Now I'm Worried

The IMF Boosts Economic Outlook for U.S. and Global Economies and gives credit for strong growth to Bush's 2001 and 2003 tax cuts:

The global economy, after being battered by recession, terrorist attacks and war, should grow strongly this year and next with growth in the United States hitting the fastest pace in 20 years, the International Monetary Fund predicted Wednesday. [...]

The IMF predicted the global economy would expand by 4.6 percent this year after growing by 3.9 percent in 2003. Those growth rates are 0.6 percentage point higher than the IMF's last global forecast made in September.

For 2005, the IMF sees continued strong global output of 4.4 percent.

For the United States, the IMF predicted growth this year of 4.6 percent, which if it comes true, would be the fastest growth rate since the U.S. economy expanded by 7.2 percent in 1984. That represented a 0.7 percentage point increase in the IMF's September forecast. [...]

However, the IMF downgraded its forecast for a number of countries in Europe which have been struggling to find the right mix of policies to bolster lagging growth. Countries using the euro, which has hit record highs recently against the falling dollar, will see growth of just 1.7 percent this year as the weaker dollar boosts the competitiveness of U.S. exports against European products.

The IMF gave credit to President Bush's 2001 and 2003 tax cuts and low interest rates engineered by the Federal Reserve for fueling this year's economic rebound.

The IMF so often gets things exactly backwards that now I'm truly worried that the global economy is about to collapse.

Trying to Understand

Jim writes:

It's hard for me to understand, Howie, how you can hang your hat on this premise.

It seems to me, that in many of the debates occurring in this blog, Howie and I disagree with Jim, but we (or at least I), understand his position and his reasoning. On the other, it seems that Jim not only disagrees with us, but can't even understand our reasoning, the implication being that our thinking is irrational. I don't think we're irrational. Instead, I think there are three subtle, but significant differences in our world views that, if taken into account, makes it fairly straightforward to understand how Howie and I can arrive at significantly different opinions.

The first difference in world view involves the perception of government. It looks to me like Jim believes the government is (or at least should be) moral and beneficial. Howie and I believe that government is inherently immoral but still beneficial. I think that there are more areas where government can be beneficial than Howie, but Howie and I share this underlying world view. Since Jim, Howie, and I all agree that government can be beneficial, it's no surprise that we support many of the same policies and don't support others.

Because I believe that most government means are immoral, I focus much more on the results than on the actions of those governing. I'm not so concerned when Bush and other government officials lie or use immoral means since the very existence of the government is immoral (in my opinion). On the other hand, if one were to think that government should be moral, then it would be very important that all government actions be (or at least try to be) moral. This creates a vastly different perspective of almost everything the government does.

The second difference is that Howie and I read different things than Jim and assign different weights to the information we glean from those documents. For many topics, the available information is extremely murky, at best. In Iraq, for example, I don't think anybody has a really good understanding of everything that's going on. Depending on what you read, the situation is either just terrible or going swimmingly well. Depending on which sources you deem reliable, a radically different world view results.

The last difference is our views regarding war. Other than some of those in the military, few people like war. However, given that, there is still a wide range of thresholds for when people consider war to be a possible option. I hate war, but there are a number of things I hate even more than war. Jim hates war, and there are probably substantially fewer things he hates more than war relative to me. Again, this significantly affects our fundamental views of the world.

Starting from different fundamental positions regarding perception of government, information sources, and war should make it easier to follow our logic. I'm not expecting Jim to agree with our opinions since he has a different fundamental viewpoint, but it should be possible for him to understand our logic.

Richard Clarke

In his recent book, Against All Enemies, Richard Clarke "slammed the Bush administration for paying insufficient attention to the terrorist threat in the summer of 2001." Clarke also praises the Clinton administration during the March 24, 2004 9/11 Commission Hearings for it's efforts fighting terrorism:

CLARKE: My impression was that fighting terrorism, in general, and fighting Al Qaida, in particular, were an extraordinarily high priority in the Clinton administration -- certainly no higher priority. There were priorities probably of equal importance such as the Middle East peace process, but I certainly don't know of one that was any higher in the priority of that administration.

However, this description of the world by Clarke is absolutely and completely the opposite of how he described the world in August, 2002:

RICHARD CLARKE: Actually, I've got about seven points, let me just go through them quickly. Um, the first point, I think the overall point is, there was no plan on Al Qaeda that was passed from the Clinton administration to the Bush administration.

Second point is that the Clinton administration had a strategy in place, effectively dating from 1998. And there were a number of issues on the table since 1998. And they remained on the table when that administration went out of office -- issues like aiding the Northern Alliance in Afghanistan, changing our Pakistan policy -- uh, changing our policy toward Uzbekistan. And in January 2001, the incoming Bush administration was briefed on the existing strategy. They were also briefed on these series of issues that had not been decided on in a couple of years.

And the third point is the Bush administration decided then, you know, in late January, to do two things. One, vigorously pursue the existing policy, including all of the lethal covert action findings, which we've now made public to some extent.

And the point is, while this big review was going on, there were still in effect, the lethal findings were still in effect. The second thing the administration decided to do is to initiate a process to look at those issues which had been on the table for a couple of years and get them decided.

So, point five, that process which was initiated in the first week in February, uh, decided in principle, uh in the spring to add to the existing Clinton strategy and to increase CIA resources, for example, for covert action, five-fold, to go after Al Qaeda.

The sixth point, the newly-appointed deputies -- and you had to remember, the deputies didn't get into office until late March, early April. The deputies then tasked the development of the implementation details, uh, of these new decisions that they were endorsing, and sending out to the principals.

Over the course of the summer -- last point -- they developed implementation details, the principals met at the end of the summer, approved them in their first meeting, changed the strategy by authorizing the increase in funding five-fold, changing the policy on Pakistan, changing the policy on Uzbekistan, changing the policy on the Northern Alliance assistance.

And then changed the strategy from one of rollback with Al Qaeda over the course of five years, which it had been, to a new strategy that called for the rapid elimination of Al Qaeda. That is in fact the timeline. [...]

JIM ANGLE: You're saying that the Bush administration did not stop anything that the Clinton administration was doing while it was making these decisions, and by the end of the summer had increased money for covert action five-fold. Is that correct?

CLARKE: All of that's correct.

Clarke now claims he was lying during the August 2002 interview, but he is now telling the truth. Not surprisingly, a quick scan shows that left leaning websites believe this and right leaning sites think that Clarke is lying now and was telling the truth in August 2002. My personal belief is that once someone has been shown (and admits to) lying for personal gain in the past (he was making his employer look good), anything they say that could possibly be for personal gain in the future (e.g., it might sell more books) should be heavily discounted.

In a presidential election, about 40% of Americans vote Democrat no matter what and about 35% vote Republican no matter what. The keys to winning the election are to get out the vote from your party and to get the swing voters to vote for you. It doesn't look to me like Clarke's "revelations" will significantly affect the turnout of the party faithful for either party. The more interesting question is what effect, if any, it will have on swing voters. My guess is that this debate has occurred too early to have much of an effect (very few will remember this when they vote in November). I also guess that the Democrats will choose not to keep it in the forefront since there has been some negative mainstream press and Senator Bill Frist has threatened to prosecute Clarke for lying under oath to Congress:

Third, Mr. Clarke has told two entirely different stories under oath. In July 2002, in front of the Congressional joint inquiry on the Sept. 11 attacks, Mr. Clarke testified under oath that the administration actively sought to address the threat posed by Al Qaeda during its first seven months in office.

It is one thing for Mr. Clarke to dissemble in front of the media. But if he lied under oath to the United States Congress, it is a far more serious matter. As I mentioned, the intelligence committee is seeking to have Mr. Clarke's previous testimony declassified so as to permit an examination of Mr. Clarke's two different accounts. Loyalty to any administration will be no defense if it is found that he has lied before Congress.

Fourth, notwithstanding Mr. Clarke's efforts to use his book first and foremost to shift blame and attention from himself, it is also clear that Mr. Clarke and his publishers adjusted the release date of his book in order to make maximum gain from the publicity around the 9/11 hearings. Assuming the controversy around this series of events does in fact drive the sales of his book, Mr. Clarke will make quite a bit of money for his efforts.

I find this to be an appalling act of profiteering, trading on his insider access to highly classified information and capitalizing upon the tragedy that befell this nation on Sept. 11, 2001.

If the Democrats do keep this in the forefront of the media's attention, I'm still not sure what effect it will have with swing voters. I have a hunch that Karl Rove, with all that Republican money and his talent, will be able to more than counteract Clarke's charges. The problem is that each time the Democrats attack Bush in this manner only to have Rove and company mitigate the effect by casting doubt on the perpetrators, the swing voters may become even more skeptical about new information. Unfortunately, that may further diminish Kerry's ability to make headway against Bush.

Europe Will Show Us the Way

Niall Ferguson of AEI argues that Europe will have even worse problems with unfunded liabilities and that these problems will occur sooner:

The German population is projected to decline absolutely from 82 to 67 million between now and 2050. Falling populations will be a characteristic feature of the once globally dominant societies of Western Europe. An increase in retirement ages would help only slightly, but it is not an adequate answer to the problems that already beset the social security systems of Western Europe. The implicit liabilities of the German social security system at the moment are currently around about 270 percent of German GDP. There are problems with the social security and Medicare systems in this country--very serious problems indeed. But the problems in Europe are much worse, and they will bite politically much sooner.

I've seen this same argument by a number of other economists and virtually no opposing views. Thus, we will have the opportunity to watch Europe try various solutions to their problems and can implement the ones that work the best ourselves. No reason to try to fix it now without the benefit of that extra information.

U.S. Economic Present

Here's an interesting perspective from our favorite magazine, the Economist:

Waiting for the job recovery might be a good time to take a broader measure of the material well-being of Americans. Their condition is widely held to be perilous. The economy, it is said, is being "hollowed out" by international competition and the connivance of business and political elites, creating "two Americas", one rich, one poor. Median income of American households, commentators often say, has been stagnant, though census figures give a rise of one-fifth since 1980. Lou Dobbs, on CNN's "Lou Dobbs Tonight", is just one media fabulist who makes his living by claiming that, as America is being "exported", so the well-being of middle Americans is in a parlous state.

It is a good story, but false on many levels. For a start, this slow growth in median income overlaps with a scale of immigration into America outpacing all immigration in the rest of the world put together. Many immigrants have come precisely to take up the lowest-paid jobs. As a result, in the 20 years to 1999 some 5m immigrant households were added to those defined as below the poverty level. Yet among native-born Americans, poverty rates have declined steadily since the 1960s. In the case of black families, median incomes have recently been rising at twice the pace for the country as a whole.

Strip out immigrants, and the picture of stagnant median incomes vanishes. Indeed, for the nine-tenths of the population that is native-born, middle-income trends continue their improvement of the 1950s and 1960s. For these people, inequality is not rising, but falling. Gregg Easterbrook cheekily points out in his excellent recent book, "The Progress Paradox" (Random House), that if left-leaning Americans seriously want better statistics about middle-income gains, then they should simply close their borders.

Mr Easterbrook points to something else about the figures for median household income. A quarter-century ago a typical household had three members. Today, it has just 2.6 members. Simply by this effect, median households have seen their real incomes rise by a half.

Another measure of improved well-being is increased access to jobs. Between 1980 and 2002 Americans in work rose by over 40%, a far brisker pace than the 26% growth in the population. Some three-quarters of the adult population are now in work, close to a record and some ten percentage points higher than in Europe.

One reason is more teenagers in work: over the same period, teenage employment grew by nearly two-thirds. As Andrew Hacker points out in the New York Review of Books, teenagers are a significant source of low-paid labour in supermarkets, shopping malls and fast-food franchises. Exploitative? Hardly, since it helps them buy cars and independence.

Yet the chief reason for higher participation is more women in work, notably married women. Very roughly, in the past half-century the average weekly hours worked by married women have tripled, while hours worked by men and single women have stayed about constant. The usual reason given is that married women have had to work so that families can make ends meet. A recent study* by three economists, Larry Jones, Rodolfo Manuelli and Ellen McGrattan, published by the Federal Reserve Bank of Minneapolis, punctures that notion. They find that the tripling of married women's hours can be explained entirely by a gender wage-gap that has narrowed. That is, a smaller pay differential between men and women gives married women sufficient incentive to invest in education and careers.

Of course, many American households struggle to survive on minimum-wage jobs with employers who do them few favours. We will look at low-paid work in a future week. What this piece attempts to argue is that the middle is far from being hollowed out. As Mr Easterbrook emphasises, most Americans have at least two cars and their own house, and they send their children to college. Certainly a bigger share of household income is being spent on things that did not feature 50 years ago, such as high-tech health care. But it has brought the benefit of a longer and better life, and not just for the old: since 1980, infant mortality has fallen by 45%.

At the end of last year, America's household wealth, at $44 trillion, passed the previous peak set in early 2000...

Compare this last household wealth number with the "staggering $45 trillion" of "American government's future obligations" that another Economist article that Jim links to worries about. Including the assets, the balance sheet doesn't look so bad, does it? Especially since the vast majority of those liabilities are Social Security and Medicare entitlements which can become un-entitled if we so choose (or if not un-entitled because of morality qualms, then particularly heavily taxed, or, in other words, means tested).

Populism and Presidential Candidates

I've often wondered why presidential candidates running on a populist message have fared so poorly in the past. Surely, if the majority of the national income accrues to the top 20% of income earners, there must be some appeal to a populist message. Recently, via a convoluted path, I stumbled across some data that might shed some light on why the populist message has been unsuccessful. The convoluted path is interesting, so I'll start there.

Not only do I complain about errors in liberal articles, I am also often dismayed by conservative articles as well. I just don't trust the media - any of it. I occasionally email authors who publish ridiculous statements. They usually don't respond. For example, I've emailed Krugman in the past but got no response.

In a recent article by Thomas Sowell, a conservative economist, I saw a statement that seemed absurd to me:

Not only is the average real income per person rising in the bottom 20 percent of the income distribution, people seldom stay in the bottom brackets for more than a few years. Over the course of their lifetimes, most of those same people are in the top 20 percent at one time or other.

Most of the bottom 20 percent end up in the 20 percent? Seemed rather far fetched to me. So I emailed the author asking for some supporting data and got the following response:

The information you quoted is from a larger discussion of income differences in chapter 9 of my "Basic Economics." The sources are listed in the back of the book. I happen to have extra copies of the galleys and will send you one if you give me a mailing address.

I sent him my mailing address. I wasn't exactly sure what a galley was. I thought it was the where you cook on a boat or a ship that was powered by rowing (I was wondering if it would come complete with ancient Roman slaves to do the rowing). So I was quite curious to see what was going to come in the mail.

Turns out a galley seems to be a copy of the book before they've filled in the page numbers in the table of contents. In other words, some sort of early printed draft of a book. Oh well, not nearly as interesting as I had hoped, but probably more useful for the task at hand.

Sure enough, in chapter nine, Sowell writes something similar:

An absolute majority of those Americans who were in the bottom 20 percent in income in 1975 were also in the top 20 percent at some point over the next 16 years.

Also, as promised, the sources were listed in the back of the book.

The primary source is the 1995 Annual Report of the Federal Reserve Bank of Dallas. The following table appears in the report:

Income quintile in 1975	Percent in each 1975 quintile in 1991					In 5th 1975 quintile sometime in 1976-91
	1st	2nd	3rd	4th	5th
5th (highest)	.3	2.5	7.7	20.1	69.4	98.4
4th	1.0	6.6	16.0	30.0	46.4	78.6
3rd (middle)	2.2	15.6	24.1	32.0	26.1	48.2
2nd	2.1	19.9	19.9	25.2	32.9	52.6
1st (lowest)	2.3	14.0	17.6	26.9	39.2	57.0

In the report, the table has the following caption:

Judging by a constant measure of living standards -- income quintiles of 1975 -- 39.2 percent of those individuals in the lowest income quintile in 1975 managed, by 1991, to achieve a real income comparable to that of the highest income group in 1975. Only 2.3 percent of this group remained at a living standard equal to the lowest of 1975. Of those individuals who were at the highest living standard in 1975, 69.4 percent were able to at least maintain that standard.

From this table, Sowell's second quote is technically correct. However, to be clearer, I think it probably should have been written:

An absolute majority of those Americans who were in the bottom 20 percent in income in 1975 were also in the top 20 percent of 1975 incomes at some point over the next 16 years.

However, this change doesn't have a whole lot of impact on the meaning.
Sowell's first quote isn't quite right. I'm guessing its creation was mostly sloppiness. He based it on his other quote which wasn't tightly worded and based on other data. So my guess was right that the first quote was incorrect.

However, the quote isn't nearly as far fetched as I had anticipated. The FRB report does show incredible income mobility. If the data is correct and the FRB's interpretation of the data is reasonable, it would easily explain why class warfare doesn't work very well. Most of the "poor" will soon not be, and they probably know it. No reason to increase taxes on higher brackets since they will be there soon.

Is the data correct? I don't know. The data is taken from the Panel Study of Income Dynamics, a large "nationally representative longitudinal study of nearly 8,000 U.S. families. Following the same families and individuals since 1968, the PSID collects data on economic, health, and social behavior." Hundreds of studies which have influenced policy have utilized this data so I hope it's good. The study design looks reasonable, but studying people is hugely difficult, so you never really know.

Is the interpretation reasonable? I don't know. However, the data is available on line and I've added it to my list of things to do to see if I can derive similar results.

The results are so stunning that if the data and analysis are any good at all, it shows the people in the U.S. have surprising income mobility. There aren't really any stable classes, so class warfare and populist messages are going to have limited appeal.

Senator Kerry might want to consider that as he hones his political rhetoric over the next few months.

Whoops! An Apology

Jim, if there was a tone of condescension in my last post, please accept my apologies. I think it was more of a reflection of my exasperation over certain lines of reasoning appearing in this blog. This is obviously a reflection of my limitations and not yours. As for angst over personal circumstances, that is very understandable. Hopefully, in future posts, I can give you a convincing set of arguements as to why the country's economic future is likely to work out better than you think.

Neo-mercantilism I would describe as a modern version of mercantilism: trade surplus -good, trade deficit - bad, and the assumption that a trade deficit must invariably cause a currency to decline. There is no gold standard nor must there be blatant protectionism as in classic mercantilism. The Economist advocates free trade and I know that, but they have the modern equivalent (neo) of mercantilism stamped on some of their assumptions. In the modern world capital flows are many times larger than trade flows. A country that creates a favorable investment environment can sustain trade deficits for quite some time without sufferring a currency crisis.

I think Paul Zane Pilzer?? wrote a book called Infinite Wealth which emphasized the role of knowledge in wealth generation as Bret mentioned. The tone was less arrogant than Wanniski - I'll try to find my copy and let you know if this is a better presentation...


My preferred policy slate

flat tax
phase out tariffs
phase out corporate welfare
tort reform
more active public debate over costs versus benefits of regulations
school choice and vouchers to empower parents and children...
reform of medicare/medicaid along the lines of the Breaux Commission as a first step to dealing with health care

this would be a good start but the tough question is how to win the political battle??

Howie's Reading List for Jim

I haven't read any of the three books Howie is recommending for Jim's "tremendous angst." I've read several articles by both Wanniski and Gilder. I don't generally disagree with what they've said in those articles, but I personally find their tone overly confident and partisan and the data too sparse to give me much confidence in what they have to say. Perhaps their books are more objective than their articles. I'm skeptical, however, given that the title of Wanniski's book is "The Way the World Works." I find it hard to believe that anyone can describe the way the world works in a mere 300 pages or so. Nonetheless, I see they have pretty good reviews and the authors can tell a pretty good story (which I'm told is a powerful way to "leverage" ideas), so the books may well be a pretty good read.

A Phoney Recovery

Even though I just let my subscription to The Economist lapse (I'm trying to reduce living beyond my means :-), I've always thought and continue to think that, more than any other weekly magazine, they at least try to present both sides of the argument. And indeed, I think they made a good effort in A Phoney Recovery (which Jim linked to). It's always entertaining and sometimes enlightening reading articles that argue against themselves.

If I had to summarize the article's conclusion in a nutshell it would be this: people are irrationally increasing their debt load and investing in property (and the stock market to a lesser extent) and Greenspan is irrationally keeping interest rates too low which encourages that sort of irrational behavior. If they deleted the "irrational" and "too" (low) part of their description, I'd agree completely. I'd also agree that worldwide economic numbers are not combining in the familiar old patterns of 20 years ago, and this new, unfamiliar territory is discomforting (even to me).

I don't think investors are acting irrationally at all. If Asian countries (notably China) want to buy bonds at absurdly low interest rates (high prices), why is it possibly irrational to sell those bonds, whether to buy a more expensive home or invest in the stock market? It's a classic opportunity to "sell high, buy low." In arguing against the rationality of the approach, the author puts forth a statement I find bizarre:

More serious is that the price of homes or shares can fall, while debts are fixed in value.

If debts are fixed in value, then why, pray tell, are there bond markets? If you sell a bond at an interest rate of 5% and interest rates go up to 10%, the value of that bond drops. If you used that money to buy a home, your monthly payment remains the same. As long as you continue to live in that house, it remains at least as affordable as long as you make at least as much money as when you bought. If you make more money over time, the mortgage payments get more affordable, not less.

Am I saying this is a good thing? No, not necessarily. I don't know. But to call it irrational like drug addiction is way off base in my opinion.

Here is another statement I found incoherent:

In the long run, the only way to create genuine wealth is to consume less than income, and to invest in real income creating assets.

Ummm, well, yes and no. First of all, in the long run we are all dead. Or, more to the point, in the long run everything we invest in real income creating assets today is dead (i.e., it will completely depreciate). It is true that some amount of time before we get to the long run, we will need to invest in income creating assets to create more "genuine" wealth in the long run (by the way, how does "genuine" wealth differ from other kinds of wealth, can you buy more with it?). Anyway, the point is that it doesn't necessarily follow that we should increase our investment in such assets today.

Also, in the long run, the most important thing is knowledge and information, not capital equipment. I'll have a post on this line of reasoning in the next few days.

Finally, we get to the core of the problem:

The current dilemma for the Fed is that inflation is presently too low for comfort, which argues for holding interest rates down.

Well, yeah! No kidding! Sounds like a good argument to me. I think Greenspan is worried that we were actually in a bit of a deflation and that scares him (possibly for good reason). A rational economist could reasonably disagree with Greenspan's position (seems he's taking some heat from economists at the moment for being partisan), but I don't think Greenspan's analysis can be dismissed out of hand as being irrational.

What it comes down to is that there doesn't seem to be a comparable example of low inflation/deflation, rapidly falling dollar, low savings rates, low interest rates, low employment growth, robust GDP growth, rapidly rising property prices, and an increasingly robust stock market. Greenspan certainly does have a dilemma on his hands. His chosen to err on the side of growth and hope for the best. That would be my choice as well. I hope he's right. Only time will tell (and even then, only the barest glimpse of the truth will be told).

Prescription for Economic Angst

Jim, in your Way Out.. post I sense tremendous angst. They have medication for problems like that. As an alternative I would prescribe that you read these 3 books and call me in the morning. (see books below) If you do this, you'll be right as rain.

Nothing is cast in stone! There is a lot of uncertainty, especially about the future. Sometimes in trying to avoid that which we fear, we cause it to happen. I'm afraid that some of your policy prescriptions would fit this category. Your own strategy has the seeds of the solution.

...accumulate enough wealth in the short-term to mitigate the impact of any future calamity.

The recommended books will give you new insights into the wealth accumulation process on a societal scale.
They will also make it easier for you to seperate the relevant from the largely irrelevant when trying to formulate an economic judgement.

note on The Economist: I read it for more than 15 years. The first 10 years they probably new more economics than I did, after that I pulled ahead. They simply refused to learn from their mistaken notions - no learning or adjustments in their thinking. The mercantilist beliefs they hold were probably reasonable 100 years ago, today they are nonsense.

The Way the World Works by Jude Wanniski
Wealth and Poverty by George Gilder
Innovation and Entrepreneurship by Peter Drucker

Data Rebuttal Rebuttal

Jim's rebuttal to Where's the Data? is in italics, my comments are in normal typeface.

Bret, here's a different perspective on the statistics (which I came across in 2 minutes of searching on the Internet).

Unfortunately, it looks like you only spent two minutes and didn't bother reading the article.

 I have no idea who the author is, but his numbers seem just as good as yours.

His numbers are the same as mine, too bad he completely ignores his own numbers when he writes the text.  I'll lead you through it if you need me to, but if you take a closer look you'll see that his numbers don't provide much support for his text, and his numbers don't in anyway refute my assertion that tax rate cuts increase growth and those numbers actually support my assertion that "the vast majority of times a country raises taxes, its economic growth slows from the baseline rate." The one thing I will concede is that I meant to say "tax rates" where I said "taxes" in my post.

 He concludes:

"Nobel laureate Robert Lucas, one of the world's most famous conservative economists, has spent over a decade looking for the secret to economic growth, and has not found it.

I don't think Robert Lucas spends a lot of time looking for "secrets" to economic growth.  Like most of the University of Chicago economists, he's very data driven. Lucas also professes to know a lot about economic growth. Here is an excerpt from a Business Week article regarding Lucas:

Considering the economy's parlous state, the timing seems strange for a Nobel laureate in economics to proclaim the triumph of macroeconomic policymaking in managing the business cycle. Yet that's exactly what University of Chicago economist Robert Lucas did in an address ("Macroeconomic Priorities") at the annual meeting of the American Economics Assn. in Washington, D.C. in early January. And Lucas, a pioneering theorist and intellectual leader of the classic school of economic thought, is always worth paying close attention to, especially when he concludes that the future of economic policymaking lies in focusing on the supply side of the economy.

That would be growth that Lucas is trying to increase with those policies.

Nobel-bound Paul Krugman, one of the world's most famous liberal economists, admits that the mystery of growth is "deep and poorly understood."

Krugman may well be clueless, no argument from me here.

People who claim that tax rates affect growth are not serious economists; more often they are journalists, radio-talk show hosts, politicians and other types of snake oil salesmen with easy solutions to complex problems. You can dismiss their bumper sticker slogans with perfect confidence."

Hmmm. If tax rates don't affect growth, why not just raise them to 100% and go back to communism?  I'd be quite surprised if even 1% of economists believed that there is no relationship whatsoever between tax rates and growth.  I find the ad hominem is usually a good clue that I can safely ignore the author.

My point is not to argue about the data. In fact, I suspect a good statistician can pretty much prove anything by drawing selectively from the huge pool of existing economic data (with the possible exception that communism worked out well).

No, only bad statisticians prove things that aren't supported by the data.  Good statisticians are able to find meaningful correlations that further understanding of the world.

I was reading a presentation this morning about how good ideas get transmitted in a corporation. In fact, presentation of charts and data have very little impact in driving improvements. Story-telling is where the real leverage comes from. This may be good news for Harvard grads, and not so good news for MIT grads. It also may explain why people from MIT are often considered nerds who are so attuned to the data that they are out of touch with the stories of "real" life. I certainly can acknowledge that this has been an occasional fault of mine.

Are you saying that we would do better by living in a fantasy world of stories rather than trying to understand real causation and correlation?  I'm not saying that story-telling isn't an effective way to leverage an idea.  But wouldn't it be better if the idea that's being leveraged at least had some foundation in reality?   Perhaps a team of Harvard and MIT would be best?

In conclusion, I don't consider Jim's post a very convincing rebuttal.

Where's the Data?

Jim writes:

This suggests to me that nobody really knows what they're talking about when it comes to economics.

I couldn't agree more. That's why I generally insist on seeing supporting data before I buy into an economic or social policy.

For example, communism was tried by many countries, and in every case it ended up as a totalitarian disaster. The data is pretty clear on that one.

Similarly, tax policy and its relationship to economic growth seems fairly clear. Virtually every time a country cuts taxes significantly, economic growth increases from its baseline (sometimes with a lag). In fact, I challenge anyone to find a single case where a country that's at least somewhat developed cut taxes and had an economic slowdown that started shortly thereafter. The converse is true as well. The vast majority of times a country raises taxes, its economic growth slows from the baseline rate.

So there is little doubt in my mind that cutting taxes is positively correlated with increased GDP growth. What's still debatable is whether or not a majority of the people benefit from that growth. Many people believe that GDP growth only benefits the rich (who've just had their taxes cut), and most others lose out.

However, the data doesn't support the belief that except for the rich, most others lose out. For example, consider the following table:

===================================================================
Median and Average Family Income by Family Size, U.S., 1947-2000
Source: U.S. Census Bureau, U.S. Department of Commerce,
Housing & Household Economic Statistics Division,
Income Surveys Branch

				Ave.	Median Income

Size &	Number	Current	 2000   Family	Growth

Year	(1000's)   $	   $	Size	2000 dollars

2000 	72,388	50,890 	50,890 	3.17	 0.59%

1999	72,031	48,950	50,594	3.17	 2.59%

1998	71,551	46,737	49,317	3.18	 3.42%

1997	70,884	44,568	47,687	3.18	 3.13%

1996	70,241	42,300	46,240	3.19	 1.41%

1995	69,597	40,611	45,599	3.2	 2.15%

1994	69,313	38,782	44,638	3.19	 2.68%

1993	68,506	36,959	43,472	3.2	-1.49%

1992	68,216	36,573	44,129	3.19	-0.86%

1991	67,173	35,939	44,514	3.17	-1.93%

1990	66,322	35,353	45,392	3.18	-1.61%

1989	66,090	34,213	46,135	3.17	 1.85%

1988	65,837	32,191	45,297	3.16	 0.29%

1987	65,204	30,970	45,166	3.17	 1.67%

1986	64,491	29,458	44,425	3.19	 4.37%

1985	63,558	27,735	42,564	3.21	 1.48%

1984	62,706	26,433	41,944	3.23	 3.41%

1983	61,997	24,580	40,559	3.24	 0.71%

1982	61,393	23,433	40,273	3.26	-1.11%

1981	61,019	22,388	40,725	3.25	-2.64%

1980	60,309	21,023	41,830	3.27	-3.42%

1979	59,550	19,587	43,311	3.29	 1.50%

1978	57,804	17,640	42,671	3.31	 5.64%

1977	57,215	16,009	40,391	3.33	 0.61%

1976	56,710	14,958	40,148	3.37	 3.12%

1975	56,245	13,719	38,935	3.39	-1.80%

1974	55,698	12,902	39,649	3.42	-2.59%

1973	55,053	12,051	40,702	3.44	 2.03%

1972	54,373	11,116	39,894	3.48	 4.85%

1971	53,296	10,285	38,048	3.53	-0.20%

1970	52,227	9,867	38,123	3.57	-0.20%

1969	51,586	9,433	38,201	3.58	 4.72%

1968	50,823	8,632	36,480	3.6	 4.62%

1967	50,111	7,933	34,869	3.63	 2.20%

1966	49,214	7,532	34,117	3.67	 5.15%

1965	48,509	6,957	32,445	3.69	 4.34%

1964	47,956	6,569	31,095	3.7	 3.74%

1963	47,540	6,249	29,974	3.7	 3.52%

1962 	47,059	5,956	28,954	3.68	 2.85%

1961 	46,418	5,735	28,151	3.67	 1.06%

1960	45,539	5,620	27,857	3.7	 1.91%

1959	45,111	5,417	27,334	3.67	 5.85%

1958	44,232	5,087	25,824	3.65	-0.45%

1957	43,696	4,966	25,940	3.64	 0.45%

1956	43,497	4,780	25,824	3.6	 6.80%

1955	42,889	4,418	24,179	3.58	 6.25%

1954	41,951	4,167	22,756	3.59	-2.41%

1953	41,202	4,242	23,317	3.59	 8.10%

1952 	40,832	3,890	21,570	3.53	 3.03%

1951	40,578	3,709	20,935	3.54	 3.50%

1950	39,929	3,319	20,227	3.54	 5.54%

1949	39,303	3,107	19,166	3.54	-1.32%

1948	38,624	3,187	19,422	3.58	-2.73%

1947	37,237	3,031	19,967	3.64	

(Families as of March of the following year. Income
in current and 2000 CPI-U-RS adjusted dollars/)
=======================================================================

Two significant tax cuts occurred during this table: Kennedy's tax cuts in 1963 and Reagan's tax cuts in 1982. Now consider the growth rate of the median household income (in constant 2000 dollars) in the years before and after these tax rate changes. Since the median household income rate of growth fluctuates some, it's necessary to average a few years (I've picked five but anything between two and six gives similar results) before (the baseline rate) and after (the resultant rate). The following table shows the effects of the tax changes:

				Baseline	Resultant	Change in

Year	Change			Rate		Rate		Rate

------------------------------------------------------------------------

1982 	Reagan Tax Cut		0.34%		2.33%		+1.99%

1963 	Kennedy Tax Cut		2.24%		4.01%		+1.77%

Both sets of tax cuts increased the rate of growth of the median household income by nearly 2%. That's nearly double the average rate of growth for the duration of the table.

Of course, a sample size of two is not statistically significant. Nor will a sample size of three be statistically significant after we see what happens with the latest round of tax cuts. However, my point is that there isn't any data at all that gives any support to the assertion that except for the rich, most people lose out when there are tax cuts. If anything, what little data there is indicates that a majority of people benefit when taxes are cut and also that when GDP grows, so does income for most people.

Even when they get it, they don't get it!

In this Thomas Friedman column he pays some homage to free trade and outsourcing. Don Luskin is not so easily fooled by this "seeing of the light." Here he points to the real implication of some of the views voiced by Friedman.


Oh, I suppose he gets to the right answer. But it's based on the moral premise that a business practice should be permitted or forbidden based on someone's judgment about whether it helps America -- rather than on the first principle that the owner of capital should be able to deploy that capital to hire anyone he wants anywhere he wants for whatever reason. So it rings hollow when Friedman congratulates himself in the column's first paragraphs:
I've been in India for only a few days and I am already thinking about reincarnation. In my next life, I want to be a demagogue.
Yes, I want to be able to huff and puff about complex issues like outsourcing of jobs to India without any reference to reality.

Unfortunately, in this life, I'm stuck in the body of a reporter/columnist.

Which is all just a tricky way of saying that business activity should be regulated by smart people in positions of authority, and that Tom Friedman thinks he's the smartest guy in the room. He should decide. And fortunately, this time, his decision happens to coincident with free market. Next time maybe it won't be.

Interesting Piece on Media Perspective

A Tale of Two Fences by Gal Luft:

The I's and the P's have been at war for over half a century. Over the past several years the level of suspicion, hostility and paranoia between the two has been unprecedented. I has been the target of a terror campaign by Islamic terrorists who infiltrated its territory and conducted horrific attacks against both soldiers and innocent civilians. I accuses P of training and arming these militants and not lifting a finger to stop them. After a long series of failed attempts to reach a peace deal or even a temporary cease fire, the government of I decided it must erect a fence as a security barrier separating it from P. I's fence project infuriates the P's. Their uniformed leader called the government of I to immediately halt the construction. But despite strong international pressure I does not seem to bend and its white haired prime minister recently called to expedite the project and finish the fence by the end of 2004.

If you thought the above 160 words describe the controversial fence currently being erected in the West Bank between Israel and the Palestinians you are in good company. Look again. I is not Israel and P is not Palestine. The story above describes another fence, three time zones away from the Middle East in the disputed area of Kashmir between India and Pakistan. Indeed, since Pakistani militants tried to storm the Indian Parliament in December 2001, India has embarked on an ambitious project aimed to seal its border with its enemy. The fence is only part of a multi-tiered system that includes mines, sensors, trenches and, in some parts, a high mud wall.

Now, ask yourself why you associated the above story with the Middle East and not with South Asia. Why does the action of a nation of six million people loom larger in your consciousness than that of one billion people? ...

Good question, read the whole thing to find out her opinion. It's a remarkable coincidence that the countries share first initials.

Update: The above link was broken. It should work now.

Light at the End of the Iraq Tunnel?

There were some interesting events over the last few weeks in Iraq. As this USA Today states:

Fallujah, 30 miles west of Baghad, is in the heart of the so-called Sunni Triangle, an area that remains a hotbed of armed resistance to the American presence.

However, even there, they seem to be progressing toward self-sufficiency in terms of security:

Officers from the 82nd Airborne Division stationed a 10-minute drive away could hear the battle clearly. They offered help but the Hammad said it wasn't needed. The Americans did provide additional ammunition and weapons, including light machine guns.

After the battle, soldiers at the civil defense base proudly displayed a light machine gun and a pair of rocket propelled grenade launchers they had captured from the attackers.

As the Belmont Club comments in response to the USA Today article:

That when dying and bleeding, beset by the flower of terrorism, with pistol to set against automatic rifle and grenade, the Iraqi police did not ask for help from 82nd Airborne. They asked for ammunition.

In related news:

Now U.S. intelligence in Iraq has snagged a compact disc containing a strategic assessment possibly penned by Jordanian Al Qaeda operative Abu Musab al-Zarqawi. Zarqawi may have served as a contact point for Al Qaeda, Baathist intelligence and Ansar Al Islam (the Islamist cadre based in north Iraq).

The New York Times saw and summarized the document. Its text asserts radicals "are failing to enlist support" inside Iraq and "have been unable to scare the Americans into leaving." It "laments Iraq's lack of mountains in which to take refuge." Perhaps that lament echoes its author's experience in Afghanistan or north Iraq. Members of Ansar al Islam holed up in mountains near Iran, until the Kurds destroyed their base.

The Times reported this could well be an "inside account of the insurgency and its frustrations ... it also charts out a battle to come."

The document asserts one strategic solution to Al Qaeda's failure is to attack Iraqi Shias and start a "sectarian war" that will "rally the Sunni Arabs" to Al Qaeda. This war against Shiites "must start soon -- at "zero hour" -- before the Americans hand over sovereignty to the Iraqis."

This document's desperation argues for its authenticity; in certain hothouse sectors, however, the fact that it suggests the coalition's strategy is successful demonstrates it's a phony. The Times' summary indicates Al Qaeda once again seeks an Arab uprising. In Mesopotamia, the Iranian, Kurd, Arab and Turk worlds collide. (Note these groups are predominantly Muslim.) The demographic tectonics get dicier. For eight decades Iraq's Sunni minority put a vicious boot to Iraq's Shiite Muslim majority. Hence Al Qaeda's plan: Provoke the Shias into attacking the Sunnis, who then ally with Al Qaeda.

And the Americans lose, QED?

Not quite. Al Qaeda senses defeat unless it spills lots of blood very quickly. After Iraqis run their own government, U.S. troops will remain, the document says, "but the sons of this land will be the authority ... This is the democracy. We will have no pretexts." Iraq's new army and police will link with the people "by lineage, blood and appearance." Al Qaeda fears an American and Iraqi strategic victory -- a democracy defending itself against terrorists.

While the country could obviously still descend into civil war and/or chaos, I see enough glimmers of hope like this that I remain hopeful (though certainly not confident).

Nader = Nadir for Democrats?

Ralph Nader plans on running for president as an independent. I find that hugely annoying in that I think the presence of fringe candidates distorts the dialogue created by the Presidential election. He can't possibly win - so what's the point?

The Power of Vision

The beginnings of remaking one of the most troubled regions of the world... see this Thomas Friedman column.


One major criticism of the Iraq war is that by invading Iraq, the U.S. actually created more enemies in the Arab-Muslim world. I don't happen to believe that, but maybe it's true. What the critics miss, though, is that the U.S. ouster of Saddam Hussein has also triggered the first real "conversation" about political reform in the Arab world in a long, long time. It's still mostly in private, but more is now erupting in public. For this conversation to be translated into broad political change requires a decent political outcome in Iraq. But even without that, something is stirring.

Take Sweden - Please!!!

Jim writes:

Take Sweden, for example. Very high tax rates -- among the highest. Pretty decent economic growth. Good healthcare. Viewed favorably as a country in nearly any dimension you want to survey. Care to explain why?

Sure. Sweden has long been put forth as the shining jewel of socialism, with the implication that if only we adopted their approach, we too could have a wonderfully utopian society. There are a few impediments, however.

First, Sweden is Sweden because, well, the Swedish live there. This obvious and snarky truism has three important aspects: culture, homogeneity, and population. As far as culture goes, the stereotypical Swede has been and is thought of as skilled and industrious and I think that the stereotype is well earned in this case (don't tell Johann I wrote this, I'll never hear the end of it). What this means is that even if the Swedes were subjected to a marginal government, they would still do relatively well. Therefore, I think it's difficult to conclude that Sweden is prosperous because of the socialistic government. It may well be that they're prosperous in spite of the government.

If a welfare state is going to be relatively successful, it turns out that homogeneity is critically important. Consider the following excerpts from a typical study of success and socialism:

But multiculturalism may bring an even broader transformation of political life and policy regimes. In particular, it may call the welfare state in question. New forms of social diversity spark debates about traditional conceptions of identity and community, and the rights and mutual obligations embedded in citizenship. [...]

For example, analysts have pointed to different levels of social diversity in explaining differences between US and European social welfare programmes (eg, Gould and Palmer 1988; Alesina, Glaeser and Sacerdote 2001). Studies comparing social expenditures across US cities and states find that ethnically heterogeneous states tend to spend less on redistributive programmes (Alesina, Baqir and Easterly 1997; Hero and Talbert 1996; Plotnick and Winters 1985). And development economists have found similar patterns across a wide range of countries, including the richest and poorest nations in the world: spending on private education tends to be higher in countries with considerable religious and ethnic diversity, and income transfer paymentstend to be lower in such countries (James 1987, 1993; Easterly and Levine 1997). It is difficult, these studies suggest, to sustain strong social welfare programmes in the face of comparatively high ethnic diversity.

While not everybody agrees with the above excerpts, I do find it striking that the world's most successful socialist country is also one of the world's most homogeneous countries.

The importance of the population is partially illustrated by the following table:

Country	GDP Per Capita (PPP) US$	Population (millions)
1. Luxembourg	44,000	0.45
2. United States	37,600	290
3. Bermuda	35,200	0.06
4. Cayman Islands	35,000	0.04
5. San Marino	34,600	0.03
6. Norway	31,800	4.6
7. Switzerland	31,700	7.3
8. Ireland	30,500	3.9
9. Canada	29,400	32
10. Belgium	29,000	10
...
22. Sweden	25,400	8.9

In the top ten countries ranked by US$ GDP per capita (using Purchasing Power Parity to normalize the numbers), four of the countries have a population less than one-million and all but two of the countries have a population of approximately 10 million people or less.

I think there are several reasons that small countries tend to be at the top of their class. They are more likely to be homogeneous which has the benefit discussed above. They have more of a feel of being a community than an artificial state, which I think is both motivational and less likely to foster endemic corruption. It's also simply easier to govern a smaller state. Lastly, sheer luck means that out of lots of small countries, some will do better than others, and it could be that things just happened to work out well for Sweden, and it might not mean that the Swedish experiment can be duplicated (even in Sweden).

Unfortunately, the above factors also means that we can't be Sweden because we're not Swedish. We are the most diverse nation on earth, and in my opinion we're way, way too big to consider many of the policies that work for Sweden, at least at the national level.

Also, there is some question as to how well Sweden is really doing. For example, consider this excerpt from Front Page Magazine:

Sweden, for example, was with its socialist welfare state supposed to inspire a "Third Way" for the world midway between capitalism and communism. But last month a new study by the Swedish Research Institute of Trade (HUI) revealed that the typical middle-class Swede, even before paying his nation's highest-in-the-world taxes, earns less money and enjoys fewer material goods than the average African-American in the United States.

The median income of African-American households is about 70 percent that of overall U.S. median income. This means, wrote HUI study authors Fredrik Bergstrom and economist Robert Gidehag, that Swedes are "below groups which in the Swedish debate are usually regarded as poor and losers in the American economy."

If present Swedish trends continue, they wrote, then "things that are commonplace in the United States will be regarded as the utmost luxury in Sweden."

"If Sweden were a U.S. state, it would be the poorest measured by household gross income before taxes," the HUI study reported. Sweden is poorer than Arkansas, Alabama, or Mississippi.

Prior to its plunge into welfare statism during the 1960s and 1970s, Sweden had one of the world's fastest-growing, most prosperous economies, writes Swedish historian Johan Norberg. Socialism dragged it down from being the 4th richest among OECD nations to the 17th. Confiscatory taxes that could reach 104 percent of income destroyed the incentive to work, become educated, or invest.

Comparing Sweden with Mississippi or Swedes with African-Americans is like comparing apples to oranges since Sweden is a socialist state and we're not. However, it still makes it difficult for me to consider the Swedish experiment an unqualified success, especially given that our GDP per capita is half again as large as theirs, and they did much better on the growth front prior to their "plunge into welfare statism." In addition, according to this article based on the same study:

Poor Swedes also experienced less income growth than African-Americans. Between 1980 and 1999, the gross income of Sweden's poorest households increased by only 6 percent while the poorest households in the U.S. enjoyed an increase in income that was three times higher.

In summary, I don't think that the Swedish approach would work nearly as well here, at least at the national level, and I'm not completely convinced that the Swedish approach works optimally for Swedes either.

Update: Lory, who lived in Sweden for a year as an exchange student, and who has a career in health care administration, questions the "Good healthcare" in Sweden assumption. She says its good for a country with socialized medicine, but not necessarily good. For example, it has severe queueing problems. She also says that the Swedes are very health conscious and take very good care of themselves, which enables their healthcare system to survive. She also strongly agrees with the homogeneity points above.

Surprised but Undaunted

This looks like it should be in the Onion, but it's in the Telegraph, and is hysterically funny. It begins:

An Oxford engineering student was surprised but undaunted when he was approached to deliver a series of lectures in Beijing on global economics.

Matthew Richardson knew "next to nothing" about the subject but, believing he would be addressing a sixth-form audience, he felt he could "carry it off".

Read the whole thing and laugh.

Still a whipping boy!

This William Anderson article mentions some swipes he has taken at the Bush administration but he really sets upon Krugman as a non-economist.

I admit to being a regular reader of Krugman's columns, and I suspect that many of my fellow economists on all sides of the ideological divide read him as well, which is one reason the Times has made him a featured star. Of course, being of the Austrian School of Economics, I find very little in Krugman's statements on economics with which I can agree. (I think that some of his criticisms of the Bush Administration's policies are correct—and especially the war in Iraq—although the policy alternatives that he presents usually are as bad or even worse.) In fact, whenever I email Krugman's columns to my friends—which I do often—I also send the accompanying message, "Krugman is evil."

Yet, it does no good simply to accuse one of the nation's most "elite" economists—most likely a future Nobel Prize winner—of being "evil." He may be a right decent fellow, for all I know. What I consider to be evil is not his personality nor his Massachusetts Institute of Technology pedigree nor his wealth and fame. Rather, I consider that the policies he recommends are evil because, in the end, they constitute fraud. That's right, fraud.

Before deconstructing Krugman's economic views, let me also say that at least when it comes to his columns, he is more of a political operative than he is an economist. (That being said, many "public intellectuals" also are little more than shills for political parties, both left and right.)



However, let me say that since my own writings have been extremely critical of the Bush Administration and both political parties, it does not bother me to read Krugman's anti-Republican rants. What does bother me is that the man pretends to be something he clearly is not: an economist.