Monthly Archives: January 2014

We Are Number Five!

Jeremiah briefly joined a discussion yesterday on this CNN report from Davos.  His purpose, apropos the World Economic Forum, was to remind readers that competitiveness is a fact of life – and that this fact determines our standard of living.

According to the WEF survey, America ranks fifth in global competiveness – behind Switzerland, Singapore, Finland, and Germany.  It’s no coincidence Jeremiah often writes about these countries.  Finland has The Smartest Kids in the World, and Germany and Singapore both lead in vocational training.  We are lucky still to be number five, because our educational ranking – depending on which survey – is roughly 30.

America’s weakest area is the macroeconomic environment, where our debt, deficits, and trade balance place us near the bottom of 148 countries surveyed.

WEF Chart 2013

This chart shows the biggest problems cited by survey respondents.  Note the top three.  The reason new jobs are not being created in your town is, in a word, our bloated (and scary) government.   Jeremiah recommends scaling back the central government, and letting the states do more on their own – particularly with education reform – or next year we’ll be looking up at Hong Kong.


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François_Hollande_(March_2010)_5Here is some upbeat news for President Obama.  His approval rating now languishes at the level of Richard Nixon, but French President Hollande is the lowest ever in history.  It turns out that business bashing policies and high taxes, while fun to campaign on, are actually bad for the economy.  Unemployment is at a sixteen year high.

The French public has noticed that they are falling behind Europe’s recovery.  So has the bond market, with investors moving to Italy and Spain. This week Hollande pledged to reduce social charges that discourage hiring.  Here is how he explained the about face:

The time has come to resolve the main problem of France: its production. We must produce more and better. It’s on the supply side we must act. Supply itself creates demand. We must continue to reduce the cost of labor.

Whew!  His socialist supporters must have whiplash.  Jeremiah warned President Obama not to follow France into this hole.  Perhaps the president will now follow France back out.

See also:  A Cautionary Tale

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Back in the USSR

ForwardThis month, Rolling Stone brings you economic reforms from an avowed communist.  The online debate is more interesting than the article – over 10,000 comments in ten days.  Jeremiah has reported how young people are turning to socialism, and this debate shows a clear split along generational lines.

People who remember the Soviet era are quick to dismiss socialist ideas, without explanation.  This is unintelligible to young people, who did not have the experience.  Several commentators seem to think Fidel Castro was a swell guy.

One insightful comment went along the lines of, “if you keep dismissing ideas we like as socialist, you will only persuade us that socialism must be a good thing.”  They have seen where mildly socialist policies have worked, in Sweden and Canada.  Such is the danger of using labels.

People could contribute the skills that inspire them – teaching, tutoring, urban farming, cleaning up the environment, painting murals – rather than telemarketing or whatever other stupid tasks bosses need done to supplement their millions.

The problem with a proposal like Myerson’s “make everything owned by everybody,” is that the money has to come from somewhere.  The government can only “buy up assets from the private sector” if the government has surplus wealth to begin with.  That’s why it’s called a “sovereign wealth fund.”

If you fund the purchases by raising taxes, that’s tantamount to simply seizing the assets – which might not bother Myerson.  The moral argument, that nationalization is theft, might not be persuasive.  The practical argument is that you can only do it once.  Once you have seized all the railroads and factories, all the buildings and airplanes – no one will ever again have the ability to create new capital assets.

Will the government make ongoing capital investments out of those dividends, which it has pledged to the “universal national income?”  Here, we must resort to history.  Governments are notoriously poor investors.  The experience of Russia, Cuba, China (before Deng) and Venezuela, has been that assets become steadily less productive from the time they are nationalized, and eventually become worthless.

The ideal of “everybody owns everything” rapidly becomes “everybody owns nothing.”  Oh, except for the government.  The process of confiscating the nation’s wealth might just – maybe – cause the government to become an all-powerful police state.  History again.  Myerson will be living in Harry Reid’s penthouse atop the Ritz, and you will be standing in the rain with your “universal national income” ration card.

So, the old folks do a bad job of explaining our mistrust of socialism.  On the flip side, the young commentators show an astonishing arrogance about history.  They say, in so many words, “we don’t care what happened in the twentieth century,” and, “it’s our country now.”

Indeed it is.  If you want Myerson’s collectivist utopia, help yourself.  It will take ten or twenty years to deplete America’s capital stock.  Jeremiah will be dead and buried, and you kids will be just waking up to how totally screwed you are.

Image Credit: The People’s Cube

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Reinhart Revisited

220px-Carmen_M._Reinhart_-_World_Economic_Forum_Annual_Meeting_2011Really, Huffington Post?  Ridiculing an advance copy of a research paper because it has the wrong date?  Grow up!  This is the latest in a string of juvenile attacks on Carmen Reinhart and her sometime collaborator, Ken Rogoff.

The left has an unreasoning contempt for Reinhart and Rogoff, because of this study linking high national debt to weak GDP growth.  That’s called “pro-austerity research.”  In the world of Huff Po, economists do research to support political beliefs.

Giving equal time to the right – they hate this latest paper, because the authors recommend a course of financial repression.  If Huff Po’s Mr. Gongloff had actually read it, he would have found much cheery “anti-austerity” news.   Prof. Reinhart has written on financial repression before, without Rogoff.

As usual, the best approach is to ignore the media, read the paper yourself, and draw your own conclusions.  The New York Times has decent coverage of reactions to the paper.

Assuming taxes ultimately need to be raised to achieve debt sustainability, the distortionary impact is likely to lower potential output. Of course, governments can also tighten by reducing spending, which can also be contractionary.

By the way, the earlier hated paper has not been “debunked.”  Yes, it had some errors, but they were not material.  What you saw in the popular press was politically biased.  The authors never claimed that correlation was causation – although it wouldn’t be surprising.  Does anybody really believe you can run national debt at 90% of GDP and not pay any kind of price for it?

Jeremiah has read a lot of Ms. Reinhart’s research, and she is very thorough.  Check out her page on the NBER website.  Most economists, we suspect, would prefer to discuss their research in peer reviewed journals without the glare of political attention.

No one gets fired from Harvard for saying that dinosaurs had feathers, or that Pluto is not a planet.  What the biased press fears from economics is research that challenges a political position.  Rational people will use new research to evaluate their opinions, not vice-versa.

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Take the Quiz

Call the copyright police!  Someone else is using a two dimensional map of the political landscape.  Jeremiah applies his “four quadrants” here, and here.  The Advocates’ quiz map is shown below.

GridIf you are in the middle or upper part of the chart, you are what the Advocates call “politically homeless.”  No matter which party is in power, Coke or Pepsi, you will be unhappy.  Here is how they describe centrists:

Centrists pride themselves on keeping an open mind, oppose political extremes, and emphasize what they see as practical solutions to problems.

This thought provoking quiz has only ten questions – well worth one minute of your time.  Try it today!

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Insulting Uruguay

If you’re an American, you see this the way Jon Stewart does.  Our Gini index places America among the world’s banana republics.  If you live anywhere else, you see a loudmouth American insulting your country.  Furthermore, since Americans are known to suck at math, you can be pretty sure Jon Stewart doesn’t know a Lorenz curve from a hole in the ground.


Jeremiah agrees that inequality is a big problem, but tossing goofy numbers around does not usefully advance the debate.  Here’s why:

  • The U.S. Gini index has not changed for decades.
  • Uruguay has a vibrant economy.

One takeaway from Stewart’s presentation is that inequality is OMG so much worse since – insert your pet reason here.  It’s not.  It’s the same inequality we’ve always had.  You can find the numbers yourself on the census bureau web site.

Stewart appears to be using the pretax Gini for household income – as opposed to the wealth measure, the individual measure, the Atkinson, or the MLD.  Jeremiah would like to know what value Mr. Stewart would prefer.  10? 100?  We would hope for an answer more intelligent than, “different from Uruguay.”

Uruguay’s per capita GDP is a little less than Puerto Rico, and their growth rate is well above ours.  Here is the CIA fact book:

Uruguay has a free market economy, a well-educated work force, and high levels of social spending. Growth for Uruguay averaged 8% annually during the period 2004-08 … managed to avoid a recession and GDP growth reached 8.9% in 2010

The Gini will typically be elevated in a rapidly growing economy like Uruguay.  To make tax policy, you really need to know how the income distribution is changing over time, and why.  For that, the Gini index is just about useless – unless you’re a loudmouth American comic.

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Science Deniers at Harvard

The_Blank_SlateWe enjoyed Larry Summers’ performance at the IMF economic forum and we were dismayed to hear he’s a sexist pig.  Poetic justice, they say, that Summers was beat out for Fed Chair by Janet Yellen.  If you read the transcript, though, the sexism charge is a wee bit exaggerated.

Summers begins by acknowledging that women are underrepresented in science and engineering, and that Harvard already has diversity measures in place.  He will speak, instead, on alternative theories of the problem.  This is just like his other speech, where he questions economic dogma.

Catholics are underrepresented in investment banking … white men are very substantially underrepresented in the National Basketball Association, and Jews are underrepresented in farming

His favored theory is that American society forces women to choose between family and career.  This common sense idea was (and is) supported by survey data.  He also proposed that since variability – not the mean – is greater for men’s performance in math, then there will be more men at the very top.

This is a subtle point of statistics, and we needed Nassim Taleb to explain it.  If you don’t get it, it just sounds like “women score lower on tests.”

Summers’ heresy was to challenge the two leading theories – discrimination and socialization.  He dares to suggest that boys and girls might be born with different predispositions.  Of current research he says,

What we’ve learned from empirical psychology in the last fifteen years has been that people naturally attribute things to socialization that are in fact not attributable to socialization.

He is referring to psychology popularized by writers like Steven Pinker.  Pinker’s book had just come out, and his chapter on gender informs much of the speech.  Ironically, it includes a remark about university presidents and censorship.  Pinker, apparently another sexist pig, has this to say:

Girls play more at parenting and trying on social roles, boys more at fighting, chasing, and manipulating objects.

It’s worth noting that Pinker is a liberal, and Summers is a career Democrat.  They are free thinkers, though, who believe that liberal values can prevail without resorting to flat-earth denials of science.

Having stated his intention to provoke fresh debate, Summers concludes with several questions for further research.  That didn’t happen.  Instead, they fired him.  Here’s what Alan Dershowitz, also at Harvard, wrote in the Times:

This issue is bigger than Summers or even Harvard University. It is really about a long-term, systematic effort to impose a political-correctness straitjacket on certain views, especially at universities.

What impressed Jeremiah about the speech was that Summers had read all of the conference papers, added new ideas from outside, and then brought it all back to the core problem of recruiting female professors at Harvard – plus, he makes an esoteric point about statistics.  This is exactly the kind of broad spectrum intellectual you want for a university president – or a Fed Chairman.

See also:  What Larry Summers Said

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