhungtshog (Council of Ministers). The Druk Gyalpo (King of Druk Yul) is head of state. Executive power is exercised by the Lhengye Zhungtshog, the council of ministers. Legislative power was vested in both the government and the former Grand National Assembly.
On the 17th of December 2005, the 4th King, Jigme Singye Wangchuck, announced to a stunned nation that the first general elections would be held in 2008, and that he would abdicate the throne in favor of his eldest son, the crown prince….
From what I can tell the royal house of Bhutan seems genuinely sincere. More plainly paternalist than deiviously despotic.
Below are some Google Data trend lines comparing Bhutan to some of its smaller South Asian neighbors, as well as Sweden and Equatorial Guinea as comparisons at the high and low ends.
Jason Collins, an economist strongly grounded in biological principles, has a post up in response to Mike the Mad Biologist’s critique of economic misunderstandings of biology. Jason asks:
On the flip side, did Dawkins or Gould (or their respective supporters) ever concede to the other side that they were wrong and substantially change their world view?
I have some opinions on this. My own attitude is that both Richard Dawkins and Stephen Jay Gould retreated from maximalist positions when it came to the gradualism vs. punctuated equilibrium arguments of the 1970s substantively. But rhetorically they often seemed to downplay their modifications, and assert more that their own positions were a change of degree, while their antagonist in the argument would have to make a change of kind to align with the evidence. This sort of semantic gamesmanship is disappointing, though alas rather conventional. But since i’m not a thorough master of the oeuvre of both men I’d be curious what readers think.
Also, it is to be noted that Dawkins has reversed himself on ‘the handicap principle’. He spent some time rejecting it in The Selfish Gene, but in the preface to the more recent editions he admits that he would rewrite that section today as he accepts the validity of this mechanism.
Finally, at least with much of biology a lot of these debates are of historical interest. Old debates have a tendency of dying down and achieving some sort of resolution. From what I can tell people don’t talk about broad cut-out general frameworks such as ‘neutralism vs. adaptationism’ or ‘gradualism vs. punctuated equilibrium’ anymore. Especially with genomics’ surfeit of data there’s no point in fixating on one theory to explain all dynamics of interest.
Image Credit: David Shankbone
One of the most annoying aspects of the post-Westphalian era is the conceit that all national administrative units are equivalent in some deep fundamental sense. So, for example, you get comparisons of per capita income for nations, and Luxembourg and Lichtenstein inevitably show up at the top of the rankings. Everyone knows that this is a farce, but a nation is a nation, and one must honor the ideal, even when it leads us to bizarre assessments like this. Luxembourg has a population of 500,000, and is a little dot of a nation. It’s really ludicrous to compare it to Italy, which spans the gamut from Milan’s value-added wealth to Puglia’s spare poverty.
But with modern statistical tools and GIS software we can disaggregate the mishmash of administrative units which coalesce together to constitute large amorphous nations, and actually compare like to like. In this way those of us who haven’t traveled all around the world, and actually lived “on the ground,” can get a sense for fine-scale variation which all the locals have as part of their background information. This is what the Eurostat Yearbook is handy for. In particular, I love their NUT2 and NUT 3 visualizations. NUT 2 specifically is good for someone like me with a modest amount of geographical knowledge, since these units often correspond to historical regions which we’re familiar with (e.g., Catalonia, Tuscany, etc.).
Below are a selection of maps which I think are informative and interesting. But please note that some of these maps are generated from mid-2000s to 2007 data. This means there are going to be some obvious inflation of values for Ireland, inflation through fraud in Greece, and the property bubble in Spain. With those caveats, here’s GDP:
One of the major parameters which shape individual success, and macroeconomic growth in the aggregate, is time preference. Time preference basically measures an individual’s future-time orientation. Would you for example take $1,000 in the present, or wait 30 days and accept $1,500 dollars? It doesn’t need to be money, children can exhibit time preference as well. Would you like one candy bar now? Or two candy bars in an hour? I also think time preference permeates our lives more concretely. Would you like to eat some greasy food now, or would you forgo epicurean pleasures in the present for a sleeker frame in the future?
Here’s an illustration of the correlates of time preference:
In one of the most amazing developmental studies ever conducted, Walter Michel of Stanford created a simple test of the ability of four year old children to control impulses and delay gratification. Children were taken one at a time into a room with a one-way mirror. They were shown a marshmallow. The experimenter told them he had to leave and that they could have the marshmallow right then, but if they waited for the experimenter to return from an errand, they could have two marshmallows. One marshmallow was left on a table in front of them. Some children grabbed the available marshmallow within seconds of the experimenter leaving. Others waited up to twenty minutes for the experimenter to return. In a follow-up study (Shoda, Mischel, & Peake, 1990), children were tested at 18 years of age and comparisons were made between the third of the children who grabbed the marshmallow (the “impulsive”) and the third who delayed gratification in order to receive the enhanced reward (“impulse controlled”).
The third of the children who were most impulsive at four years of age scored an average of 524 verbal and 528 math. The impulse controlled students who scored 610 verbal and 652 math! This astounding 210 point total score difference on the SAT was predicted on the basis of a single observation at four years of age! The 210 point difference is as large as the average differences between that of economically advantaged versus disadvantaged children and is larger than the difference between children from families with graduate degrees versus children whose parents did not finish high school! At four years of age gobbling a marshmallow now v. waiting for two later is twice as good a predictor of later SAT scores than is IQ.
The issue of causality is probably one which you will immediately bring up. There is a correlation between higher IQ and low time preference (consuming less in the present to have a potential for more consumption in the future), but who knows how the feedback loops here work? For example, unlike many males my age I gave up playing video games around the age of 16. I calculated that I was substituting video games for reading, and that that would have long term consequences which I was not pleased with. Video games were very pleasurable in the short term, addictive even. But I decided that there simply were not enough hours in the day that I could do everything I needed to do, so I stopped playing them (I am aware that many, many, very smart people are avid video game enthusiasts. I’m just using it to illustrate the trade offs one might make). How much less erudite, as Dr. Dan MacArthur might say, would I be if I did continue to expend many hours per week on video games?
A new working paper on the SSRN website has some interesting data on time preference cross-culturally. How Time Preferences Differ: Evidence from 45 Countries:
In the the 19th century the Democratic party, rooted in large part among Southern planters who were dependent on exports of commodities and imports of finished goods, was the party of free trade. The northern Whigs, and later the Republicans, were the party of tariffs. They were the faction which drew support from the industry of the North which benefited from protection against European competitors. The Republican support for tariffs and Democratic opposition persisted into the early 20th century. Only after World War II did this long standing division between the two parties diminish, so that by 1993 a much larger proportion of Republicans than Democrats supported the ratification of NAFTA.
Because of NAFTA’s prominence in my mind, as well as the tinge of economic nationalism on the labor Left and the maturing anti-globalization sentiment on the cultural Left, I had assumed that the Republicans tilted toward free trade more than Democrats. Not so. Pew came out with a survey a few days ago, and the results indicate that my preconception was wrong.
I asked this on twitter, but no one responded. If you had to choose between two scenarios, which would you choose:
- A world population of 10 billion where 90% were not malnourished?
- A world population of 500 million were 90% were malnourished?
The first scenario has 2.2 times as many malnourished individuals as the second.
This issue of relative and absolute values matters. Most of you are likely aware of the economic literature on the “big fish small pond” vs. “small fish big pond” effect. Perceptions of poverty are to some extent standardized to local distributions.
I just listened to a discussion between John Horgan and Madhusree Mukerjee, and the conversation ended on a moderately down note as Mukerjee seemed pessimistic about the prospects for the world’s poor. Where do these people get the idea that things are getting worse? I recall the same sentiment from Massimo Pigliucci. These are people with advanced degrees in science (Mukerjee has a doctorate in physics from University of Chicago, and Pigliucci has multiple advanced degrees), but they seem totally immune to the empirical trendlines of our age.
Here is China’s life expectancy over the past 50 years:
And below are a series of vital statistics for the world which are “looking up.” I’m not arguing here that things will inevitability get better, I’m arguing to at least acknowledge that things have noticeably gotten better.
Jonah Lehrer has a post up, How Preschool Changes the Brain over at Frontal Cortex. He reports on a paper, Investing in our young people, which has been around for about 5 years. The top line of it is this, an investment in a $2,500/year (inflation adjusted) pre-school program in the early 1960s seems to have been effective in improving the life outcomes of at-risk low SES young black Americans tracked over their lives up to the age of 40. Their measured I.Q.s were not initially high, 85-75, 15th to the 5th percentile (though the median black American IQ is ~85, so not so low within ethnic group). They did gain an initial I.Q. boost, but like most of these programs that boost disappeared over time. But in terms of their non-cognitive skills there remained an appreciable effect which impact their life outcomes. What were these non-cognitive skills? To me they resemble classical bourgeois values rooted in low time preference. Willing to be a “grind,” work hard and forgo short-term pleasures and not cave in to impulses with short-term gains and long-term costs.
Here’s a figure from the paper which I’ve reedited with labels:
The New York Times has an interesting piece, As English Spreads, Indonesians Fear for Their Language. It is dense with the different strands of this story. Basically, upper and upper middle class Indonesians are switching from Bahasa Indonesian to English to give their children a leg up, and are sending their children to English-medium schools. Because these children have a weak command of Indonesian some authorities are fearing for the cohesion of the Indonesian nation. Though the piece alludes to other languages in Indonesia, such as Javanese, it does not emphasize the fact that the widespread knowledge of Bahasa Indonesian was the outcome of a top-down project of nation-building, and that that language is the native tongue of only a minority of the citizens of Indonesia!
Whilst Indonesian is spoken as a mother tongue (first language) by only a small proportion of Indonesia’s large population (i.e. mainly those who reside within the vicinity of Jakarta), over 200 million people regularly make use of the national language – some with varying degrees of proficiency. In a nation which boasts more than 300 native languages and a vast array of ethnic groups, the use of proper or ‘good and correct’ Indonesian (as opposed to Indonesian slang or regional dialects) is an essential means of communication across the archipelago. Use of the national language is abundant in the media, government bodies, schools, universities, workplaces, amongst members of the Indonesian upper-class or nobility and also in many other formal situations.
I’ve been hearing about structural adjustment due to technology and gains to productivity from people since the early 1990s. The sort of dynamic which motivated the original Luddites. But this chart from Calculated Risk makes me lean toward the proposition that the time is nigh. In relation to previous post-World War II recessions the big difference in unemployment seems to be in the area of the long term; these are those whose skills will degrade, and are probably least likely to reenter the labor force at an equivalent position.
Larry Witham’s Marketplace of the Gods: How Economics Explains Religion is a manifestly ill-timed book. He states that “…around 2006 I began to notice a good deal of hoopla in the book market about economic explanations for just about everything-books that were best sellers.” Marketplace of the Gods was obviously written to capitalize on the prestige of economic explanations, but unfortunately it has come out after the bubble had burst on that market, so to speak. Within the past few years even many economists have come to admit that the power of their discipline’s logic can explain far less than they’d once thought. In fact, it seems a bit much for economics to explain everything when the core competency in financial domains are themselves being challenged. Even in 2008 in The Logic of Life Tim Harford was engaging in a rearguard attempt to prevent behavioral economists such as Dan Ariely from knocking the legs out from under the central thesis of his book. A more accurate subtitle for Marketplace of the Gods would have been “economic explanations of religion.” Not punchy or imperialistic, but true to the content of the text.
For the past year I’ve been having periodic discussions with a friend who has a nice amount of money which he invests (he’s a single male cresting up to his peak earning years after receiving an advanced science degree from an elite institution). He is pessimistic about the long term prospects for the American economy, and believes that the current run of stock market gains are simply a bear market rally. Even when he made his assertion last year I pointed out that if it was a bear market rally it was unprecedented in its magnitude. Of course I wasn’t too confident about appealing to historical precedents after what’s happened in the past few years. Look at the comments I elicited after mooting fears of a recession in May 2007. I know some of the commenters are regular readers to this day, so I hope everyone enjoys watching the frankly moronic confidence. I use the term not as an aspersion but as an accurate description of the hubris and complacency on display. I myself told a friend that the credit crisis was overblown in the summer of 2008, relying on moronic conventional wisdom from overeducated morons that the Great Moderation was in effect. I was wrong, and I don’t have a word to capture the contempt which I have for the likes of me, a fool who relied naively on the foolish. I am reckoned a young man by some, so that’s the excuse I’ll give.
Ezra Klein references the old Shaggy hit “It wasn’t me” to characterize Alan Greenspan’s testimony yesterday. It’s not just Greenspan, Robert Rubin is pulling it too. The point isn’t that these people have plausible deniability, they don’t, the issue is that there’s no real recourse anyone has to hold them accountable. They can lie to your face because there’s no consequence. I noted below that institutional investors demand risk so that they can have an opportunity for high returns. This isn’t necessarily just from on high, pension funds need the high returns to fulfill their obligations, and those obligations were entered into by labor and management. The fact is that we don’t have the economic growth to come through over the long term through a conservative investing strategy, so the managers start rolling the dice. If they fail and it blows up, they’re fired, and if they luck out, they’re heroes for the day.
It wasn’t just the big shots. Unless you’re a prodigy (i.e., you’re a 2 year old reading this weblog) and you’re an American you lived through the real estate bubble of the mid-aughts, and you know people who treated their homes like ATMs. People who bet on a “sure thing” future which never came about. Yes, there were greedy mortgage brokers and shady speculators, but if it wasn’t for the avarice of the average man and woman it wouldn’t have been so widespread. But here’s the difference: the average American has experienced a lot of economic distress or insecurity. There have been real consequences for their bad calls. The unemployment rate is high enough that anyone who isn’t a shut-in knows someone who’s been negatively impacted. Not so for Sirs Greenspan and Rubin. The high & mighty are too big to fail, they may have their reputations tarnished but ultimately their lot is one of comfort and ease. This is of course not atypical, it’s most of human history.
I think the ultimate long term problem for American society is that many Americans now perceive the elites as rent seekers and not engines of productivity. The vision of the expanding pie is starting to recede, and once the spell is broken I fear for the well being of the “virtuous circles” which economists praise.
Less than a high school diploma: 14.5%
High school with no college: 10.8%
Some college or associates degree: 8.2%
Bachelor’s or higher: 4.9% (this is near full employment from an economic perspective).
If you read the media sometimes it seems like the past recession was total hell in the white-collar sector, but really it wasn’t (comparatively). For what it’s worth, 84% of readers of my weblogs have university degrees or higher….
(Yes, I know the issues in regards to underemployment, part-time employment and those who have dropped out of the labor force, but all the issues seem more relevant to those with less education from what I’ve seen. Correction with data welcome)
Daniel Gross has a piece out on the rise of the cash economy, Cash Is King I found this section interesting, though not surprising:
…During the go-go years, it was common to hear theorists talk about the “discipline of debt.” On paper, high debt loads force managers (and homeowners) to make tough, swift decisions to stay solvent. Default, and you lose the company (or the house). But in reality, rather than scrimp, overextended borrowers are more likely to walk away from mortgages, or push companies into Chapter 11 bankruptcy protection. Americans are now discovering that cash exerts a superior discipline. The real discipline of cash may be that it causes executives, consumers, and investors to think twice—and to think about the long-term consequences—before spending. The need for instant gratification is part of what created the current mess.
There’s theory, and then there’s reality. I really don’t know if cash is so much better at enforcing discipline, but I’m sure theorists can invent a new rationale for why it is superior to debt financing in maximizing economic utility. Economic behavior is the most amenable in the social domain to theorizing, but too often it seems to fall prey to false certainty and after the fact rationalization of the status quote as the timeless equilibrium. This of course does not mean that we should not think logically, or deduce inferences from what we know a priori. Rather, in the social domain we should be extremely self-aware of our uncertainty as to the validity of our inferences based on the lessons of history. For example, there’s an obvious straightforward possible social consequence in regards to the spread of cash envelope usage, more break-ins. The greater utilization of relatively concrete paper currency* and its consequent drawbacks will probably make us more cognizant of the benefits of more abstract financial tools such as revolving credit card accounts (e.g., you lose cash, you’re screwed, you lose your credit card, you’re insured).
* Paper currency is itself a relatively new invention over the scope of human history