The Long-Run Economic Trend Is Our Friend: No Longer so Fresh at Project Syndicate

Over at Project Syndicate: The Long-Run Economic Trend is Our Friend

These are days of grave disappointment at the state of the world. Sinister forces of fanatic religion-linked murder that we thought had been largely scotched by 1750 are back. They have been joined by and are reinforcing forces of nationalism, bigotry, and racism that we thought had been largely scotched in the ruins of Berlin in 1945. (There is a bright spot: the other principal fanaticism of the twentieth century, that of ideology, is comatose if not dead.) In addition, the state of economic growth since 2008 has been profoundly disappointing. There is no reasoned case for optimistically expecting a turn for the better in the next five years or so. And the failure of the globe’s institutions to deliver ever-increasing prosperity has undermined the trust and confidence which in better times would be strong factors suppressing the murderous demons of our age. Read MOAR Over at Project Syndicate

In these days of pronounced pessimism, it is past time to engage in enthusiastic and positive contrarianism with respect to the state of global economic growth not over the next five but over the next 30 years, and beyond at least to the next 60.

The reason that the 25 to 50-year economic growth future looks very bright is that the biggest of the macro trends that have been operating since the end of World War II are still, under the surface, at work. Technology continues to diffuse. World trade continues to grow. The population explosion continues to ebb. The innovative heart of the world economy in the global north continues to beat–albeit perhaps more sluggishly than it has since the 1880s (maybe). War and terror continue to destroy, terrorize, shock, and horrify, but on a scale much less than the holocausts and megadeaths of 1914-1978.

And these trends are likely to continue.

Our best source of summary information on global economic growth remains the Penn World Table research project started two generations ago by Alan Heston and Robert Summers. Take the geometric mean of individual country estimates of real GDP per capita as our first summary statistic of the state of the global economy. The Penn World Table then tells us that the world in 1980 was some 80% better off than it had been in 1950, and the world in 2010 was another 80% better off in measured material-well being terms that it had been in 1980. That places us today more than three times as well off as our predecessors in the 1950s were.

Moreover, this more than tripling of world material well-being is an underestimate. First, our real GDP measure was designed to be something Simon Kuznets could estimate quickly from data that was easily available. It does not not take proper account of use-value surplus accruing to users but only of market-value revenue captured by sellers. Over time the commodities we are producing are shifting in a direction that makes user surplus a greater and market value realized a smaller proportion of their total contribution to societal well being. And I find attempts to claim either that it has always been thus profoundly unconvincing given how much of our leisure and even our work time is spent interacting with information systems where the revenue flow is not of the essence but is only a small dribble tied to ancillary advertising.

Second, there is the case of China–and, more recently, of India. According to the PWT, China’s real GDP per capita in 1980 was more than 60% below of that of the country at the then-geometric mean of the world distribution. Today China is 25% above that moving benchmark. India in 1980 was more than 70% that benchmark, but since 1980 it has closed half the gap vis-a-vis the contemporaneous geometric mean. In the scatter of country experiences, India and China are only two counties. But they are 30% of humanity.

Now do not push optimism too far. There has been no sign of the world’s countries drawing together in their levels of prosperity. In 1950 two-thirds of countries had GDP per capita levels between 45% and 225% of the geometric mean of the world’s nations. By 1980 you had to widen that spread to 33% to 300%. And today it is 28% to 360%. That on the level of individuals the world economy is a more equal place than it was in 1980 is due to rulership that has been on the whole much better than average in China and India since the accessions of Deng Xiaoping and Rajiv Gandhi. But there are no more countries of the size of China or India to stand up. And few observers have anything like the confidence in and hopes for Xi Jinping and Narendra Modi that they had in their predecessors. It may be harder to find an export niche in the world economy to accelerate technology transfer in the future than it has been since the end of World War II. It may well be that the engine of innovation at the world’s leading technological edge will beat more slowly. But it will continue to beat. And technology will continue to diffuse. And the world will continue to grow.

Expect–terror that somehow triggers global nuclear armageddon aside–my successors in 2075 or so to be writing about how their world is, once again, three times as well off in material terms as we are today.

And beyond that? It is harder to project. We are already letting global warming, a potentially very large demon for the post-2080 world, out of the Pandora’s Box we hold. Our children’s children’s children will not thank us for that.

A Brief History of (In)equality: No Longer So Fresh at Project Syndicate

Elephant graph Google Search

No Longer Fresh at Project Syndicate: A Brief History of (In)equality: Here we have a very nice set of slides http://tinyurl.com/dl20160725a. It comes from a talk in Lisbon given by Barry Eichengreen, my sixth-floor office neighbor here at the Berkeley Economics Department. The slides have one of the great virtues of economic history: We, unlike other economists, are allowed to at least gesture at and even glory at the complexities of a situation. We are not forced, as other economists are, into ruthless oversimplification in pursuit of conceptual clarity—to be followed by the intellectually-faulty imperialism overloading more of an explanation of the world on a simple model then it can rightfully bear. Read MOAR at Project Syndicate

In Barry’s view, with respect to inequality there have been and are now ongoing six important first-order processes at work over the past two and a half centuries:

  1. The 1750-1850 pulling-apart of Britain’s income distribution, as the technologies and institutions of the British Industrial Revolution benefitted the urban bourgeoisie and the rural bourgeois gentry but neither the rural nor the urban proletariat http://amzn.to/2aFJAYz https://www.jstor.org/stable/2600061.

  2. The 1850-1914 great First Age of Globalization convergence of living standards and labor productivity levels in the Global North, as 50 million people left overcrowded agricultural Europe for resource-rich settler colonies and ex-colonies, and brought their institutions, their technologies, and their capital with them. Gaps of roughly 100% in wage levels between European sender and settler recipient economies shrank to 25% or so http://amzn.to/2a6aXz6.

  3. The 1750-1975 enormous pulling-apart of the global income distribution, as some parts of the world were able to take full or nearly full advantage of industrial and post industrial technologies, and others were not. Measured at purchasing power parity, America was twice as well off as China in 1800. By 1975 it was thirty times as well off http://tinyurl.com/dl20160725b.

  4. The 1870-1914 First Gilded Age rise of within-country inequality in the Global North, as entrepreneurship, industrialization, and rent seeking distributed the bulk of increases and productivity to the relatively well off and to the plutocracy http://tinyurl.com/dl20160725a.

  5. The 1930-1980 Social Democratic Age great compression of the earnings distribution in the Global North http://tinyurl.com/dl20160725c.

  6. The post 1980 divergence of outcomes within the Global North, as political economic choices lead to the coming of a Second Gilded Age to the Global North’s English-speaking portions.

I, however, think Barry’s talk is not economic-historiany enough. I would go further. I would start by adding five more first-order important factors and processes:

  1. The extraordinary post-1980 reduction in and yet stubborn persistence of remaining pools of absolute poverty. Inequality is a maldistribution of the opportunities for Isaiah Berlin’s positive liberty. But as my ex-colleague Ananya Roy points out, absolute poverty is a deprivation of Berlin’s negative liberty as well—it matters little when you are in a cage without any money whether you could theoretically buy a key http://amzn.to/2ac721f http://tinyurl.com/dl20160725d.

  2. The extraordinary nineteenth-century global shrinkage of slavery.

  3. The global reduction of other caste barriers—race, ethnicity, gender—which limit people’s opportunities to make use of whatever wealth they have.

  4. The post-1975 global-scale switch from increasing planet-wide divergence in wealth to convergence—although do note that, so far at least, all of the switch from the pre-1975 increasing divergence pattern is the result of two good growth generations in China, and one good growth generation in India.

  5. The dynamic of compound interest backed by political-economic rent-seeking identified by Thomas Piketty—with the caveat that Piketty’s logic applies not very much to our past, even our 1980-2015 past, but may well be an important part of our 2015-2100 future http://amzn.to/2ab4rSI.

Complicated, yes? A matter for careful adjustment of institutions by those with social science expertise directed by elected leaders who share the people’s value, yes?

And, most important, I would finish by adding, underlining, and emphasizing a twelfth process:

Populist mobilizations to try to deal with problems of inequality have had consequences we can call “checkered” only out of politeness. Populist mobilizations have been directed in France toward installing an Emperor, Napoleon III, and toward overthrowing democratic governments of the Third Republic. Populist mobilizations in America have been directed at excluding immigrants from China to California, at excluding immigrants from anywhere save northwest Europe, at enforcing Jim Crow. Populist mobilizations in central Europe were turned toward imperialism as the problem was redefined as that Germany and Italy were “proletarian nations” that needed bigger empires. And only Naziism could surpass in its consequences the populist mobilizations that were turned to entrenching in power Lenin’s “party of a new type” and all of its imitators. The constructive responses were fewer: Extending the franchise. Progressive income taxes. Social insurance. Building society’s physical and, more important, human capital. Opening economies. Prioritizing full employment. Encouraging migration to where ample resources and, more important, good institutions were already established. History teaches us that those have been the reactions to inequality that have made the world a better place.

Of course, history also tells us that we fail to learn what lessons history has to teach us.

Must-Read: Branko Milanovic: How Unequal Is India?

Must-Read: Branko Milanovic: How unequal is India?: “In the 1990s… the survey numbers began to diverge more and more from National Accounts statistics…

…NSS kept on producing a fairly stable consumption Gini… with only a small increase in inequality after India’s sharp turn toward capitalism in the early 1990s… made India inequality look about the same as in developed countries. But until recently we had no other reliable and nationally-representative survey to confront NSS with. Now… we have… the first income based surveys of Indian population for 2004 and, just released by LIS, another same survey for 2011…. First, Indian Gini is… 51… the level of Latin American countries and is some 15 points… higher than… NSS….

Now, if we replace NSS with the new income survey as I have done for the global inequality calculation for the year 2011 (unpublished), you may expect that the greater inequality revealed by IHDS would push global inequality up, especially since India is such a populous country. Right? Wrong…. Global inequality goes down by approximately 1 Gini point since the higher income levels implied by IHDS push Indians toward the middle of the global income distribution and more than offset the contribution to higher global inequality that comes from the stretched-out Indian distribution…. In conclusion, more unequal but richer India, makes the world more equal.

Must-read: Branko Milanovic: “There is a trade-off between citizenship and migration”

Must-Read: A surprisingly-large (to me) number of people have been trashing the very sharp Branko Milanovic for what seems to any normal economist to be an obvious point: At one pole is (1) restricting immigration far below the economically-rational level for any economic welfare analysis because the political system rejects providing full national-community citizenship rights and powers to every migrant. At the other pole is (2) completely decoupling political voice from geographic location and affective ties to the local community. The best policy has to be somewhere in the middle. Yet many more so-called “leftists” than really ought to or than I expected to see say that (1) is obviously correct, and that Branko is guilty of ThoughtCrime for thinking about where in the middle the proper balance might lie…

Branko Milanovic: There is a trade-off between citizenship and migration: “The rich world believes it has reached the limits of acceptable migration….

…We know that migration does more to reduce global poverty and inequality than any other factor. Calculations done by Alan Winters of the University of Sussex show that even a small increase in migration would be far more beneficial to the world’s poor than any other policy…. So is there a way to make greater migration acceptable to the native populations of the rich countries?… Most of a person’s lifetime income is determined by where he or she lives…. Citizens of rich countries receive a citizenship premium, while citizens of poor countries suffer a citizenship penalty. Migration is the attempt by the global poor to enjoy that premium, or at least a part of it, for themselves….

We [need to find a way to] redefine “citizenship” in such a way that migrants are not allowed to lay claim to the entire premium falling to citizens straight away, if at all… [to] assuage the concerns of the native population, while still ensuring the migrants are better off than they would be had they stayed in their own countries…. Migrants could be allowed to work for a limited number of years, or to work only for a given employer, or else be obliged to return to their country of origin… pay higher taxes since they are the largest net beneficiaries of migration…. This would require significant adjustments to traditional ways of thinking about migration and citizenship….

It is not clear that the old conception of nation-state citizenship as a binary category that in principle confers all the benefits of citizenship to anyone who happens to be physically present within a country’s borders is adequate in a globalised world. In effect, there is a trade-off between such a view of citizenship and the flow of migration…. If graduated categories of citizenship were created… we would be able to reconcile the objective of reducing world poverty with reducing migration to acceptable levels. If we do not do something, we will be stuck in a position in which everyone who makes it to the rich world is given full rights of citizenship, but we do everything in our power to make sure that nobody gets here.

Must-read: Branko Milanovic and Suresh Naidu: Branko Milanovic’s New Approach to Global Inequality

Must-Read: Branko Milanovic and Suresh Naidu: Branko Milanovic’s New Approach to Global Inequality: “Convergence and Divergence Across Nations Reinforced or Damped by Kuznets Waves within Nations…

…Global inequality can be broken down into inequality between countries (btw US & Mexico) & within them (among US citizens). Within-country inequality is driven by “Kuznets waves” & between country by economic growth convergence. Real income growth has been quite strong for the global middle class (Vietnam, China, etc), but weak for 80th-90th percentile (US lower MC)…. Migration is the most powerful tool for the reduction of global poverty and inequality