Month: January 2015

The American economy has done badly over the past generation or so.

This is not to say other economies have done better: The American economy remains among the richest in the world. However, given the economic lead America had a generation ago, it really ought to still be well ahead of the North Atlantic pack, and it no longer is.

Moreover, across most of the income distribution Americans today are little if any better off than their predecessors back in 1979, at the business-cycle peak in the Jimmy Carter presidency. Yes, today Americans have remarkable access to incredibly cheap electronic toys. But those are a small part of expenditure, and the costs of securing the standard indicia of middle-class life–a home in a safe neighborhood with good schools and a short commute, college for the children, assurance that a major illness will not lead to bankruptcy, a secure and reasonably-sized pension–have all become more costly relative to incomes. This shift is astonishing: For 150 years before 1979 Americans had confidently expected that each generation would live roughly twice as well in a material sense as its predecessor, not find itself struggling against the current to stay in the same place.

If you want a single set of numbers to keep in the front of your mind to understand America’s relative position today, you cannot do better than those in the figure below, copied from the Credit Suisse Global Wealth Report1:

The median American has only about $45,000 to his or her name, and wealth inequality as measured by the gap between the average and the median wealth is greater by far than in the typical rich country–only Sweden comes close. A generation ago it would have been ridiculous to even consider that the typical middle-class or working-class American might not lose if switched with the typical inhabitant of Australia or Italy or Japan or Finland or Singapore. It is not so ridiculous at all today. But America’s rich remain rich indeed: as Tahmi Lubby writes, with 4.3% of the world’s population America has half of those with over $50 million, and two-fifths of all millionaires.2

Over the past generation America has had a very slow pace of economic progress and has lost its economic lead as far as the median is concerned. But, as we have just seen, this does not mean that everybody thinks that they have done badly–and indeed, the people at the top of today’s American income and wealth distribution have not done badly at all. Today in America the top 1%, even more the 0.1%, and even even more the top 0.01% are vastly richer in both absolute and relative terms than their predecessors of 35 years ago. They are also vastly more powerful, politically and economically. Relative to what they reasonably might have anticipated 35 years ago, America has vastly rewarded them far beyond their wildest dreams: Modern America has been very good to them. They have at least matched in all and vastly exceeded in most dimensions what they thought life would be like were they to make it big. And they have enough wealth and derived social power to give their children and grandchildren an enormous head start vis-a-vis others.

Perhaps they have some worries as they look down the much-steeper and ever-steepening income and wealth pyramid and think about intergenerational regression toward the mean, but their children’s and grandchildren’s inherited money to be offers them a very bright set of opportunities and challenges.

But look a bit further down, below the top 1%.

The rest of the top 5% are about as rich as they might have expected. They have traded smaller houses and more burdensome commutes for more lavish vacations, cheap electronic toys, and greater social order. But the rest of the top 5% look up and recognize that being upper-upper-middle-class (or perhaps lower-upper-class) in today’s Second Gilded Age does not bring the respect from others and from oneself that they had anticipated. Lower-upper-class Americans of a generation ago were social peers within financial shouting distance of successful financiers and corporate executives. That is not the case today. And the rest of the top 5% look down, and they recognize that–unlike the top 1%–they do not have the wealth and derived social power to insulate their children and grandchildren.

And further down?

The best that we can say is that the rest of America is at best treading water relative to the same percentile slots in the income and wealth distribution a generation ago. They are no richer, more unequal, and less secure along multiple dimensions then their predecessors were a generation ago. They are vastly worse off than they themselves confidently expected thirty-five years ago that they would be today. Note that this is not just a matter of distribution: Yes, about half of the net stagnation of the 95% relative to expectations as of a generation ago is due to rising inequality. But half of it is due to slower overall growth as well.

Sam Williamson and company’s Measuring Worth website teaches an enormous amount about what our current guesses as to the long-run shape of economic growth are.3 It demonstrates the magnitude by which the American economy as a whole has underperformed not just in distribution but in raw total an-extra-dollar-for-billionaires-is-as-good-as-an-extra-dollar-for-everybody-else since the high tide and end of the Social Democratic Era, as marked by the attainment of a real (2009 dollar) level of GDP per capita of $28,694 at the 1979 business-cycle peak during the Jimmy Carter presidency:

Back in 1979 real GDP per capita was double what it had been 28 years before. And in 1951 real GDP per capita was double what it had been 28 years before in 1923. Yet 28 years after 1979 in 2007 saw American real GDP per capita not at $57,388 but $49,310.6–a 16% gap. And after 2007 things really went bad: the real GDP level right is not $68,246.2 but only $50,295.0–a 35.7% gap relative to the extrapolated 1923-1951-1979 trend.

You can claim that the coming of post industrial civilization makes real GDP an increasingly inadequate guide to even material well-being. There is some truth in that. You can claim that even proportional differences in wealth, income, and consumption nevertheless for the rich then a poor economy. And there may be some truth in that. But there is not much truth in either–certainly not enough to be happy with America’s economic performance over the past generation.

So what has gone wrong? And why?

1104 words

Must- and Shall-Reads:

• Barry Eichengreen: Financial Crisis: The Banking Rules that Died by a Thousand Small Cuts
• Brad Plumer:
  It’s official: 2014 was the hottest year on record
• Tim McDonnell:
  There are now twice as many solar jobs as coal jobs
• Anatole Kaletsky:
  “If one number determines the fate of the world economy, it is the price of a barrel of oil”
• Philippa Leighton-Jones et al.::
  Swissie Shocker: The SNB’s Drumbeat to Date
• Barry Ritholtz:
  “The U.S., with the most activist central bank and after more than five years of quantitative easing and a zero interest rate policy, has the best looking economy in the developed world…. Preliminary results of these grand monetary experiments are now in and the results are clear: More monetary stimulus equals a strongest economic recovery…”
• Gillian Tett:
  “With an edge to his voice, [Benjamin] Friedman pointed out that one of the great beneficiaries of debt forgiveness throughout the last century was Germany…. So why couldn’t Germany do the same for others?… What became clear that night was that the question of how to handle Greece is a deeply emotional issue, not just a matter of economics–even (or especially) among central bankers…”

2. Tim Worstall:
   Facebook Explains Why Marc Andreessen And Larry Summers Disagree:
   “I was a little puzzled to see that Larry Summers and Marc Andreessen were disagreeing… over the effects of technology on the passing landscape…. Take, for example, Facebook. As far as the general economic statistics are concerned, GDP, labour productivity and all that, the output of Facebook is the advertising it sells…. Valuing Facebook’s contribution to living standards as being the advertising it sells is near insane… but that advertising is the only part of the value which we do ascribe to Facebook that is actually monetised. And given that GDP, labour productivity and all that are described only in monetised terms then we’re missing a very large part of what it’s all about. People (for some unknown reason to me) like Facebook. Their lives are made richer by Facebook’s existence: they are in fact richer. We’re just not measuring that extra wealth that they derive from Facebook’s existence…. Brad Delong once pointed out (or perhaps pointed to someone who pointed out) that one way of looking at rising living standards in the 20th century was a factor of about 8. Rich world people in 2000 were 8 times better off than rich world people in 1900. Roughly true by those standard measures of GDP and so on. But if we than added what people could do, the improvements in quality, all something analagous to that consumer surplus. it might be more true to say that people were 100 times better off. That’s how I would explain (some of) that productivity puzzle…. Andreessen is… talking to that Facebook example above…. I do tend to think that the gap between “real living standards” and “recorded living standards” is growing simply because so much more of the value of the new technologies is not in fact monetised.”
   

3. Sahil Kapur:
   Paul Ryan Undermines SCOTUS Case To Topple Obamacare):
   “Remarks in 2010 by Rep. Paul Ryan… weaken the premise of… King v. Burwell…. The lawsuit… contends that the text of the Affordable Care Act unambiguously blocks premium tax credits for Americans in three-dozen states which didn’t build their own insurance exchange…. Ryan… believed otherwise…. ‘You’re taking money out of this program to create a brand new open-ended entitlement. And it’s a new open-ended entitlement that basically says to just about everybody in this country, people making less than $100,000, “You know what? If your health care expenses exceed anywhere from 2 to 9.8 percent of your adjusted gross income, don’t worry about it. Taxpayers got you covered. Government’s gonna subsidize the rest.”… What we’re basically saying to people making less than… $100,000, is “Don’t worry about it. Taxpayers got you covered.”‘ Ryan expressed no doubt that the relevant language… would apply the subsidies to Americans… regardless of where in the country they lived. His remarks… add to the overwhelming body of evidence that members of Congress, staffers, policy experts, and the media covering the health reform debate all understood the law to be providing for subsidies on the exchanges, whether state or federal…”
   

4. Annalee Newitz:
   Welcome to the Future Initiative:
   “The world is changing. And things are changing at io9 and Gizmodo, too. I’m heading up the the Future Initiative, which is a project to bring io9 into closer collaboration with Gizmodo and Sploid, plus a handful of boutique sites like Paleofuture, Space, Reframe, and more. These sites already share an obsession with science, technology and the world of tomorrow. Now it’s time to bring them together, and build a habitat for slipstream journalism that combines speculative wonder with skepticism and hard truths. I’ll be serving as the editor-in-chief of Gizmodo, and Charlie Jane Anders is going to become editor-in-chief of io9. The two sites, along with Sploid and our diagonals, will be collaborators within the greater universe of the Future Initiative. Some editors and writers will be shared across the sites, and we’ll be working together on a lot of story packages. But the sites will also retain separate identities, with separate commenter communities. My goal for the Future Initiative is to produce original reporting, must-read explainers, and smart analysis. I want our sites to have clear opinions — even if they piss everybody off — and distinct voices. And I also want us to be experts in the topics we cover…”
   

5. Paolo Squatriti:
   Of Seeds, Seasons, and Seas: Andrew Watson’s Medieval Agrarian Revolution Forty Years Later:
   “Andrew Watson’s… ‘The Arab Agricultural Revolution and Its Diffusion, 700–1100’, has been used and cited widely by… many working in fields far removed from Watson’s…. The seventh century unification of Central Asia… created unprecedented opportunities for unhindered circulation… specialized techniques of cultivation, particularly irrigation, and… rice, sorghum, hard wheat, sugar cane, cotton, watermelons, eggplants, spinach, artichokes, taro root, sour oranges, lemons, limes, plantains, mangos, and coconut palms… into a single agronomic ‘package’…. Most… originated in India…. Except for coconuts and mangos, they could be acclimatized to different environmental conditions within the Caliphate by judicious cultivation… in the space of 400 years… achieved widespread diffusion and became economically significant…. This ‘achievement’, unparalleled before European expansion… permitted high and stable agricultural profits… stimulated a demographic upswing… fed urbanism…”
   

6. 
   Nick Bunker
   :
   Weekend reading – Washington Center for Equitable Growth
   :
   ”
   Justin Wolfers and Jan Zilinsky… on the connection between higher wages and productivity…. Neil Irwi… wage growth could pick up in 2015…. Mark Thoma… long-term forces will hold back wage growth…. Carola Binder… problems with central banks targeting inflation when inflation is already low…. Noah Smith… Fed should consider letting inflation run above its target…. Matthew C. Klein… the relationship…. Gwynn Guilford… toxic mix of deflation and debt in the Chinese economy.
   ”
   

Should Be Aware of:

• Plutarch:
  Dion: The Savior of Syracuse
• Mark Lilla:
  The Lure of Syracuse
• Rebecca Leber:
  Obama, EPA Target Methane Emissions in Oil and Gas Sector
• Matthew Yglesias:
  “We’ve asked our whole staff to do at least one refresh per week, and we’re looking forward to seeing how it goes. Hopefully you’ll find some great pieces you may have missed the first time around, or see some longstanding issues presented in a brand new light. And hopefully we’ll get a bit closer to building and surfacing the persistent news resource we’re working towards…”
• Jason Kottke:
  Hermione Granger and the Goddamn Patriarchy
• Uwe Reinhart:
  Rethinking The Gruber Controversy: Americans Aren’t Stupid, but They’re Often Ignorant–and Why
  Sila Brush:
  FXCM Lobbied Against Leverage Limit Before Franc Trades Went Bad
  

1. Polemic:
   Trust Me, I’m a Swiss Central Banker:
   “One trade structure I have always liked is the peg break trade. I first deployed it in 1997 with the Thai Baht. It is fairly simple and involves the option market pricing smooth curves of probability, thanks to nice models, over realities that are far from such. If I had had the confidence to put it on in EURCHF, or rather a lack in confidence in the Swiss national bank, then It would have looked a bit like this. Sell 1.2000 Eur puts Chf calls and buy twice as many 1.1750 or there about Euro puts choosing the period to make this 2×1 put spread at zero premium. The payoff being zero if no break but if there is to be a break I lose between 1.15 and 1.20 but make on everything below. The theory being that when pegs break they don’t mess around with 500pt moves instead jumping right over the loss zone into profit. This isn’t a bleat about missed trades, but an idea for future application and, more importantly, a lesson in faith. Hands up. I had complete faith in what I was told by the SNB…. Why?… Because removing the prop of central bank credence in the midst of a market that is completely controlled by central banks and the expectations of what they will do to save the world leaves a financial world orphaned. It’s is a bit like hearing that your parents aren’t yours…”
   

2. Max Fisher and Amanda Taub:
   Vox got no threats for posting Charlie Hebdo cartoons, dozens for covering Islamophobia:
   “Though we do enjoy a readership among Muslims inside and outside of the United States, some of whom have not hesitated to express displeasure or worse at our coverage of stories such as the Israel-Palestine conflict, none has seen the Charlie Hebdo cartoons as worth sending an angry email or even an annoyed tweet, much less a threat of violence. Our coverage of Islamophobia has brought a very different response. Articles decrying anti-Muslim bigotry and attacks on mosques have been met with dozens of threats on email and social media. The most common states a desire that jihadist militants will murder the offending writer: a recent email hoped that Muslims will ‘behead you one day’ so that ‘we will never have to read your trash again.’ Some directly threaten violence themselves, or imply it with statements such as ‘May you rot in hell.’ Others express a desire to murder all Muslims — one simply read ‘I agree with maher  Kill them all’ — also often implying the emailed journalist is themselves Muslim. One pledge to attack Vox writers begins, ‘Fuck you and any cunt who believes in allah.’ As is often the case, the strongest threats have been reserved for women. One writer received a message arguing that someone should ‘put a gun up your ass’ to make her understand…”
   

3. Daniel Kuehn:
   Very quick, context free thoughts on Magness & Murphy (forthcoming) and Piketty’s Figure 10.5:
   “I am now curious about a couple things: 1. Did Magness and Murphy notice the three points I made here where Piketty’s data decisions work against his narrative? And if they did why didn’t they include them? 2. Did Magness and Murphy even try to email Piketty and ask for do-files, etc.? (This is a little less relevant for Figure 10.5 but more relevant for some of the other wealth series, particularly the UK). 3. What did the referee reports at the Journal of Private Enterprise say? I’m really curious about where the referees pushed back.”
   

Tim Worstall is, I think, 100% right here. The key difference is between “Smithian” commodities–where it is a safe rule of thumb that the consumer surplus generated is about equal to the producer cost, so that GDP accounts that value goods and services at real producer cost will capture a more-or-less stable fraction equal to half of true standards of living–and… I might as well call them “Andreesenian” commodities, where consumer surplus is a much larger proportion of monetized value because what is monetized is merely an ancillary good or service to what actually promotes societal welfare. What is the proportion? 5-1? 10-1? Somewhere in that range, I think–at least.

Trying to construct the Just City in the Sewer of Dionysios II:

Over at Grasping Reality:

I mean, what is the upside for Switzerland in having a central bank with fewer assets and liabilities and having a higher real exchange rate value of its currency?