Clueless DeLong Was Clueless About What Was Coming in 2007 and 2008: Hoisted from the Archives

From November 2008: Why I Was Wrong… Calculated Risk issues an invitation:

Calculated Risk: Hoocoodanode?: Earlier today, I saw Greg “Bush economist” Mankiw was a little touchy about a Krugman blog comment. My reaction was that Mankiw has some explaining to do. A key embarrassment for the economics profession in general, and Bush economists Greg Mankiw and Eddie Lazear in particular, is how they missed the biggest economic story of our times…. This was a typical response from the right (this is from a post by Professor Arnold Kling) in August 2006:

Apparently, the echo chamber of left-wing macro pundits has pronounced a recession to be imminent. For example, Nouriel Roubini writes, “Given the recent flow of dismal economic indicators, I now believe that the odds of a U.S. recession by year end have increased from 50% to 70%.” For these pundits, the most dismal indicator is that we have a Republican Administration. They have been gloomy for six years now…

Sure Roubini was early (I thought so at the time), but show me someone who has been more right! And this brings me to Krugman’s column: Lest We Forget

Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories? Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world? Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer to these questions is that nobody likes a party pooper…. There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice…

[I]n addition to looking forward, I think certain economists need to do some serious soul searching. Instead of leaving it to us to guess why their analysis was so flawed, I believe the time has come for Mankiw, Kling, and many other economists to write a post titled “Why I was wrong”…

And I respond:

Let me say what things I was “expecting,” in the sense of anticipating that it was they were both likely enough and serious enough that public policymakers should be paying significant attention to guarding the risks that it would create:

(1) A collapse of the dollar produced by a panic flight by investors who recognized the long-term consequences of the U.S. trade deficit.


(2) A fall back of housing prices halfway from their peak to pre-2000 normal price-rental ratios.

I was not expecting (2) plus:

(3) the discovery that banks and mortgage companies had made no provision for how the loans they made would be renegotiated or serviced in the event of a housing-price downturn.

(4) the discovery that the rating agencies had failed in their assessment of lower-tail risk to make the standard analytical judgment: that when things get really bad all correlations go to one.

(5) the fact that highly-leveraged banks working on the originate-and-distribute model of mortgage securitization had originated but had not distributed: that they had, collectively, held on to much too much of the risks that they were supposed to find other people to handle—selling the systemic risk they had created, but not all of it, and buying the systemic risk that their peers had created.

(6) the panic flight from all risky assets–not just mortgages–upon the discovery of the problems in the mortgage market.

(7) the engagement in regulatory arbitrage which had left major banks even more highly leveraged than I had thought possible.

(8) the failure of highly-leveraged financial institutions to have backup plans for recapitalization in place in the case of a major financial crisis.

(9) the Bush administration’s (and the Federal Reserve’s!) sticking to a private-sector solution for the crisis for months after it had become clear that such a solution was no longer viable.

We could have interrupted this chain that has gotten us here at any of a number of places. And I still am trying to figure out why we did not.

Will the U.S. Economy Boom?

The very sharp Ken Rogoff predicts a boom over the next four years: “The biggest missing piece… is business investment, and if it starts kicking in… output and productivity could begin to rise very sharply…. You don’t have to be a nice guy to get the economy going…. It is far more likely that after years of slow recovery, the US economy might at last be ready to move significantly faster…”

I really can’t see it as likely. Rogoff talks about:

  • “the prospect of a massive stimulus, featuring a huge expansion of badly needed infrastructure spending…” but Trump’s stimulus proposal as of now is for tax subsidies to projects that would be built in any event coupled with privatization to restrict use. There is definitely space for fiscal stimulus and infrastructure–and we should lobby and argue hard to use that space–but what appears to be on Trump’s agenda is a bunga-bunga Berlusconi-like policy.

  • “a massive across-the-board income-tax cut that disproportionately benefits the rich… [although it] hardly seems as effective as giving cash to poor people… tax cuts can be very good for business confidence…” but I haven’t seen cases in which this is true–rather, rich people say that tax cuts are very good for business confidence and then skip town with the money.

  • “repealing Obama-era regulation… businesses will be ecstatic, maybe enough to start really investing again. The boost to confidence is already palpable…” but I can’t see a bigger carbon-energy boom than we have had, I don’t notice other labor or environmental regulations binding–certainly not in the Seattle restaurant industry–and, this morning, Boeing is really not ecstatic about a president Trump.

  • “the huge shadow Obamacare casts on the health-care system, which alone accounts for 17% of the economy…” but ObamaCare is primarily a source of money for health care, not a regulatory drain. Repeal of ObamaCare would be–as every hospital and insurance company is right now telling everyone on Capitol Hill who will listen–a major downer. Who is Rogoff talking to? When he made this point earlier, he referred to the “substantial regulatory burden of ObamaCare on small business”. But there never was any. Small businesses–those with less than fifty employees–face no burden. Those few larger businesses–those with fifty employees or more–that do not offer employer-sponsored health insurance face a not-yet-implemented and often-postponed 2% of payroll tax. That’s a cost to them, but a benefit to their many, many competitors who have been offering employer-sponsored insurance.


  • “Even steadfast opponents of President-elect Trump’s economic policies would have to admit they are staunchly pro-business (with the notable exception of trade)…” Enough said.

By saying that a boom is “far more likely” than the opposite, I think Rogoff is playing a 20% chance as if it were a 60% chance. And I do not understand what makes him see the world this way. Tax credits for already-planned infrastructure projects are not fiscal stimulus, ObamaCare is not a substantial regulatory burden on small business, etc. Or do I not live in the real world?

Kenneth Rogoff: The Trump Boom?: “Under President Barack Obama, labor regulation expanded significantly…

…not to mention the dramatic increase in environmental legislation. And that is not even counting the huge shadow Obamacare casts on the health-care system, which alone accounts for 17% of the economy. I am certainly not saying that repealing Obama-era regulation will improve the average American’s wellbeing. Far from it. But businesses will be ecstatic, maybe enough to start really investing again. The boost to confidence is already palpable.

Then there is the prospect of a massive stimulus, featuring a huge expansion of badly needed infrastructure spending. (Trump will presumably bulldoze Congressional opposition to higher deficits.) Ever since the 2008 financial crisis, economists across the political spectrum have argued for taking advantage of ultra-low interest rates to finance productive infrastructure investment, even at the cost of higher debt. High-return projects pay for themselves.

Far more controversial is Trump’s plan for a massive across-the-board income-tax cut that disproportionately benefits the rich. True, putting cash in the pockets of rich savers hardly seems as effective as giving cash to poor people who live hand to mouth. Trump’s opponent, Hillary Clinton, memorably spoke of “Trumped-up trickle-down economics.” But, Trumped-up or not, tax cuts can be very good for business confidence.

It is hard to know just how much extra debt Trump’s stimulus program will add, but estimates of $5 trillion over ten years – a 25% increase – seem sober. Many left-wing economics commentators, having insisted for eight years under Obama that there is never any risk to US borrowing, now warn that greater borrowing by the Trump administration will pave the road to financial Armageddon. Their hypocrisy is breathtaking, even if they are now closer to being right.

Exactly how much Trump’s policies will raise output and inflation is hard to know. The closer the US economy is to full capacity, the more inflation there will be. If US productivity really has collapsed as much as many scholars believe, additional stimulus is likely to raise prices a lot more than output; demand will not induce new supply.

On the other hand, if the US economy really does have massive quantities of underutilized and unemployed resources, the effect of Trump’s policies on growth could be considerable. In Keynesian jargon, there is still a large multiplier on fiscal policy. It is easy to forget the biggest missing piece of the global recovery is business investment, and if it starts kicking in finally, both output and productivity could begin to rise very sharply.

Those who are deeply wedded to the idea of “secular stagnation” would say high growth under Trump is well-nigh impossible. But if one believes, as I do, that the slow growth of the last eight years was mainly due to the overhang of debt and fear from the 2008 crisis, then it is not so hard to believe that normalization could be much closer than we realize. After all, so far virtually every financial crisis has eventually come to an end….

At the risk of hyperbole, it’s wise to remember that you don’t have to be a nice guy to get the economy going. In many ways, Germany was as successful as America at using stimulus to lift the economy out of the Great Depression.

Yes, it still could all end very badly. The world is a risky place. If global growth collapses, US growth could suffer severely. Still, it is far more likely that after years of slow recovery, the US economy might at last be ready to move significantly faster, at least for a while.

No. There Is Not One Chance in Seven the 2018Q4 Fed Funds Rate Will Be 4.75% or Higher

WTF?! A 15% chance that the Fed Funds Rate will be 4.75% or higher in 27 months? Only a 15% chance that the Fed Funds rate will be effectively zero in 27 months?

Janet Yellen: Figure 1:

Yellen figure1 20160826 png 735×610 pixels

I confess I do not understand how such a graph could be estimated and drawn.

Business cycle asymmetry is a thing. It is an important thing.

The note under the graph says:

Confidence interval equals the median of the end-of-year funds rate paths projected by individual FOMC members (interpolated quarterly), plus or minus the average root mean square prediction error for 0 to 9 quarters ahead made by private and government forecasters over the past 20 years, subject to an effective lower bound of 12.5 basis points.

Eyeballing, I get a 9-quarter-ahead standard error of the forecast of a symmetric 2.2%-points. Look at the data over the past 20 years:

Effective Federal Funds Rate FRED St Louis Fed

There are no episodes in which private and government forecasters underestimated the 9-quarter-ahead funds rate by 2.2%-points. Even in March 2004 observers were expecting more than 2%-points of tightening over the next 9 quarters. By contrast, there have been two episodes in which private and government forecasters’ 9-quarter-ahead funds rate forecasts were more than 4%-points high:

Effective Federal Funds Rate FRED St Louis Fed

If the Federal Reserve is truly failing to take account of business cycle asymmetry here–taking some of the risk that the economy will greatly weaken rapidly and using it to raise its estimated probability of a sudden upside breakout on inflation–then I will be flummoxed. But if that is not what they are doing, why draw this graph?

Indeed, if we look back over the past 40 years, we see only two episodes of an unanticipated tightening of more than 2.2%-points: the late 1970s Volcker disinflation itself, and Greenspan’s late 1980s tightening overshoot. I see no way of ascribing any probability greater than 1 in 20 to a late-2018 fed funds rate of 4.75% or more.

What More Has to Happen Before the Fed Concludes That This Looks Like Yet Another Failed Interest-Rate Liftoff?

Real Gross Domestic Product FRED St Louis Fed

If you had told the Federal Reserve at the start of last December that 2015Q4, 2016Q1, and 2016Q2 were going to come in at 0.9%, 0.8%, and 1.2%, respectively, a rational Fed would not only have not raised interest rates in December, they would have announced that they would not even think of raising interest rates until well into 2017, and they would have started looking for more things they could do that would safely boost demand.

So why is the FOMC now not cutting interest rates back to zero? I mean, what more has to happen before the balance of probabilities says that this is likely to be yet another failed liftoff of interest rates?

Must-Read: Jamie Chisholm: Treasury Yields Hit Record Lows

Must-Read: May I please have a theory from the Federal Reserve–I am not asking for much: just a theory–as to why they continue to be confident that their models are a better guide to likely futures than financial markets, and as to why they continue to regard the lower tail of outcomes as something that can be handled if and when it happens rather than something they need to be desperately clawing away from as fast as they can?

Jamie Chisholm: Treasury Yields Hit Record Lows: “The 10-year Treasury yield is down 7 basis points to 1.39 per cent…

…earlier touching 1.377 per cent, its most meagre offering on record. The 30-year Treasury yield also hit an all-time low of 2.14 per cent. Equivalent maturity German Bunds and UK gilts are down 3bp to minus 0.17 per cent and off 4bp to 0.80 per cent, respectively — also flirting with record lows. The Bank of England has already said it is likely to loosen policy further in coming months, and governor Mark Carney on Tuesday said banks could stop building up rainy-day funds in an attempt to support lending. Shares in real estate companies, life insurers and housebuilders are leading declines in London, following the Standard Life news. Miners are under pressure too, as the ‘risk off’ mood batters commodities, with base metals lower and Brent crude down 3.6 per cent to $48.31 a barrel.

Must-Read: Paul Krugman (2015): Insiders, Outsiders, and U.S. Monetary Policy

Must-Read: As I periodically say, there are two rules that would have made me much smarter had I adopted them back in, say, 1996:

  1. Paul Krugman is right.
  2. If you think Paul Krugman is wrong, consult rule #1.

May I have unanimous consent on the proposition that Paul Krugman was right back at the start of 2015 on this issue?:

Paul Krugman (2015): Insiders, Outsiders, and U.S. Monetary Policy: “I ran into Olivier Blanchard over breakfast… in Hong Kong…

…Many of the people who either make monetary policy or comment on it from fairly influential perches are members of what you might call the 1970s Cambridge mafia… most of this group shares fairly similar views…. Which brings me to the point. Unusually, Olivier and I do have a significant disagreement right now, over US monetary policy…. I’m very worried that the Fed may be gearing up to raise rates too soon; he’s sanguine, considering the risk of a Japan-type trap in the US minimal and the case for a rate hike this year solid…. Our disagreement… is part of a wider split…. There’s a surprisingly sharp divide over near-term US monetary policy. And the divide seems to depend on one thing: whether the economist in question is currently in a policy position….

So why this divide? We don’t have access to different facts; we don’t, in any fundamental sense, have different economic models. It’s an uncertain world, but why do those in office come down on one side of that uncertainty, while those outside come down on the other? Well, even smart, flexible people can fall prey to incestuous amplification. And I worry that this is what is happening to the insiders. On the whole, it seems less likely for the outsiders, although it’s true that the Keynesian econoblogs form what amounts to a tight ongoing discussion group…. But if you ask me, there’s a worrying complacency among the insiders right now, and I would urge them to consider the potential consequences if they’re wrong.

And this is why I find myself worrying that this today is also much too sanguine. The very sharp Olivier Blanchard argues that it is not too sanguine:

Our goal was less ambitious and more realistic. It was to see if the eurozone could function and handle shocks without further political integration if political realities made it impossible for the time being. Our answer is a qualified yes, but it is surely not an endorsement of a do-nothing strategy…

But I think back to the start of 2015. And I remember the two rules that would have made me look like a fracking genius if I had been smart enough to adopt them back in 1996…

Must-Read: Tim Duy: Fed Once Again Overtaken by Events

Must-Read: That the Brexit crisis would happen was unforeseeable. That the odds were strongly that some negative shock would hit the global economy was very foreseeable indeed. And yet the Fed since 2014 has been actively making sure that it is unprepared.

10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Starting with Bernanke’s abandonment in 2013 of a policy bias toward further expansion and acceptance of a need for interest rate normalization and the resulting Taper Tantrum, there has been a dispute between the markets and the Fed. The markets have expected the Federal Reserve to try to normalize interest rates and fail, as the economy turns out to be too weak to sustain higher rates. The Federal Reserve has always expected to be able in less than a year or so to successfully liftoff from zero and embark on a tightening cycle, raising interest rates by about one percentage point per year.

The markets have been right. Always:

Tim Duy: Fed Once Again Overtaken By Events: “A July hike was already out of the question before Brexit, while September was never more than tenuous…

…Now September has moved from tenuous to ‘what are you thinking?’… as market participants weigh the possibility of a rate cut…. Internally they are probably increasingly regretting the unforced error of their own–last December’s rate hike…. Uncertainty looks to dominate in the near term. And market participants hate uncertainty. The subsequent rush to safe assets… is evident…. Direct action depends on the length and depth of the financial turmoil currently underway. I think the Fed is far more primed to deliver such action than they were a year ago. And that… will minimize the domestic damage from Brexit.

The Fed began 2015 under the direction of a fairly hawkish contingent that viewed rate hikes as necessary to be ahead of the curve on inflation. Better to raise preemptively than risk a sharper pace of rate hikes in the future…. [But] asset markets were telling exactly the opposite, that there was far less accommodation than the Fed believed. Fed hawks were slow to realize this, and, despite the financial turmoil of last summer, forced through a rate hike in December. I think this rate hike had more to do with a perceived need to be seen as ‘credible’ rather than based in economic necessity. I suspect doves followed through in a show of unity for Chair Janet Yellen. They should have dissented.

Markets stumbled again in the early months of 2016, and, surprisingly, Fed hawks remained undeterred. Federal Reserve Vice Governor Stanley Fischer scolded financial market participants for what he thought was an overly dovish expected rate path. And even as recently as prior to the June meeting, Fed speakers were highlighting the possibility of a June rate hike, evidently with the only goal being to force the market odds of a rate hike higher. But I think that as of the June FOMC meeting, the hawkish contingent has been rendered effectively impotent…. I suspect the Fed will be much more responsive to the signal told by the substantial drop in long-term yields that began last Friday (as I write the 10 year is hovering about 1.46%) then they may have been a year ago….

I expect some or all of…. Forward guidance I. Fed speakers will concur with financial market participants that policy is on hold until the dust begins to settle…. Forward guidance II…. Watch for the balance of risks to reappear – it seems reasonable to believe they have shifted decidedly to the downside. Forward guidance III. This would be an opportune time for Chicago Federal Reserve President Charles Evans to push through Evans Rule 2.0. No rate hike until core inflation hits 2% year-over-year…. Forward guidance IV. A lower path of dots in the next Summary of Economic projections to validate market expectations…. Rate cut. Former Minneapolis Federal Reserve President Narayana Kocherlakota argues that the Fed should just move forward with a rate cut in July. I concur…. If all else fails. If some combination of 1 through 5 were to fail, the Fed will turn to more QE and/or negative rates…

I am thinking of Stan Fischer on January 5, 2016 on interest rates:

Well, we watch what the market thinks, but we can’t be led by what the market thinks. We’ve got to make our own analysis. We make our own analysis, and our analysis says that the market is underestimating where we are going to be. You know, you can’t rule out that there is some probability they are right because there’s uncertainty. But we think that they are too low…

Even though the markets had been right and the Fed wrong for the previous three years, as of January 2016 Fischer was claiming that market expectations were irrationally pessimistic and that the Fed understood the state of the economy.

I would very much like to hear Stan Fischer give a speech early next month laying out how he has over the past six months marked to market his beliefs about the state of the economy and the correct economic model.

Ten Current-Situation Questions for Brad DeLong

(1) Recession Chances?: The chances of recession are smmall, but not very small. Robert Solow likes to quote Damon Runyon that nothing between humans is more than 3 to 1. We have a very hard time imagining how fat the tails are–and so even when things look clear there are always dangers surprisingly close

That said, expansions do not die of natural causes. It is true that the unwinding of malinvestment balances is a fraught moment. But we climbed down from the dot-com bubble successfully. And we almost climbed down from the housing bubble successfully—I confess that even in July 2008 I thought we were going to make it. And so I think, today, that we are going to make it without a recession in our near future. (Britain and Texas, on the other hand…)

(2) Secular Stagnation?: If what we call “secular stagnation” were predominantly on the supply side, we would be seeing many more signs of demand exceeding supply and of upward pressure on prices in individual sectors with bottlenecks than we are. As it is, we see only one bottleneck and one sector of significant pressure: housing prices in world cities where NIMBYism rules.

(3) The Equilibrium Level of the Interest Rate?: The case for a lower equilibrium safe real interest rate is the market’s: that is what the market is telling us. The big remaining question his whether this Is because of a shortage of profitable investment opportunities—that we have had a breakdown in that those investments that would promote societal utility cannot be also jiggered to create private profits—or whether it is because it is a shortage of global risk-bearing capacity. And both theories have evidence supporting them.

(4) Should the Fed Have Increased Rates in December?: No. There was no upside I could see. There was some downside that I could see. Now the downside has come to roost and is sitting on the telephone wire. With no possible upside and possible downsides, how could it not have been a mistake ex ante? And with the downside as it has materialized, it does look like a moderate mistake ex post.

(5) A Higher Inflation Target?: Put yourself back in the mid-1990s. There is no way that anybody who foresaw any reasonable possibility of 2008-2016 would have thought that a 2.5%/year CPI-inflation target was a reasonable thing. It would have been 4%/year. And in the long run there is nothing to be gained by desperately trying to hold onto a policy that was and remains unwise. For getting a credible reputation for unwisdom is not the kind of credibility you want.

(6) Fed Performance?: Both Bernanke and Yellen were world-class in their preparation for the job, are world-class in their intelligence and competence, and have done better then any of the other first-world central bankers since 1995. We are lucky. They have avoided repeating previous mistakes. They are making and will continue to make their own mistakes. But what we think we identify in real-time and will identify in retrospect as their policy failures speaks not that they should not have had their jobs but rather of the difficulty of the dive. We are very lucky that GWB and Obama made those appointments, and Senators who did not advise and consent should be deeply ashamed of themselves.

(7) Trump?: The hoped-for scenario if Trump wins is Trump = Schwarzenegger—a Hollywood celebrity who would try to make Hollywood-style deals in politics and, like Schwarzenegger, fail. The feared scenario if Trump wins is Trump = Berlusconi–or, worse, Mussolini. More broadly, if Trump wins and turns out to be less abnormal than his campaign persona–or if Clinton wins–there are then three other scenarios:

  1. There is the total gridlock scenario.
  2. There is the people-realize-that-they-are-“Washington”-and-that-making-“Washington”-disfunctional-is-bad-for-their-long-run-careers scenario, in which case what we used to think of as normal—pre-1993 dealmaking rather than rigid ideological posturing—resumes.
  3. There is the Trump has negative coattails that destroy Republican congressional power scenario.

(8) China?: We do not know if Xi Jinping’s desire to return to “democratic centralism” is at all compatible with a prosperous modern economy. The experience of 19th and 20th Century Europe says no—that authoritarian rule by a caste without a plausible economic role is unstable in the industrial and even more so in the post-industrial age. But maybe Europe is a bad guide. We do not know why the Middle Income Trap is a Thing, or even whether it is really a Thing. But maybe that is a Latin American phenomenon only. China’s long history tells us that the way to bet is that China’s natural condition is to be at the lead as one of the world’s most prosperous and most peaceful regions containing about one-fifth of humanity. If we can take a 200-year perspective, that is probably right. But in a 50-year perspective? Be afraid. Be very afraid.

But it is not a thing I would worry about if either the Federal Reserve or the rest of the U.S. government had both the will and the tools to stabilize aggregate demand in response to what can be, at most, only a moderate adverse shock from China. Unfortunately, the Federal Reserve has the will but may not have the tools. And the rest of the government has the tools but not the will…

(9) Brexit?: Brexit may well not happen. Buyer’s remorse may be very high, and none of the Brexiteers seem to have read the legal documents to figure out which parliaments have to approve Brexit for it to happen or if indeed there can be an Engxit if Scotland, Wales, and Northern Ireland wish their people to retain their EU passports. It is a disaster: investment in England is right now dropping like a stone as everyone decides to wait and see.

Whatever happens–Engxit, Brexit, Morexit, or nothing–Europe will continue to be a very rich part of the world. Profits from investing and producing in Europe will continue to be high. The political economy of Europe will continue to make Germany an export powerhouse. And that means that as long as the world as a whole has slack demand—which looks like a long time—being in a currency union with Germany and being subject to German demands for fiscal policy will inflict considerable drag on the rest of Europe. But it is the strangling of rapid growth and the fumbling of opportunities for economic convergence that is at issue here, not a meltdown or any harder landing then we have already had.

(10) Risks to Emerging Markets?: The conventional economic models that I was taught told me that monetary tightening in the United States was expansionary for emerging markets as long as they allowed the market to value their currencies. That seems to be wrong. But we are confused about why that is wrong. Some say that it is because emerging markets must borrow inflation-fighting credibility from abroad and so cannot afford to let their currencies undergo a clean float. Others say that international capital flows carry not just financing capacity but risk-bearing and entrepreneurship along with them. Therefore: be afraid, be very afraid of the current Fed tightening cycle, although our models of why we should be afraid are pretty-much crap.

As to why growth keeps disappointing, it has always been thus. We tend to focus on the Western European convergence during the 30 glorious years, on the Asian Tigers, on Japan’s Meiji and Showa eras, on China today, and, earlier, on Wilhelmine Germany. But those are the exceptions. The rule is that this is very hard.

Now on some level it makes no sense that this is very hard.

Both Karl Marx and John Stuart Mill around 1850 were certain that the next 50 years would see industrial structure and productivity levels in India converge to the British standard. Mill expected it to be because of world trade, the inculcation of British market-friendly institutions, and good government by himself and all his friends in the India Office. Marx expected it to be because the British Millocracy were throwing a net of railroads across India for their own profit that would, unintentionally, allow the global markets and the world bourgeoisie to do their wonderful, horrible thing that would make the communist revolution to create a free society of associated producers possible, necessary, and very desirable. Both were wrong.

Right now we can ship anything non-spoilable across the world for pennies, talk to anyone, and access any piece of engineering knowledge less than a generation old for free. Yet the world has very steep valleys and peaks. And one billion of our fellow human beings who could do just as well as we do in our pitch and our board meetings if they were properly briefed still live lives barely distinguishable from those of our pre-industrial agrarian age ancestors.