To Get Rich is Glorious

Chart of the day

2012-01-30T10:01:00.003-05:00

Saving the rich through higher taxes

2012-01-29T18:27:00.000-05:00

Robert Frank, an economist this blog has encountered on numerous occasions, takes to today's New York Times to advance a novel argument: the rich would be better off with higher taxes. His argument rests on two foundations. First, that higher taxes woud result in improved government services:

...Higher spending on many forms of public consumption would produce clear gains in satisfaction for the wealthy. It’s reasonable to assume, for example, that driving on well-maintained roads is safer and less stressful than driving on pothole-ridden ones.

Of course, this assumes both that the tax increase would be used to fund useful projects rather than various boondoggles, and that increased government spending produces improved outcomes. But if this were true, government welfare and housing projects would not be synonymous with social dysfunction and the country's schools would be world class.

The heart of his argument, however, is that happiness/contentment is assessed by humans from a relative rather than an absolute perspective:

Beyond some point, there seems to be little gain in satisfaction from bolstering your private spending. When mansions grow to 15,000 square feet from 10,000, for instance, the primary effect is merely to raise the bar that defines an adequate home among the superwealthy.

...If you pay higher taxes, you obviously have less money to spend on what you want. So the prospect of a tax increase naturally inclines people to think that they’ll be less able to satisfy their desires.

But once incomes rise beyond a modest absolute threshold, many of the things that people want are what economists call positional goods. These may be things that are inherently in short supply, like gorgeous waterfront property; or things whose value depends heavily on context, like precious stones or sure-footed sports cars. Because positional goods are in short supply, they go to the highest bidders. The tendency to overlook that fact distorts how people think about the effects of higher taxes.

The cognitive illusion occurs because most financial setbacks that people experience in life stem from events that affect them alone. They may suffer health emergencies, for instance, or problems at work. Marriages may fail, jewelry may be stolen, and floods may damage homes. In each case, the effect is to limit the ability to bid for positional goods.

Because an overwhelming majority of financial setbacks occur for such idiosyncratic reasons, it’s natural to think that the income decline from higher taxes would have similar effects. But a tax increase is different. It affects all participants in the bidding for positional goods. And because it leaves everyone with less to spend, it has essentially no effect on the outcomes of those contests. The same paintings and the same marina slips end up in the same hands as before.

First off, most goods purchased by people are not positional goods. But let us say that provisional goods account for 75 percent of all purchases. Even then, the rich are made worse off; if a tax increase results in the status quo prevailing in terms of positional goods, they will still be made worse off with regard to the other 25 percent of purchases. With this alone Frank's argument begins to unravel.

But let us more closely examine the provisional goods cited by Frank, which he divides into two categories: those goods that are in limited supply (such as beachfront property or the works of a great painter) or those whose value depends on context (essentially being used as displays of conspicuous consumption to assert one's superior material standing).

With regard to the former, one can readily think of numerous goods and services requiring more than just a modest income whose value is intrinsic rather than simply due to context. Take Frank's sports car example. While the pleasure of owning a Ferrari may partly lie in the fact that few others can afford one, the car also brings value that is intrinsic (such as design or performance). Would the owner of a Ferrari be equally content being forced to downgrade to a Mercedes due to a tax increase if previous Mercedes owners then had to downgrade to a Toyota? Doubtful.

Other examples abound. Is the pleasure of a meal at a three star Michelin-rated restaurant derived solely from the knowledge that not everyone can afford such an experience? Is a vacation to Fiji only enjoyable because others must content themselves with a trip to the local water park? If not, then Frank is obviously wrong. While there may be numerous goods whose value is at least partly derived from the message it sends to others or the knowledge that the owner is part of an exclusive club, there are very, very few where the benefit is not at least partly intrinsic.

With regard to positional goods that are in limited supply, meanwhile, Frankly is flatly wrong when he asserts that a tax increase would result in the status quo prevailing: no it would not. When it comes to such positional goods, be it a slip at the marina in Cannes or a Rembrandt, it is absolutely not true that a tax increase would leave everyone with less to spend. Rather, a tax increase would only leave Americans with less to spend, while having no impact on foreigners.

Given that many (most? all?) positional goods, such as Miami real estate or the previously cited examples, have international competition for them this is no small consideration. One can't help but think that if Frank were not completely blinkered by his ideological blinders that he would have realized this.

Economists vs. Americans

2012-01-27T13:49:00.001-05:00

Fascinating stuff from the Wall Street Journal's Real Time Economics blog:

The Financial Trust Index has been tracking public sentiment toward the financial system for more than three years. And sentiment isn’t good...For its latest quarterly survey, the Financial Trust Index took its responses from average Americans to a series of economic assertions and put them up against the responses from an expert panel of economists. The results are striking:

Top marginal tax rate: On the factual assertion, “Permanently raising the federal tax rate by one percentage point for those in the top income tax bracket would increase federal tax revenue over the next 10 years.”

Economists: 100% agree with that statement (regardless of their political orientation)Americans overall: 66% agree (50% of Republicans; 80% of Democrats)

Eliminating tax deductions: “Eliminating tax deductions on mortgages would lead to better financing by individuals.”

Economists: 85% agree
Americans overall: 35% agree (41% of lower-income households agreed, but just 23% of higher-income households)

“Buy American” provisions: “Mandates that Federal government purchases should be ‘buy American’ have a significant positive impact on U.S. manufacturing employment.”

Economists: 10% agree
Americans overall: 75% agree

Readily apparent is that average Americans disagree with economists -- even wildly so -- on issues that economists don't find particularly controversial (or even thoroughly uncontroversial, as with the impact of a tax increase). While striking, this is in no way surprising given that most Americans are neither economists nor have studied the subject in any real depth. They are rationally ignorant.

By itself this is no big deal -- there are better ways to spend one's life than pouring over economics literature (or so it's been rumored) -- but then recall such ignorance also finds its way into the voting booth. This is another reason why limited government is so vital: to protect us from the ignorance of our fellow citizens and the pandering politicians they vote for.

SOTU reaction

2012-01-25T07:47:00.002-05:00

John Stossel has the State of the Union speech President Obama should have given.

And center-lefty blogger Ryan Avent reacts to the president's statement "Don’t let other countries win the race for the future":

The context, innocuously enough, was in calling for greater support for American research and development efforts. But the language of this statement is either daft or ghastly, depending on how charitably one is willing to read it. Is Mr Obama so dense as to miss that when America invents things other countries benefit, and vice versa? If a German discovers a cure for cancer, shouldn't we be ecstatic about that, rather than angry? Indeed, shouldn't we be quite happy and interested in ensuring that Germans and Britons and Indians have the capability and opportunity to develop fantastic new technologies?

In the more nefarious reading, Mr Obama seems to accept that only relative standing really matters. A sick, poor world in which America always triumphs is preferable in all cases to one in which America maybe doesn't "win" the race to discover every last little thing that's out there to be discovered. And hell, one has to ask again whether the easiest way to prevent other countries from winning the race for the future isn't simply to blow up their labs.

Very good commentary.

Update: More reaction:

Lefty Matt Yglesias also bashes Obama for his stance on trade.

Right-wing apostate Bruce Bartlett knocks Obama regarding the tax code.

Peter Suderman says that Obama railed against bailouts in a speech defending the auto bailout and also highlights a dog that didn't bark.

Warren Meyer points out that Obama took credit for things he had nothing to do with.

Yuval Levin's must-read: A State of Denial.

The New Deal revisited II

2012-01-22T22:16:00.002-05:00

More highlights from New Deal or Raw Deal:

Resettlement Administration

Established in April 1935, the Resettlement Administration (RA) was tasked with the relocation of struggling farmers into communities planned by the federal government. The head of the RA was Rexford Tugwell, a former professor of economics at Columbia. As Folsom states:

The visionary Tugwell was skeptical of capitalism and even the ownership of private property. "I personally have long been convinced that the outright ownership of farms ought to be greatly restricted," Tugwell explained. "My own view," Tugwell added, is "that under intelligent state control it should be possible to a planned flexibility into the congestion and rigidity of our outdated economic system." Tugwell was anxious to head the RA and begin his experiment in planned societies. With a staff of 13,000 and a massive $250 million to spend, Tugwell made plans for resettling thousands of tenants and marginal farmers into new model communities.

The result was a disaster. "It was all done awkwardly and wastefully," Tugwell later confessed about the work of the RA. Even Roosevelt himself conceded, "I don't think we have a leg to stand on," when confronted with the high cost of the model towns Tugwell was building. Drawing model communities on paper was one thing, but it was another thing to relocate tenant farmers into affordable houses far away in real towns with functioning services.

One of Tugwell's model communities was Arthurdale in West Virginia. A major problem there was that the ready-made houses could not fit their foundations. Once that problem was solved, the planner discovered that most residents, people from poor backgrounds, could not afford to live there. That protest became a common one in model communities all over the nation. Finding meaningful and profitable work for unskilled laborers was another recurring complaint.

What that meant was that sometimes the RA had communities built, but not residents either willing or able to move in. An example of this was Ak-Sar-Ben (Nebraska spelled backward), a "dream city" of thirty-eight green-shuttered houses, each on seven acres of land twenty miles west of Omaha on the Platte River. The problem was that no one wanted to move in. Nearby farmer Henry C. Glissmann observed this project and drew this conclusion: "I predict that in time these homes will all be abandoned and stand as a gruesome monument to government's inefficiency and folly in festering a movement that to a practical mind has the earmarks of failure from the start."

Glissmann is my great-grandmother's brother, so it seems that skepticism of government runs in the family.

Wikipedia, meanwhile, has the following to say about the RA:

Some of the RA's activities dealt with land conservation and rural aid, but the construction of new suburban satellite cities was the most prominent. In her book The Death and Life of Great American Cities, author Jane Jacobs critically quotes Tugswell on the program: "My idea is to go just outside centers of population, pick up cheap land, build a whole community and entice people into it. Then go back into the cities and tear down whole slums and make parks of them." Three "Greenbelt" towns were completed before the Supreme Court found the program unconstitutional in Franklin Township v. Tugwell.

Tugwell ended up resigning from his position in 1936 in the face of widespread criticism of his management of the agency.

Works Progress Administration

Established with the aim of providing jobs constructing public works for the unemployed, Folsom levels two main criticism against the WPA. First, from a theoretical perspective, it's difficult to assess whether the WPA actually created more jobs than would otherwise be the case had the money used to fund the program been left in the pockets of the taxpayers. Every dollar taxed away was one less dollar to be spent on products and services that provide employment and money for charitable relief.

The other main criticism was usage of the program as political patronage:

...The evidence indicates that politics often was the key variable in distributing WPA jobs. Gavin Wright, an economic historian, did a state-by-state analysis of New Deal spending. He noted that safe Democrat states, especially those in the South, received fewer WPA dollars than richer battleground states in the North and West. Since southern states had more poverty than northern states, that meant that WPA jobs often went to the states that needed them the least.

An example of this shift of WPA funds from poorer to richer states is in the wages paid from North to South. The WPA hourly pay scale for skilled workers ranged from 31 cents an hour in Alabama, Kentucky, Tennessee and Virginia, to $2.25 an hour in New Jersey. New Jersey, unlike those southern states, was a swing state, and Mayor Frank Hague of Jersey City had been the key for Roosevelt narrowly carrying the state in 1932. As president, therefore, Roosevelt allowed all WPA jobs in New Jersey to be cleared through Hague. According to Lyle Dorsett, who has studied the Hague machine in detail, "Concrete evidence shows that from the outset of the New Deal, Frank Hague was in complete control of all patronage in the state."

And Roosevelt poured patronage into New Jersey in the form of massive public works (Hague owned a construction company), which included almost 100,000 WPA jobs annually during the 1930s and the highest rate of pay in the nation for these skilled jobs. One minor drawback to the high pay was that WPA workers in New Jersey had to "tithe" 3 percent of their salaries to the Democrat Party at election time. One WPA director in New Jersey -- a corrupt but candid man -- answered his office phone, "Democratic headquarters!"

This and other criticisms of the WPA are noted by wikipedia.

Certainly seems to be plenty out there about the New Deal that differs from what many of us were taught in school!

Alter's myth-making

2012-01-20T19:16:00.001-05:00

Jonathan Alter has a column in the Washington Post addressing various alleged myths about President Obama. Among these:

4. Obama’s stimulus package failed.

This has become a GOP talking point, repeated by everyone from John Boehner to Karl Rove to Romney. It isn’t true.

Objecting to various provisions of the stimulus or believing that it worsened the deficit isn’t the same as deeming it a failure. When the Obama administration was little more than a year old, three of the best-known economic research firms — IHS Global Insight, Macroeconomic Advisers and Moody’s Economy — all said the American Recovery and Reinvestment Act, which almost every Republican in Congress opposed, would create more than 2.5 million jobs. And last August, the nonpartisan Congressional Budget Office estimated that the stimulus package created between 1.4 and 4 million jobs. Even Mark Zandi, one of McCain’s top economic advisers in 2008, has called the stimulus “a significant benefit to the economy’s performance.”

Many on the left have complained that the $787 billion stimulus was too small. This may be true as an economic matter, but it is an unfair, ahistorical shot at Obama. Congressional Democrats made it clear that this amount was the most that could win approval.

Let's examine Alter's defense of the stimulus from the conservative critique. First he notes that various economic forecasting firms said that the stimulus would create 2.5 million jobs. Fine, but that's irrelevant. The only thing anyone should be interested in is what actually happened, not what some predicted would happen.

Next, he states that the CBO estimated the stimulus would create between 1.4 and 4 million jobs. Beyond the amazing fudge factor the CBO gave itself with such a wide range of job creation numbers, what Alter fails to mention is that the CBO did not actually count jobs created by the stimulus, but rather simply ran the numbers through an economic model. As Peter Suderman explains:

...According to the CBO’s top official, [job creation figures resulting from the stimulus cited by the CBO] don’t actually tell us whether or not the stimulus created jobs. That’s because, as I’ve noted so many times before, the reports rerun slightly updated versions of the same models of that were used to estimate that the stimulus would create jobs prior to the law’s passage. And lo and behold, if you create a model that predicts the law will create jobs, and then you rerun a mild variation of that model a few years later using updated figures about what money was actually spent, it still reports that the stimulus created jobs.

But there’s no counting here, no real-world attempt to assess the reality of the stimulus—just a model that assumes that stimulus spending will create jobs and therefore reports that stimulus spending has in fact created jobs. As CBO director Douglas Elmendorf confirmed on the record last year in response to a question, “if the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis.”

Furthermore, even if we take the CBO job creation numbers at face value, it is still not apparent the stimulus was worthwhile. After all, if the low end figure of 1.4 million jobs is accurate, this means that -- given the stimulus cost of $821 billion -- each job cost taxpayers $586,000. If the 4 million figure is accurate, each job came with a price tag of $205,000. Is this cost-effective?

Lastly, with regard to Mark Zandi, let us recall that in addition to being an adviser to John McCain that Zandi was an early and staunch supporter of fiscal stimulus as this February 2009 article notes:

A frequent expert witness at congressional hearings and omnipresent in news coverage, Mr. Zandi has become the most vocal economist arguing for a major fiscal stimulus package. The biggest risk today, he says, is “people not having clear sense of the severity of the recession.”

“I feel strongly about stimulus. I feel it’s absolutely vital,” he said. “It’ll make all the difference between recession and depression.”

Mr. Zandi argued for years the benefits of fiscal stimulus to boost a sagging economy, and his firm’s multipliers — showing the stimulative effect of spending, tax cuts and other measures — are widely cited by lawmakers and outside advocacy groups.

But it probably loses some of the punch if Alter were to instead write that "Even Mark Zandi, a longtime supporter of fiscal stimulus measures, has called the stimulus 'a significant benefit to the economy’s performance.'"

The New Deal revisited

2012-01-20T18:39:00.001-05:00

Burton Folsom Jr. is the author of New Deal or Raw Deal, a fascinating history of the New Deal economic program of the 1930s. Some highlights from the first five chapters:

National Recovery Administration

The National Recovery Administration, implemented shortly after Franklin Roosevelt took office in 1933, was, in the words of wikipedia, the president's "primary New Deal agency." The mission of the NRA was to fix prices, reduce working hours (think France here) and tamp down on competition. Folsom explains the rationale:

As part of their faith in the underconsumption theory, [the New Dealers] believed that artificially higher wages [resulting from less competition, fixed prices and fewer working hours] meant greater purchasing power, which they believed would help Americans out of the Great Depression. If people earned more, they could buy more, and that would stimulate industrial and economic recovery.

In this "high wage" theory, the efficient businessman, the innovator and the price cutter, was evil because he was believed to contribute to lower wages, and therefore diminishing purchasing power. He was a violator of "fair competition." His gain was not just the loss of his competitors, but of the whole country. The NRA, by encouraging codes of "fair competition," was giving all existing businesses a chance to make profits, to pay high wages, and to survive the price cutter and innovator.

As Roosevelt said, the NRA "was passed to put people back to work (emphasis in original), to let them buy more of the products of farms and factories and start our business at a living rate again."

This dovetails with wikipedia's description, which states:

[NRA Director Hugh Samuel] Johnson called on every business establishment in the nation to accept a stopgap "blanket code": a minimum wage of between 20 and 45 cents per hour, a maximum workweek of 35 to 45 hours, and the abolition of child labor. Johnson and Roosevelt contended that the "blanket code" would raise consumer purchasing power and increase employment.

Folsom explains that such laws punished those who sold and produced goods at cheap prices. He highlights the example of a tire company that had traditionally undersold the competition being forced to raise its prices, thus eliminating its competitive advantage against more established players. Not only were such rules economically harmful, but they also posed a safety risk. In the face of higher prices, people are less apt to replace their tires in a timely fashion or rely on rebuilt ones, thus placing them at higher risk of a blowout.

Other notes from wikipedia regarding the NRA:

In early 1935 the new chairman, Samuel Williams announced that the NRA would stop setting prices, but businessmen complained. Chairman Williams told them plainly that, unless they could prove it would damage business, NRA was going to put an end to price control. Williams said, "Greater productivity and employment would result if greater price flexibility were attained." Of the 2,000 businessmen on hand probably 90% opposed Mr. Williams' aim, reported Time magazine: "To them a guaranteed price for their products looks like a royal road to profits. A fixed price above cost has proved a lifesaver to more than one inefficient producer."

...The National Recovery Review Board, headed by noted criminal lawyer Clarence Darrow, a prominent liberal, was set up by President Roosevelt in March 1934 and abolished by him that same June. The board issued three reports highly critical of the NRA from the perspective of small business, charging the NRA with fostering monopolies.

...The NRA was famous for its bureaucracy. Journalist Raymond Clapper reported that between 4,000 and 5,000 business practices were prohibited by NRA orders that carried the force of law, which were contained in some 3,000 administrative orders running to over 10 million pages, and supplemented by what Clapper said were "innumerable opinions and directions from national, regional and code boards interpreting and enforcing provisions of the act."

In 1935, the U.S. Supreme Court unanimously declared that the National Industrial Recovery Act law which created the NRA was unconstitutional, with the NRA halting operations shortly thereafter. It was, of course, rulings such as this that led to Roosevelt's attempted court-packing scheme.

Lest anyone think that economic lunacy such as government price-setting was only a passing fad among Democrats, recall that just this week it was revealed that no less than six House Democrats proposed legislation to set up a "Reasonable Profits Board" to control gas profits.

Agricultural Adjustment Act

Folsom sums up another New Deal program, the Agricultural Adjustment Act:

The AAA was very complicated, but in a nutshell here is how it worked. First, some farmers would be paid not to produce on part of their land; second, farm prices would be pegged to the purchasing power of farm prices in 1910; third, millers and processors would pay for much of the cost of the program. What's more, power would be centralized through the secretary of agriculture, who would set the processing taxes, target the price of many commodities, and tell farmers how much land to remove.

Wikipedia offers basically the same take:

The Agricultural Adjustment Act...was a United States federal law of the New Deal era which restricted agricultural production by paying farmers subsidies not to plant part of their land (that is, to let a portion of their fields lie fallow) and to kill off excess livestock. Its purpose was to reduce crop surplus and therefore effectively raise the value of crops, The money for these subsidies was generated through an exclusive tax on companies which processed farm products.

Think about that: the government was paying farmers not to grow crops in order to boost prices at the very same time that people were literally struggling to put food on the table and avert hunger. Like the NRA, the AAA was found by the Supreme Court to be unconstitutional.

More New Deal blogging to come.

Quote of the day

2012-01-20T14:22:00.002-05:00

Secretary of Health and Human Services Kathleen Sebelius:

“The more we educate people about [Obamacare], the more they’ll be able to take advantage of the benefits. The more they take advantage of the benefits, the harder it will be for opponents to take those benefits away. Once you have something and you like it and you’re using it, you will fight with your own member of Congress to keep it.”

As Michael Cannon notes, dependency on government is the goal. Not terribly dissimilar from FDR.

Chart of the day

2012-01-19T12:52:00.002-05:00

Source: Andrew Coulson

Borderless Economics: health care

2012-01-15T14:28:00.001-05:00

Chapter 4 of Borderless Economics examines how global networks of people impact innovation. Starting on page 103, Guest profiles two Indian brothers, both with MBAs from Duke University, who founded Fortis Healthcare:

The Singhs are not doctors; they are businessmen. Both are obsessed with getting not only the best out of the their employees, but also the most. A top surgeon in America might perform 250 to 350 operations per year. A surgeon at a Fortis hospital will perform 1,200. The difference is partly due to regulation: American doctors are barred from doing much more, for fear that they will become exhausted and make mistakes. India can ill afford such tight rules -- it has so few doctors that it must make the most of the ones it has.

Fortis does this by ensuring that its surgeons waste as little time as possible. Unlike doctors in rich countries, they spend almost no time wrestling with paperwork or administration. Surgeons in America sometimes even make their own coffee, marvels Shivinder. Not in a Fortis hospital.

An army of helpers takes care of all the mundane tasks, leaving surgeons free to operate -- often. The economic logic is compelling. Doctors are more expensive than support staff everywhere, of course, but in India the gap is gigantic. Doctors are scarce and therefore well paid; cleaners and form-fillers are plentiful and cheap. The average wage for a doctor at a Fortis hospital is about $60,000 a year -- a small fortune in India. Star surgeons can make more than $1 million. That would be a tidy sum even in America. Yet Fortis's prices are much lower than those at American hospitals. A kidney operation that might cost $100,000 in America costs less than $10,000 at a Fortis hospital.

This is a great example of a regulation in the US that is directly raising health care costs. Was there any mention of this rule being repealed during the health care debate of 2009-10? Not a peep. Anyone who thinks that the hours worked by India's highly-productive surgeons cause a danger to their patients, meanwhile, needs to read this WSJ article, which profiles an Indian hospital with much the same approach:

Some in India question whether Dr. Shetty is taking his high volume model too far, risking quality.

"On one level, it's a damn good idea. My only issue with it comes from the fact that if you pursue wholesale volumes, you may give up something -- which is usually quality," says Amit Varma, a physician who serves as president of health-care initiatives for Religare Enterprises Ltd., a publicly listed financial services group in Delhi. Religare is part of a conglomerate that also owns Fortis Healthcare Ltd., a rival hospital chain.

"I think he has reached the point where if you increase volume any more, you could compromise patient care unless backed up by very robust standard operating procedures and processes," Dr. Varma says.

But Jack Lewin, chief executive of the American College of Cardiology, who visited Dr. Shetty's hospital earlier this year as a guest lecturer, says Dr. Shetty has done just the opposite -- used high volumes to improve quality. For one thing, some studies show quality rises at hospitals that perform more surgeries for the simple reason that doctors are getting more experience. And at Narayana, says Dr. Lewin, the large number of patients allows individual doctors to focus on one or two specific types of cardiac surgeries.

...Dr. Shetty's success rates appear to be as good as those of many hospitals abroad. Narayana Hrudayalaya reports a 1.4% mortality rate within 30 days of coronary artery bypass graft surgery, one of the most common procedures, compared with an average of 1.9% in the U.S. in 2008, according to data gathered by the Chicago-based Society of Thoracic Surgeons.

Guest also, in something of a useful non-sequitur, looks at what is wrong with US healthcare:

US clinics are often paid according to how many medical procedures they carry out, regardless of whether those procedures are necessary. As a result, American doctors massively overprescribe every kind of test that an insurer will pay for. If they don't, they risk being sued. All these costs are passed on to ordinary Americans, as either higher taxes (to pay for Medicare, the government plan for the elderly, or Medicaid benefits for the poor) or lower wages (to make up for the soaring cost of employer-provided group health insurance).

The waste in the system is incredible. Paul Grundy, a doctor who is the head of health-care technology at IBM, told me a revealing anecdote a few years ago. A middle-aged IBM executive was having chest pains. He had excellent health insurance, so he went straight to a specialist. His cardiologist put him through a bunch of tests, including a computerized tomography scan. The radiologist conducting the scan noticed something odd in his neck, so the executive saw a neck surgeon, who checked him out and found nothing. He went back to the cardiologist, who ordered an angiogram, which caused dangerous complications and landed him in the hospital for a while. In all, he ran up more than $150,000 in medical expenses before the chest pains disappeared on their own.

When they reappeared several months later, he spoke to Dr. Grundy, a doctor of preventive medicine by training. Dr. Grundy asked him if his lifestyle had changed recently. The executive mentioned that he had taken up gardening again. Dr. Grundy quickly established that his chest pains sprang from a muscle he had strained through overzealous Weedwacking.

But instead of attempting to de-emphasize the central role played by health insurance to help get such costs under control, the plan supported by President Obama and congressional Democrats actually sought to further cement it. This will not end well.

Borderless Economics: the poor

2012-01-15T14:13:00.000-05:00

Finished reading Borderless Economics this weekend, which was excellent. Authored by Robert Guest, the book focuses on the flow of people rather than products across national borders -- an oft overlooked aspect of globalization. In chapter 7, Guest focuses on why migrants desire to move to the United States, devoting part of the chapter to a comparison of the economic situations faced by a late middle aged man on public assistance in Appalachia and a doctor in the Democratic Republic of Congo:

No American would dispute that Mr. Banks [who draws $521 per month in SSI, less $67 per month due to $3,600 in winnings from the slot machines] is poor. But by global standards, he is not. Shortly before I met him, I interviewed another man with roughly the same income: Mbwebwe Kabamba the chief trauma surgeon at the biggest hospital in the Democratic Republic of Congo. After 28 years as a doctor, his salary is only $250 dollars a month, but by operating on private patients after hours, he stretches it to $600 or $700.

Given the lower cost of living in congo, one might guess that Dr. Kabamba is better off than Mr. Banks. But the doctor has to support an extended family of 12, whereas Mr. Banks's ex-wife and three sons all claim public assistance. Indeed, the reason Mr. Banks split up from his wife, he says, is because they can draw more benefits separately. Still, he lives in the trailer next door.

What do Dr. Kabamba's wages buy? He has a four-bedroom house with a kitchen and living room, which would be ample if there weren't a dozen people under his roof. His home would be deemed unacceptably overcrowded in America. Even among the 44 million Americans officially classified as poor, only 6 percent live in homes with more occupants than rooms.

Dr. Kabamba would quite like running water and a steady power supply. His family fetches water in jars, and the electricity comes on maybe twice a week. Air-conditioning would be nice but "that's only for VIPs," says Dr. Kabamba. In America, 84 percent of poor (emphasis in original) households have air-conditioning. Some 98 percent have a color television (two-thirds have two or more) and two-thirds have a car.

Dr. Kabama earns enough to feed his children, but not as well as he would like. The family eats meat about twice a month; he calls it "a great luxury." In America, poor children eat more meat than the well-to-do. In fact, they get twice as much protein as their government says is good for them, which is why the Walmart in Mr. Banks's neighborhood sells such enormous jeans.

A Congolese doctor, a man most of his countrymen would consider wealthy, is worse off materially than most poor people in America. That puts America's prosperity into context. It also helps explain why so many of the world's huddled masses yearn to live there. But it is not only people from poor countries who seek a better standard of living in the United States. Americans are richer than people in other rich countries, too. Income per head in America is about 40 percent higher than the average among the members of the Organization for Economic Co-operation and Development (OECD), a club of rich industrialized nations.

Among OECD members, only Luxembourg (a tiny tax haven) and Norway (an orderly Scandinavian country sitting on a huge pool of oil) score higher. Compared with other reasonably large rich countries, America is substantially better off: 40 percent richer than France or Japan, 35 percent richer than Germany and 22 percent richer than Canada.

One can quibble with these statistics. Americans work longer hours for their extra cash. Their health care costs more. And the American average is skewed by very high incomes at the top. It might be fairer to compare median household incomes, but this is tricky, since difference countries define "household" differently.

...My observation is that a skilled blue-collar worker in America lives as well as an educated professional in Europe or Japan. To take one example of many, I once statyed with a family near New Orleans. The father was a mechanic; the mother a librarian. They lived in a spacious home by the bayou. I couldn't help noticing that it was bigger than the home of the vice president of a medium-sized software company that I used to work for in Tokyo. Granted, the VP's home was more elegant, with more antique woodblock prints and fewer pictures of his daughters riding quad bikes. But the mechanic had two cars, a recreational vehicle, a huge backyard and an above-ground swimming pool. In the American heartland, such luxuries are unremarkable.

We must always keep in mind how relative the term poor is. There is plenty of talk in the country about the 99 percent versus the 1 percent, but from a global perspective the 99 percent in the US are the 1 percent, or not far off.

Fingleton responds

2012-01-12T15:48:00.002-05:00

My recent post on Japan has elicited a response from the target of my criticism, Eamonn Fingleton. Interestingly, while Fingleton says that his New York Times piece has prompted a "flood of email" and has been "extensively noted in the blogosphere," my post is thus far the only one he has deigned to respond to (although he promises that more, including one for Paul Krugman, are forthcoming). The fact that he feels the need to respond to both this blog and Paul Krugman is taken as a compliment.

He begins:

An article I have written on Japan for the January 8 New York Times Sunday Review went live at the nytimes.com website yesterday and already the reaction has been the greatest I have ever known. Virtually all of it has been good but some bloggers have greatly confused the issue.

In particular I am surprised by one Washington-based trade lobbyist for a Japanese corporation who in a 2,000-word commentary has ostensibly rebutted several of my points. On closer analysis his take is just standard-issue ignorance of Japan, plus an evident desire to perpetuate the usual spin.

First, note that while Fingleton links to his own piece, he does not link to my criticism so that readers can draw their own conclusions. Second, he mischaracterizes my profession. I am not a trade lobbyist, or a lobbyist of any kind. I have never engaged in the act of lobbying nor have ever met with any active member of Congress or their staff in a professional capacity.

Not only am I not a lobbyist, nobody in my office is a lobbyist either, nor does my company employ outside lobbyists. Lobbying has absolutely nothing to do with my employment. His description of me is, quite simply, the product of his own imagination. My guess is that, given the negative connotation associated with lobbyists, he chose this description in order to help discredit me, but that's pure speculation.

I have a busy today ahead of me so I will confine myself here to a representative sample of his argument — his first and closing points, which I take it he considers to be particularly persuasive.

It is not apparent why he would think this, as my post responds to the points he raised in his column largely in the same order he presented them. As the author of the piece I am surprised he did not immediately recognize this.

His first point concerns life expectancy. As I mentioned, Japan’s life expectancy at birth increased by 4.2 years between 1989 and 2009. He thinks this does not count because Japanese-Americans are also extremely long lived. Well, yes, Japanese-Americans enjoy exceptional good life expectancy but that surely reflects in large measure the fact that they have long ranked among the wealthiest of ethnic groups in the world’s until-recently wealthiest nation (nearly 30 percent of Japanese Americans have college degrees). They also benefit of course from a good diet.

My point in presenting the data was that Fingleton should compare Japanese to Japanese-Americans in order to present more of an apples-to-apples comparison given the impact of ethnicity on life expectancy. Also, his point about 30 percent of Japanese-Americans having college degrees is irrelevant -- 29.93 percent of *all* Americans have college degrees [EDIT: that figure refers to Americans ages 25 and over, while the figure for all Americans is 22 percent].

But all this is beside the point. I repeat: the 4.2 year increase reflects mainly a major improvement in the Japanese healthcare system and is a powerful indicator of superior economic growth. There is no other explanation and my interlocutor provides none.

None was provided because I didn't see it as incumbent upon me to provide an explanation for the growth in Japanese life expectancy. But since he asked, I think the explanation is rather simple: improved medical technology and health care advances which people around the world have benefitted from.

Life expectancy as a proxy for economic strength, meanwhile, is problematic. Note that Italy from 1990-2000 had essentially zero economic growth (GDP in 1990: $1.13 trillion. In 2000: $1.10 trillion) but the country's life expectancy rose over the same period from 76.86 years to 79.43 years. Russia, meanwhile, saw life expectancy stagnate from 1990 to 2000 even while its GDP roughly tripled.

Now for his parting shot. He shows pictures of Japanese consumers lining up to buy the new Apple iPhone. This supposedly is evidence that the United States, not Japan, leads in cellphone technology. He omits to mention — something well known to anyone who follows global competition in that industry — that Apple is an outsourcer. Its manufacturing is done in East Asia, particularly in Japan and to a lesser extent Korea and Taiwan, with final assembly in China. Essentially most of the jobs are East Asian.

More generally Japan is by far the largest manufacturer of the key components in all cellphones. And the real technological magic is in these highly miniaturized components (they are why your cellphone doesn’t look like a walkie-talkie). A survey by Deutsche Bank some years ago identified nine key components in cellphones. Of the 36 manufacturers worldwide of these, 29 were Japanese — and just one was American. Japan indeed monopolizes the world supply of many such components and without them Apple, Motorola, Nokia, and so on would not have a business. An example is capacitors, formerly the size of light-bulbs but now, using tantalum technology, reduced to the size of a grain of salt.

They are essential in virtually all electronic devices and a typical cellphone requires half a dozen of them — all made in Japan, mainly by Kyoto-based Murata. According to the Asian Development Bank Institute, Tokyo-based Toshiba Corporation alone contributes 33 percent of the manufacturing content in the iPhone (in particular its superb touch-sensitive screen). Such manufacturing not only requires far greater per-capita capital investment than U.S. corporations can afford these days but vast amounts of secret manufacturing knowhow, typically built up over decades.

None of this refutes what I said. Apple, an American company, designs the cellphones while the parts -- a lower value-add part of the production process -- are produced and assembled in East Asia (which I have previously noted). Based on Fingleton's comments, however, one might think that Japan and these other East Asian economies have the choicest, most financially rewarding parts of the iPhone production process and deserve the lion's share of the credit for it.

To illustrate how absurd this is, consider cars. If Japan designed cars (hard to imagine, I know) but relied on the US for the production of auto parts and Mexico for assembly, would anyone in their right mind credit North America with the product edge in cars?

In any case, note that Fingleton is shifting his argument away from cell *phones* (original quote: "In cellphones, for instance, Japan leapfrogged the United States in the space of a few years in the late 1990s and it has stayed ahead ever since, with consumers moving exceptionally rapidly to ever more advanced devices.") towards cell phone *parts* and the manufacturing process.

Update: I have now had time for a few further rejoinders.

My interlocutor says that Japan’s astounding trade surpluses do not matter, nor do America’s vast trade deficits. We have come a long way since John F Kennedy said the two things he feared most were nuclear war and trade deficits. The idea that these deficits do not matter comes from broadly the same school of economics that told Americans they could borrow ad infinitum against the value of their homes without negative consequences.

This is perhaps the biggest low-light of his response in which he simply attempts to poison the well rather than actually engage with my argument. Further, the notion that people who attach little importance to trade deficits also favor taking out unlimited lines of credit based on home equity lacks any evidence to support it, and is something that I personally have never said or advocated. Very disappointing here.

My interlocutor tries to gainsay the scale of the remarkable building bom during Japan’s supposed “lost decades.” He cites misleadingly low population figures for U.S. cities to suggest that Tokyo’s skyscraper ratio is not very impressive on a per-capita basis. The key fact — one that he has no answer for — is that 81 skyscrapers taller than 500 feet have been built in Tokyo proper since 1990, versus a total of only 12 such buildings up to that date.

And this in a country that suffered one of the biggest real estate busts on record true), an aging population (also true), supposedly idiotically out of control government finances (not true but widely believed in the West), and huge hidden unemployment (obviously untrue but also widely believed in the West). The issue here again is economic growth: how can such a historically extraordinary pace of building be reconciled with the story of an economy that is supposed to be flat on its back? And why don’t the analysts who have sold us the “basket case Japan” story never mentioned such interesting contrary data?

Fingleton accuses my figures of being misleading, but provides no evidence for how they are misleading or what the true figures might be. In fact, my numbers were taken straight from wikipedia (here are the entries for Tokyo, New York City, Los Angeles and Chicago).

As for why Tokyo has built tall buildings since 1990, the answer is simple: Tokyo's population has actually grown, with this site claiming growth of 1.3 million since 1996. Secondly, in a densely-populated area such as Tokyo, building upwards becomes far more attractive. Indeed, while Fingleton highlights Tokyo's construction of many tall buildings while pointing out that Los Angeles only built seven, note that Tokyo has a population density roughly twice that of LA (15,610.4/sq mi vs. 8,092.30/sq mi).

Furthermore, the construction of tall buildings is not a traditional metric of economic growth and -- more importantly -- Tokyo is not Japan writ large. This is the equivalent of arguing that if Manhattan is booming then so is the rest of the US. Also note that Tokyo's population growth of 11 percent since 1996 is in stark contrast with the country as a whole, which grew only 1.6 percent over the same time frame.

He suggests that Japanese unemployment figures are understated. Wrong. The figures I used have been adjusted by the U.S. Bureau of Labor Statistics to be fully comparable with U.S. statistics. He points out that the labor participation rate is lower than in the United States. This is true but it does not cast doubt on the low unemployment rate.

The lower labor participation rate – 59 percent versus 64 percent – reflects (1) a high proportion of retirees; (2) a high proportion of young people at college; and (3) a strong cultural tendency for women to give up work once they have a child. Those of us who read Japanese know that small businesses are constantly advertising for staff. There is no shortage of jobs in Japan, either for women or men. As countless foreign employers in Japan can testify, the problem rather is a shortage of young workers.

My problem with his citing of the unemployment rate was not that it was wrong or understated, but that it was presented with zero context (his remarks on unemployment in their entirety: "The unemployment rate is 4.2 percent, about half of that in the United States."). If, as in Japan, more women and discouraged workers chose to withdraw from the labor force the US unemployment rate would decline (indeed, we have already seen this dynamic at work), but this would hardly be indicative of economic vitality (which is what Fingleton is trying to prove by wielding Japan's unemployment stat). In fact, it would be the opposite.

His remarks regarding the labor participation rate aren't terribly useful either. As the labor participation rate tends to only count those up to age 65, a high proportion of retirees in Japan isn't terribly relevant (although it should be noted that social security payments in Japan begin at age 60). A high proportion of young people attending college, meanwhile, is little different than the US where 56 percent of Americans have at least some college education (can't find an authoritative source for Japan but this site claims 47 percent). Given Japan's declining marriage and birthrates, meanwhile, one must wonder how significant is the last factor he cites.

Whew!

Corporate greed and the price of natural gas

2012-01-12T11:22:00.001-05:00

It seems that whenever the price of gasoline spikes that some television news crew inevitably heads down to the local gas station and finds drivers who, when asked about the cost increase, place the blame on corporate greed and fatcat CEOs. This is, of course, absurd. If oil companies and their CEOs posssessed the power to raise prices on a whim they would do so in perpetuity; times of relatively low prices are not caused by their goodwill or benevolence but rather basic supply and demand.

Today's Wall Street Journal notes that the price of natural gas has been trending downwards for some time now, and if the futures markets are to be believed, that the decline is set to continue for some time to come. Unlike with the gasoline example, if a man on the street interview were to result in corporate greed being blamed for the price decline, that person would actually be right.

How so? Simple: when natural gas prices were high, energy companies -- driven by greed and the desire to make money -- invested considerable resources in producing more natural gas in order to take advantage of the higher prices. As the article notes:

When Louisiana's Haynesville Shale was discovered in 2008, gas prices were over $9 per million BTUs and companies rushed to lease as much acreage as possible.

Now in chart form:

The higher production resulting from corporate greed has boosted supply and reduced prices. More like this please!

Time to cut defense

2012-01-10T21:55:00.001-05:00

The truth about Japan

2012-01-07T11:35:00.000-05:00

Eamonn Fingleton has authored one of the strangest opinion pieces one is likely to come across, taking to the pages of The New York Times to defend Japan's economic model and even call for its emulation. While the virtues of Japan's economic approach may appear somewhat esoteric, Fingleton's column is best understood as part of the broader left-right debate over economic policy.

Traditionally more interventionist than the US -- Japan is synonymous with industrial policy and is the only developed country to have a higher corporate tax rate than the US (there was talk of cutting the corporate tax but I can't determine if this ever occurred) -- it is easy to see why the left is eager to defend this model against its free market critics. Indeed, perhaps this explains why Ezra Klein felt the need to highlight the column.

Fingleton begins the column by citing a variety of metrics that he claims boost the case for a surging Japan:

Japan’s average life expectancy at birth grew by 4.2 years — to 83 years from 78.8 years — between 1989 and 2009. This means the Japanese now typically live 4.8 years longer than Americans. The progress, moreover, was achieved in spite of, rather than because of, diet. The Japanese people are eating more Western food than ever. The key driver has been better health care.

Life expectancy, of course, is a product of much more than either economic growth or health care systems, with ethnicity also playing a very significant role. Asian-Americans, for example, live the longest of any ethnic group in the US, with a life expectancy of 85. Hawaii, the US state with the country's longest life-expectancy, is also home to the greatest percentage of Asian-Americans. To correct for these factors it is best to compare life expectancy in Japan not against all Americans, but against Japanese-Americans. While the average life expectancy in Japan is 83 years, among Japanese-Americans it is 84.5 years.

Japan has made remarkable strides in Internet infrastructure. Although as late as the mid-1990s it was ridiculed as lagging, it has now turned the tables. In a recent survey by Akamai Technologies, of the 50 cities in the world with the fastest Internet service, 38 were in Japan, compared to only 3 in the United States.

This in indeed good for Japan, although given the regulatory hurdles in cities such as Washington DC this is perhaps unsurprising. As this Washington Post article notes, Japan's internet infrastructure also benefits from higher population density which reduces roll-out costs per customer.

Measured from the end of 1989, the yen has risen 87 percent against the U.S. dollar and 94 percent against the British pound. It has even risen against that traditional icon of monetary rectitude, the Swiss franc.

A strong currency is neither automatically good nor bad. On the positive side, it cheapens the cost of imports and make overseas tourism more affordable. However it also increases the cost of exports and selling one's goods overseas, which can be a competitive disadvantage.

The unemployment rate is 4.2 percent, about half of that in the United States.

Given Fingleton's lack of further elaboration this is rather deceptive on his part, as this is somewhat of an apples-to-oranges comparison. The Bureau of Labor Statistics explains:

Why is Japanese unemployment so low?

Japan has been able to maintain relatively low unemployment rates because large numbers of women who are temporary or casual workers withdraw from the labor force when they lose their jobs, rather than becoming unemployed — that is, they stop working and do not look for another job. Temporary workers, both male and female, represent an increasing share of Japanese employment. Such workers generally bear the brunt of labor market adjustments in Japan. In this way, Japanese employers have flexibility in their work forces during economic downturns, enabling full-time workers with permanent employment contracts — predominantly men in larger Japanese enterprises — to keep their jobs.

The conventional unemployment rate misses a great deal of labor underutilization in Japan, namely workers on reduced hours for economic reasons and discouraged workers (those who want a job, but are not actively seeking work because they believe their search will be futile). A more broadly defined rate which takes these other elements of underutilization into account increases the Japanese rate beyond that of the U.S. rate.

Perhaps a better metric is the labor participation rates of each country, which is the ratio between the labor force and the overall size of the population of those of working age. In the US the civilian labor force participation rate is currently 64 percent. In Japan, as of 2010 (the most recent numbers I could find) it was 59 percent -- and on a multi-year downward trend.

According to skyscraperpage.com, a Web site that tracks major buildings around the world, 81 high-rise buildings taller than 500 feet have been constructed in Tokyo since the “lost decades” began. That compares with 64 in New York, 48 in Chicago, and 7 in Los Angeles.

The population of Tokyo is 13.1 million. The combined populations of New York, Chicago and Los Angeles is 14.6 million. Thus, Tokyo has built one new tower for every 162,000 residents while the US cities have built one new tower for every 123,000 residents. Why Fingleton opted for this statistic is not entirely clear.

Japan’s current account surplus — the widest measure of its trade — totaled $196 billion in 2010, up more than threefold since 1989. By comparison, America’s current account deficit ballooned to $471 billion from $99 billion in that time. Although in the 1990s the conventional wisdom was that as a result of China’s rise Japan would be a major loser and the United States a major winner, it has not turned out that way. Japan has increased its exports to China more than 14-fold since 1989 and Chinese-Japanese bilateral trade remains in broad balance.

As with currency, the state of the current account is neither good nor bad. If the US maintained the same level of exports but then bombed and sunk all ships carrying imports to the US this would produce a big trade surplus -- but would the economy be better off? Furthermore, it is not obvious why Japan should be celebrating the fact that it sends more stuff out of the country than what it takes in. The goal of most people is to accumulate more items, not less.

Beyond his odd and misleading statistics, Fingleton engages in some intellectual laziness by pointing out anecdotal data, some of which isn't even true:

As longtime Japan watchers like Ivan P. Hall and Clyde V. Prestowitz Jr. point out, the fallacy of the “lost decades” story is apparent to American visitors the moment they set foot in the country. Typically starting their journeys at such potent symbols of American infrastructural decay as Kennedy or Dulles airports, they land at Japanese airports that have been extensively expanded and modernized in recent years.

William J. Holstein, a prominent Japan watcher since the early 1980s, recently visited the country for the first time in some years. “There’s a dramatic gap between what one reads in the United States and what one sees on the ground in Japan,” he said. “The Japanese are dressed better than Americans. They have the latest cars, including Porsches, Audis, Mercedes-Benzes and all the finest models. I have never seen so many spoiled pets. And the physical infrastructure of the country keeps improving and evolving.”

First off, unlike Kennedy airport which is operated by a government agency -- the NY/NJ Port Authority -- Japan's busiest airport, Narita, has been privatized. Second, despite Fingleton's claims about Dulles suffering from decay, billions of dollars have actually been spent on improvements to the airport over the past decade.

With regard to Holstein, meanwhile, it is debatable how much can be gleaned from merely looking around. We also have no idea where he traveled -- one is surely to get a different impression of Japan from traveling to a thriving metropolis like Tokyo than other areas of the country where there is stagnation and rising poverty. It's also unfortunate that Holstein said nothing about Japanese housing. Perhaps one reason that money is being spent on items of conspicuous consumption such as clothing and spoiled pets is because the Japanese spend so much less furnishing their homes. With the average Japanese housing unit at 1,021 square feet, it is less than half that of its counterpart in the US which has 2,700 square feet.

Fingleton also trots out another strange statistic to promote the idea of a revitalized Japan:

In the 1990s, while Japan was being widely portrayed as an outright “basket case,” its rate of increase in per-capita electricity output was twice that of America, and it continued to outperform into the new century.

Rate of increase of per-capita electricity output? The statistic is meaningless unless one knows the base the measurement is beginning from. If Japan begins from a much lower base, the stat loses all significance. To illustrate the point, imagine one person who makes $100,000 a year receiving a $5,000 raise, or 5 percent. Now imagine someone else who makes $1000 per year receiving a $1,000 raise, or 100 percent. Who is better off? Fortunately there is an electricity statistic that allows for a more apples-to-apple comparison: electricity consumption per capita. While the average American uses 1,460 watts per person, in Japan it's 868.

While there isn't time to rebut every silly or false point raised by Fingleton's lengthy piece, one other observation of his deserves to be highlighted:

If the Japanese have really been hurting, the most obvious place this would show would be in slow adoption of expensive new high-tech items. Yet the Japanese are consistently among the world’s earliest adopters. If anything, it is Americans who have been lagging. In cellphones, for instance, Japan leapfrogged the United States in the space of a few years in the late 1990s and it has stayed ahead ever since, with consumers moving exceptionally rapidly to ever more advanced devices.

Fingleton's remark about leapfrogging cell phone technology in the late 1990s is likely a reference to i-mode, a technology that launched in 1999 but never made it outside of Japan. However, here's what even the creator of i-mode had to say about the platform:

"I believe the iPhone (a phone that uses the traditional TCP/IP model) is closer to the mobile phone of the future, compared with the latest Japanese mobile phones."

Here, meanwhile, are pictures of Japanese lined up to purchase the iPhone 4, a foreign technology, despite Fingleton's claim that Japan has "stayed ahead ever since" in the cell phone industry.

What a strange column. But perhaps not terribly surprising from someone who authored a book -- in 1995! -- claiming that Japan would overtake the US by the year 2000.

Update: Forgot to mention that the American Enterprise Institute held a forum on Japan this week at which Taro Kono, a member of Japan's Diet, called for deregulation and said that the country was "going downhill."

Update: Perhaps this is less of a left-right issue than I thought -- Paul Krugman also thinks Fingleton is wrong.

Update: Fingleton fires back, and I respond here.

Europe going broke

2012-01-06T09:34:00.000-05:00

NPR reporter Adam Davidson makes a point that can't be repeated enough:

One great way to start a bar fight during an American Economic Association conference is to claim that the U.S. economy is preferable to Europe’s. Someone will undoubtedly start quarreling about how G.D.P. per capita doesn’t measure a person’s happiness. Someone else may point out that if you look at income inequality and entitlements, the average European is doing much better.

But G.D.P. per capita (an insufficient indicator, but one most economists use) in the U.S. is nearly 50 percent higher than it is in Europe. Even Europe’s best-performing large country, Germany, is about 20 percent poorer than the U.S. on a per-person basis (and both countries have roughly 15 percent of their populations living below the poverty line). While Norway and Sweden are richer than the U.S., on average, they are more comparable to wealthy American microeconomies like Washington, D.C., or parts of Connecticut — both of which are actually considerably wealthier. A reporter in Greece once complained after I compared her country to Mississippi, America’s poorest state. She’s right: the comparison isn’t fair. The average Mississippian is richer than the average Greek.

HT: Instapundit.

Economic mobility

2012-01-05T16:49:00.000-05:00

Beyond income inequality, another common criticism leveled at the US economy is its alleged lack of economic mobility -- basically the ability to move between economic classes. Writing in today's New York Times, reporter Jason DeParle (author of an excellent book on welfare reform) notes that economic mobility in the US is actually less than that of many other developed countries:

Benjamin Franklin did it. Henry Ford did it. And American life is built on the faith that others can do it, too: rise from humble origins to economic heights. “Movin’ on up,” George Jefferson-style, is not only a sitcom song but a civil religion.

But many researchers have reached a conclusion that turns conventional wisdom on its head: Americans enjoy less economic mobility than their peers in Canada and much of Western Europe. The mobility gap has been widely discussed in academic circles, but a sour season of mass unemployment and street protests has moved the discussion toward center stage.

...“It’s becoming conventional wisdom that the U.S. does not have as much mobility as most other advanced countries,” said Isabel V. Sawhill, an economist at the Brookings Institution. “I don’t think you’ll find too many people who will argue with that.”

...John Bridgeland, a former aide to President George W. Bush who helped start Opportunity Nation, an effort to seek policy solutions, said he was “shocked” by the international comparisons. “Republicans will not feel compelled to talk about income inequality,” Mr. Bridgeland said. “But they will feel a need to talk about a lack of mobility — a lack of access to the American Dream.”

So is the ideal of lifting oneself out of poverty by the bootstraps every bit as fictional as the characters in Horatio Alger's books? Is the American dream actually be found in Belgium? Not really. Upon closer scrutiny the economic mobility argument is revealed as another example of lies, damned lies and statistics.

Consider the example of a village with five inhabitants. One makes $50,000 per year, another makes $50,001, another $50,002, another $50,003 and the last $50,004. They are neatly divided into quintiles, call them poor, lower middle class, middle middle class, upper middle class and rich. With a mere $5 raise, the person making $50,000 leapfrogs his neighbors into the ranks of the rich -- amazing economic mobility! What's more, the person making $50,001 has been knocked down a peg and is now the poor man in town, even though he has suffered no decline in income.

This is, of course, an extreme example meant to illustrate a point: the closer the rungs of the economic ladder are together, the more easy it is to achieve mobility. Now imagine this principle applied to the US. If one believes the US is truly the land of opportunity, with the sky the limit as to what someone can achieve if they work hard and make full use of their talents, then it should also follow that to enter the ranks of the rich will not require $50,005 as in our example, but considerably more. If someone can literally become a billionaire such as Steve Jobs or Bill Gates, that will necessarily make entering the upper crust a far more difficult proposition than in our village.

Imagine a second example, with another village in which the five inhabitants have incomes of $50,000, $60,000, $70,000, $80,000 and $90,000. Let us suppose that the person making $50,000 receives a raise of not $5, but $5,000. Not only is he not rich after the raise, he's still on the bottom rung with zero economic mobility! Is this such a bad thing? Which village is really better off?

This problem with the economic mobility argument is only identified more than halfway through the article:

The income compression in rival countries may also make them seem more mobile. Reihan Salam, a writer for The Daily and National Review Online, has calculated that a Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000.

With those two sentences the alleged problem of US income mobility vis-à-vis its foreign counterparts is pretty much blown out of the water. Just as with income inequality, the problem with economic mobility is that it is a relative rather than absolute measurement.

The article also notes this:

A Pew study found that 81 percent of Americans have higher incomes than their parents (after accounting for family size). There is no comparable data on other countries.

This, not the relative measurements of income inequality or economic mobility, is what truly matters. And it seems that a good majority of us are doing alright.

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