Will China’s growth continue forever?

July 23, JDN 2457958

It’s easy to make the figures sound alarming, especially if you are a xenophobic American:

Annual GDP growth in the US is currently 2.1%, while annual GDP growth in China is 6.9%. At markte exchange rates, US GDP is currently $18.6 trillion, while China’s GDP is $11.2 trillion. If these growth rates continue, that means that China’s GDP will surpass ours in just 12 years.

Looking instead at per-capita GDP (and now using purchasing-power-parity, which is a much better measure for standard of living), the US is currently at $53,200 per person per year while China is at $14,400 per person per year. Since 2010 US per-capita GDP PPP has been growing at about 1.2%, while China’s has been growing at 7.1%. At that rate, China will surpass the US in standard of living in only 24 years.

And then if you really want to get scared, you start thinking about what happens if this growth continues for 20, or 30, or 50 years. At 50 years of these growth rates, US GDP will just about triple; but China’s GDP would increase by almost a factor of thirty. US per-capita GDP will increase to about $150,000, while China’s per-capita GDP will increase all the way to $444,000.

But while China probably will surpass the US in total nominal GDP within say 15 years, the longer-horizon predictions are totally unfounded. In fact, there is reason to believe that China will never surpass the US in standard of living, at least within the foreseeable future. Sure, some sort of global catastrophe could realign the world’s fortunes (climate change being a plausible candidate) and over very long time horizons all sorts of things can happen; but barring catastrophe and looking within the next few generations, there’s little reason to think that the average person in China will actually be better off than the average person in the United States. Indeed, while that $150,000 figure is actually remarkably plausible, that $444,000 figure is totally nonsensical. I project that in 2065, per-capita GDP in the US will indeed be about $150,000, but per-capita GDP in China will be more like $100,000.

That’s still a dramatic improvement over today for both countries, and something worth celebrating; but the panic that the US must be doing something wrong and China must be doing something right, that China is “eating our lunch” in Trump’s terminology, is simply unfounded.

Why am I so confident of this? Because, for all the proud proclamations of Chinese officials and panicked reports of American pundits, China’s rapid growth rates are not unprecedented. We have seen this before.

Look at South Korea. As I like to say, the discipline of development economics is basically the attempt to determine what happened in South Korea 1950-2000 and how to make it happen everywhere.

In 1960, South Korea’s nominal per-capita GDP was only $944. In 2016, it was $25,500. That takes them from solidly Third World underdeveloped status into very nearly First World highly-developed status in just two generations. This was an average rate of growth of 6.0%. But South Korea didn’t grow steadily at 6.0% for that entire period. Their growth fluctuated wildly (small countries tend to do that; they are effectively undiversified assets), but also overall trended downward.

The highest annual growth rate in South Korea over that time period was an astonishing 20.8%. Over twenty percent per year. Now that is growth you would feel. Imagine going from an income of $10,000 to an income of $12,000, in just one year. Imagine your entire country doing this. In its best years, South Korea was achieving annual growth rates in income comparable to the astronomical investment returns of none other than Warren Buffett (For once, we definitely had r < g). Even if you smooth out over the boom-and-bust volatility South Korea went through during that period, they were still averaging growth rates over 7.5% in the 1970s.

I wasn’t alive then, but I wouldn’t be surprised if Americans back then were panicking about South Korea’s growth too. Maybe not, since South Korea was and remains a close US ally, and their success displayed the superiority of capitalism over Communism (boy did it ever: North Korea’s per capita GDP also started at about $900 in 1960, and is still today… only about $1000!); but you could have made the same pie-in-the-sky forecasts of Korea taking over the world if you’d extrapolated their growth rates forward.

South Korea’s current growth rate, on the other hand? 2.9%. Not so shocking now!

Moreover, this is a process we understand theoretically as well as empirically. The Solow model is now well-established as the mainstream neoclassical model of economic growth, and it directly and explicitly predicts this sort of growth pattern, where a country that starts very poor will initially grow extremely fast as they build a capital base and reverse-engineer technology from more advanced countries, but then over a couple of generations their growth will slow down and eventually level off once they reach a high level of economic development.

Indeed, the basic reason is quite simple: A given proportional growth is easier to do when you start small. (There’s more to it than that, involving capital degradation and diminishing marginal returns, but at its core, that’s the basic idea.)

I think I can best instill this realization in you by making another comparison between the US and China: How much income are we adding in absolute terms?

US per-capita GDP of $53,200 is growing at 1.2% per year; that means we’re adding $640 per person per year. China per-capita GDP of $14,400 is growing at 7.1% per year; that means they’re adding $1,020 per year. So while it sounds like they are growing almost six times faster, they’re actually only adding about 40% more real income per person each year than we are. It’s just a larger proportion to them.

Indeed, China is actually doing relatively well on this scale. Many developing countries that are growing “fast” are actually adding less income per person in absolute terms than many highly-developed countries. India’s per capita GDP is growing at 5.8% per year, but adding only $340 per person per year. Ethiopia’s income per person is growing by 4.9%—which is only $75 per person per year. Compare this to the “slow” growth of the UK, where 1.0% annual growth is still $392 per person per year, or France, where “stagnant” growth of 0.8% is still $293 per person per year.

Back when South Korea was growing at 20%, that was still on the order of $200 per person per year. Their current 2.9%, on the other hand, is actually $740 per person per year. We often forget just how poor many poor countries truly are; what sounds like a spectacular growth rate still may not be all that much in absolute terms.

Here’s a graph (on a log scale) of GDP per capita in the US, Japan, China, and Korea, from World Bank data since 1960. I’d prefer to use GDP PPP, but the World Bank data doesn’t go back far enough.

As you can see, there is a general pattern of growth at a decreasing rate; it’s harder to see in China because they are earlier in the process; but there’s good reason to think that they will follow the same pattern.

If anything, I think the panic about Japan in the 1990s may have been more justifiable (not that it was terribly justified either). As you can see on the graph, in terms of nominal GDP per capita, Japan actually did briefly surpass the United States in the 1990s. Of course, the outcome of that was not a global war or Japan ruling the world or something; it was… the Nintendo Wii and the Toyota Prius.

Of course, that doesn’t stop people from writing news articles and even publishing economic papers about how this time is different, not like all the other times we saw the exact same pattern. Many Chinese officials appear to believe that China is special, that they can continue to grow at extremely high rates indefinitely without the constraints that other countries would face. But for once economic theory and economic data are actually in very good agreement: These high growth rates will not last forever. They will slow down, and that’s not such a bad thing. By the time they do, China will have greatly raised their standard of living to something very close to our own. Hundreds of millions of people have already been lifted out of abject poverty; continued growth could benefit hundreds of millions more.

The far bigger problem would be if the government refuses to accept that growth must slow down, and begins trying to force impossible levels of growth or altering the economic data to make it appear as though growth has occurred that hasn’t. We already know that the People’s Republic of China has a track record of doing this sort of thing: we know they have manipulated some data, though we think only in small ways, and the worst example of an attempt at forcing economic growth in human history was in China, the so-called “Great Leap Forward” that killed 20 million people. The danger is not that China will grow this fast forever, nor that they will slow down soon enough, but that they will slow down and their government will refuse to admit it.

Should we give up on growth?

JDN 2457572

Recently I read this article published by the Post Carbon Institute, “How to Shrink the Economy without Crashing It”, which has been going around environmentalist circles. (I posted on Facebook that I’d answer it in more detail, so here goes.)

This is the far left view on climate change, which is wrong, but not nearly as wrong as even the “mainstream” right-wing view that climate change is not a serious problem and we should continue with business as usual. Most of the Republicans who ran for President this year didn’t believe in using government action to fight climate change, and Donald Trump doesn’t even believe it exists.
This core message of the article is clearly correct:

We know this because Global Footprint Network, which methodically tracks the relevant data, informs us that humanity is now using 1.5 Earths’ worth of resources.

We can temporarily use resources faster than Earth regenerates them only by borrowing from the future productivity of the planet, leaving less for our descendants. But we cannot do this for long.

To be clear, “using 1.5 Earths” is not as bad as it sounds; spending is allow to exceed income at times, as long as you have reason to think that future income will exceed future spending, and this is true not just of money but also of natural resources. You can in fact “borrow from the future”, provided you do actually have a plan to pay it back. And indeed there has been some theoretical work by environmental economists suggesting that we are rightly still in the phase of net ecological dissaving, and won’t enter the phase of net ecological saving until the mid-21st century when our technology has made us two or three times as productive. This optimal path is defined by a “weak sustainability” condition where total real wealth never falls over time, so any natural wealth depleted is replaced by at least as much artificial wealth.

Of course some things can’t be paid back; while forests depleted can be replanted, if you drive species to extinction, only very advanced technology could restore them. And we are driving thousands of species to extinction every single year. Even if we should be optimally dissaving, we are almost certainly depleting natural resources too fast, and depleting natural resources that will be difficult if not impossible to later restore. In that sense, the Post Carbon Institute is right: We must change course toward ecological sustainability.

Unfortunately, their specific ideas of how to do so leave much to be desired. Beyond ecological sustainability, they really argue for two propositions: one is radical but worth discussing, but the other is totally absurd.

The absurd claim is that we should somehow force the world to de-urbanize and regress into living in small farming villages. To show this is a bananaman and not a strawman, I quote:

8. Re-localize. One of the difficulties in the transition to renewable energy is that liquid fuels are hard to substitute. Oil drives nearly all transportation currently, and it is highly unlikely that alternative fuels will enable anything like current levels of mobility (electric airliners and cargo ships are non-starters; massive production of biofuels is a mere fantasy). That means communities will be obtaining fewer provisions from far-off places. Of course trade will continue in some form: even hunter-gatherers trade. Re-localization will merely reverse the recent globalizing trade trend until most necessities are once again produced close by, so that we—like our ancestors only a century ago—are once again acquainted with the people who make our shoes and grow our food.

9. Re-ruralize. Urbanization was the dominant demographic trend of the 20th century, but it cannot be sustained. Indeed, without cheap transport and abundant energy, megacities will become increasingly dysfunctional. Meanwhile, we’ll need lots more farmers. Solution: dedicate more societal resources to towns and villages, make land available to young farmers, and work to revitalize rural culture.

First of all: Are electric cargo ships non-starters? The Ford-class aircraft carrier is electric, specifically nuclear. Nuclear-powered cargo ships would raise a number of issues in terms of practicality, safety, and regulation, but they aren’t fundamentally infeasible. Massive efficient production of biofuels is a fantasy as long as the energy to do it is provided by coal power, but not if it’s provided by nuclear. Perhaps this author’s concept of “infeasible” really just means “infeasible if I can’t get over my irrational fear of nuclear power”. Even electric airliners are not necessarily out of the question; NASA has been experimenting with electric aircraft.

The most charitable reading I can give of this (in my terminology of argument “men”, I’m trying to make a banana out of iron), is as promoting slightly deurbanizing and going back to more like say the 1950s United States, with 64% of people in cities instead of 80% today. Even then this makes less than no sense, as higher urbanization is associated with lower per-capita ecological impact, which frankly shouldn’t even be surprising because cities have such huge economies of scale. Instead of everyone needing a car to get around in the suburbs, we can all share a subway system in the city. If that subway system is powered by a grid of nuclear, solar, and wind power, it could produce essentially zero carbon emissions—which is absolutely impossible for rural or suburban transportation. Urbanization is also associated with slower population growth (or even population decline), and indeed the reason population growth is declining is that rising standard of living and greater urbanization have reduced birth rates and will continue to do so as poor countries reach higher levels of development. Far from being a solution to ecological unsustainability, deurbanization would make it worse.

And that’s not even getting into the fact that you would have to force urban white-collar workers to become farmers, because if we wanted to be farmers we already would be (the converse is not as true), and now you’re actually talking about some kind of massive forced labor-shift policy like the Great Leap Forward. Normally I’m annoyed when people accuse environmentalists of being totalitarian communists, but in this case, I think the accusation might be onto something.

Moving on, the radical but not absurd claim is that we must turn away from economic growth and even turn toward economic shrinkage:

One way or another, the economy (and here we are talking mostly about the economies of industrial nations) must shrink until it subsists on what Earth can provide long-term.


If nothing is done deliberately to reverse growth or pre-adapt to inevitable economic stagnation and contraction, the likely result will be an episodic, protracted, and chaotic process of collapse continuing for many decades or perhaps centuries, with innumerable human and non-human casualties.

I still don’t think this is right, but I understand where it’s coming from, and like I said it’s worth talking about.

The biggest mistake here lies in assuming that GDP is directly correlated to natural resource depletion, so that the only way to reduce natural resource depletion is to reduce GDP. This is not even remotely true; indeed, countries vary almost as much in their GDP-per-carbon-emission ratio as they do in their per-capita GDP. As usual, #ScandinaviaIsBetter; Norway and Sweden produce about $8,000 in GDP per ton of carbon, while the US produces only about $2,000 per ton. Both poor and rich countries can be found among both the inefficient and the efficient. Saudi Arabia is very rich and produces about $900 per ton, while Liberia is exceedingly poor and produces about $800 per ton. I already mentioned how Norway produces $8,000 per ton, and they are as rich as Saudi Arabia. Yet above them is Mali, which produces almost $11,000 per ton, and is as poor as Liberia. Other notable facts: France is head and shoulders above the UK and Germany at almost $6000 per ton instead of $4300 and $3600 respectively—because France runs almost entirely on nuclear power.

So the real conclusion to draw from this is not that we need to shrink GDP, but that we need to make GDP more like how they do it in Norway or at least how they do it in France, rather than how we do in the US, and definitely not how they do it in Saudi Arabia. Total world emissions are currently about 36 billion tons per year, producing about $108 trillion in GDP, averaging about $3,000 of GDP per ton of carbon emissions. If we could raise the entire world to the ecological efficiency of Norway, we could double world GDP and still be producing less CO2 than we currently are. Turning the entire planet into a bunch of Norways would indeed raise CO2 output, by about a factor of 2; but it would raise standard of living by a factor of 5, and indeed bring about a utopian future with neither war nor hunger. Compare this to the prospect of cutting world GDP in half, but producing it as inefficiently as in Saudi Arabia: This would actually increase global CO2 emissions, almost as much as turning every country into Norway.

But ultimately we will in fact need to slow down or even end economic growth. I ran a little model for you, which shows a reasonable trajectory for global economic growth.

This graph shows the growth rate in productivity slowly declining, along with a much more rapidly declining GDP growth:


This graph shows the growth trajectory for total real capital and GDP:


And finally, this is the long-run trend for GDP graphed on a log scale:


The units are arbitrary, though it’s not unreasonable to imagine them as being years and hundreds of dollars in per-capita GDP. If that is indeed what you imagine them to be, my model shows us the Star Trek future: In about 300 years, we rise from a per-capita GDP of $10,000 to one of $165,000—from a world much like today to a world where everyone is a millionaire.

Notice that the growth rate slows down a great deal fairly quickly; by the end of 100 years (i.e., the end of the 21st century), growth has slowed from its peak over 10% to just over 2% per year. By the end of the 300-year period, the growth rate is a crawl of only 0.1%.

Of course this model is very simplistic, but I chose it for a very specific reason: This is not a radical left-wing environmentalist model involving “limits to growth” or “degrowth”. This is the Solow-Swan model, the paradigm example of neoclassical models of economic growth. It is sometimes in fact called simply “the neoclassical growth model”, because it is that influential. I made one very small change from the usual form, which was to assume that the rate of productivity growth would decline exponentially over time. Since productivity growth is exogenous to the model, this is a very simple change to make; it amounts to saying that productivity-enhancing technology is subject to diminishing returns, which fits recent data fairly well but could be totally wrong if something like artificial intelligence or neural enhancement ever takes off.

I chose this because many environmentalists seem to think that economists have this delusional belief that we can maintain a rate of economic growth equal to today indefinitely. David Attenborough famously said “Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad – or an economist.”

Another physicist argued that if we increase energy consumption 2.3% per year for 400 years, we’d literally boil the Earth. Yes, we would, and no economist I know of believes that this is what will happen. Economic growth doesn’t require energy growth, and we do not think growth can or should continue indefinitely—we just think it can and should continue a little while longer. We don’t think that a world standard of living 1000 times as good as Norway is going to happen; we think that a world standard of living equal to Norway is worth fighting for.

Indeed, we are often the ones trying to explain to leaders that they need to adapt to slower growth rates—this is particularly a problem in China, where nationalism and groupthink seems to have convinced many people in China that 7% annual growth is the result of some brilliant unique feature of the great Chinese system, when it is in fact simply the expected high growth rate for an economy that is very poor and still catching up by establishing a capital base. (It’s not so much what they are doing right now, as what they were doing wrong before. Just as you feel a lot better when you stop hitting yourself in the head, countries tend to grow quite fast after they transition out of horrifically terrible economic policy—and it doesn’t get much more terrible than Mao.) Even a lot of the IMF projections are now believed to be too optimistic, because they didn’t account for how China was fudging the numbers and rapidly depleting natural resources.

Some of the specific policies recommended in the article are reasonable, while others go to far.

1. Energy: cap, reduce, and ration it. Energy is what makes the economy go, and expanded energy consumption is what makes it grow. Climate scientists advocate capping and reducing carbon emissions to prevent planetary disaster, and cutting carbon emissions inevitably entails reducing energy from fossil fuels. However, if we aim to shrink the size of the economy, we should restrain not just fossil energy, but all energy consumption. The fairest way to do that would probably be with tradable energy quotas.

I strongly support cap-and-trade on fossil fuels, but I can’t support it on energy in general, unless we get so advanced that we’re seriously concerned about significantly altering the entropy of the universe. Solar power does not have negative externalities, and therefore should not be taxed or capped.

The shift to renewable energy sources is a no-brainer, and I know of no ecologist and few economists who would disagree.

This one is rich, coming from someone who goes on to argue for nonsensical deurbanization:

However, this is a complicated process. It will not be possible merely to unplug coal power plants, plug in solar panels, and continue with business as usual: we have built our immense modern industrial infrastructure of cities, suburbs, highways, airports, and factories to take advantage of the unique qualities and characteristics of fossil fuels.

How will we make our industrial infrastructure run off a solar grid? Urbanization. When everything is in one place, you can use public transportation and plug everything into the grid. We could replace the interstate highway system with a network of maglev lines, provided that almost everyone lived in major cities that were along those lines. We can’t do that if people move out of cities and go back to being farmers.

Here’s another weird one:

Without continued economic growth, the market economy probably can’t function long. This suggests we should run the transformational process in reverse by decommodifying land, labor, and money.

“Decommodifying money”? That’s like skinning leather or dehydrating water. The whole point of money is that it is a maximally fungible commodity. I support the idea of a land tax to provide a basic income, which could go a long way to decommodifying land and labor; but you can’t decommodify money.

The next one starts off sounding ridiculous, but then gets more reasonable:

4. Get rid of debt. Decommodifying money means letting it revert to its function as an inert medium of exchange and store of value, and reducing or eliminating the expectation that money should reproduce more of itself. This ultimately means doing away with interest and the trading or manipulation of currencies. Make investing a community-mediated process of directing capital toward projects that are of unquestioned collective benefit. The first step: cancel existing debt. Then ban derivatives, and tax and tightly regulate the buying and selling of financial instruments of all kinds.

No, we’re not going to get rid of debt. But should we regulate it more? Absolutely. A ban on derivatives is strong, but shouldn’t be out of the question; it’s not clear that even the most useful derivatives (like interest rate swaps and stock options) bring more benefit than they cause harm.

The next proposal, to reform our monetary system so that it is no longer based on debt, is one I broadly agree with, though you need to be clear about how you plan to do that. Positive Money’s plan to make central banks democratically accountable, establish full-reserve banking, and print money without trying to hide it in arcane accounting mechanisms sounds pretty good to me. Going back to the gold standard or something would be a terrible idea. The article links to a couple of “alternative money theorists”, but doesn’t explain further.

Sooner or later, we absolutely will need to restructure our macroeconomic policy so that 4% or even 2% real growth is no longer the expectation in First World countries. We will need to ensure that constant growth isn’t necessary to maintain stability and full employment.

But I believe we can do that, and in any case we do not want to stop global growth just yet—far from it. We are now on the verge of ending world hunger, and if we manage to do it, it will be from economic growth above all else.

Actually, our economic growth has been fairly ecologically sustainable lately!

JDN 2457538

Environmentalists have a reputation for being pessimists, and it is not entirely undeserved. While as Paul Samuelson said, all Street indexes have predicted nine out of the last five recessions, environmentalists have predicted more like twenty out of the last zero ecological collapses.

Some fairly serious scientists have endorsed predictions of imminent collapse that haven’t panned out, and many continue to do so. This Guardian article should be hilarious to statisticians, as it literally takes trends that are going one direction, maps them onto a theory that arbitrarily decides they’ll suddenly reverse, and then says “the theory fits the data”. This should be taught in statistics courses as a lesson in how not to fit models. More data distortion occurs in this Scientific American article, which contains the phrase “food per capita is decreasing”; well, that’s true if you just look at the last couple of years, but according to FAOSTAT, food production per capita in 2012 (the most recent data in FAOSTAT) was higher than literally every other year on record except 2011. So if you allow for even the slightest amount of random fluctuation, it’s very clear that food per capita is increasing, not decreasing.


So many people predicting imminent collapse of human civilization. And yet, for some reason, all the people predicting this go about their lives as if it weren’t happening! Why, it’s almost as if they don’t really believe it, and just say it to get attention. Nobody gets on the news by saying “Civilization is doing fine; things are mostly getting better.”

There’s a long history of these sorts of gloom and doom predictions; perhaps the paradigm example is Thomas Malthus in 1779 predicting the imminent destruction of civilization by inevitable famine—just in time for global infant mortality rates to start plummeting and economic output to surge beyond anyone’s wildest dreams.

Still, when I sat down to study this it was remarkable to me just how good the outlook is for future sustainability. The Index of Sustainable Economic Welfare was created essentially in an attempt to show how our economic growth is largely an illusion driven by our rapacious natural resource consumption, but it has since been discontinued, perhaps because it didn’t show that. Using the US as an example, I reconstructed the index as best I could from World Bank data, and here’s what came out for the period since 1990:


The top line is US GDP as normally measured. The bottom line is the ISEW. The gap between those lines expands on a linear scale, but not on a logarithmic scale; that is to say, GDP and ISEW grow at almost exactly the same rate, so ISEW is always a constant (and large) proportion of GDP. By construction it is necessarily smaller (it basically takes GDP and subtracts out from it), but the fact that it is growing at the same rate shows that our economic growth is not being driven by depletion of natural resources or the military-industrial complex; it’s being driven by real improvements in education and technology.

The Human Development Index has grown in almost every country (albeit at quite different rates) since 1990. Global poverty is the lowest it has ever been. We are living in a golden age of prosperity. This is such a golden age for our civilization, our happiness rating maxed out and now we’re getting +20% production and extra gold from every source. (Sorry, gamer in-joke.)

Now, it is said that pride cometh before a fall; so perhaps our current mind-boggling improvements in human welfare have only been purchased on borrowed time as we further drain our natural resources.

There is some cause for alarm: We’re literally running out of fish, and groundwater tables are falling rapidly. Due to poor land use deserts are expanding. Huge quantities of garbage now float in our oceans. And of course, climate change is poised to kill millions of people. Arctic ice will melt every summer starting in the next few years.

And yet, global carbon emissions have not been increasing the last few years, despite strong global economic growth. We need to be reducing emissions, not just keeping them flat (in a previous post I talked about some policies to do that); but even keeping them flat while still raising standard of living is something a lot of environmentalists kept telling us we couldn’t possibly do. Despite constant talk of “overpopulation” and a “population bomb”, population growth rates are declining and world population is projected to level off around 9 billion. Total solar power production in the US expanded by a factor of 40 in just the last 10 years.

Of course, I don’t deny that there are serious environmental problems, and we need to make policies to combat them; but we are doing that. Humanity is not mindlessly plunging headlong into an abyss; we are taking steps to improve our future.

And in fact I think environmentalists deserve a lot of credit for that! Raising awareness of environmental problems has made most Americans recognize that climate change is a serious problem. Further pressure might make them realize it should be one of our top priorities (presently most Americans do not).

And who knows, maybe the extremist doomsayers are necessary to set the Overton Window for the rest of us. I think we of the center-left (toward which reality has a well-known bias) often underestimate how much we rely upon the radical left to pull the discussion away from the radical right and make us seem more reasonable by comparison. It could well be that “climate change will kill tens of millions of people unless we act now to institute a carbon tax and build hundreds of nuclear power plants” is easier to swallow after hearing “climate change will destroy humanity unless we act now to transform global capitalism to agrarian anarcho-socialism.” Ultimately I wish people could be persuaded simply by the overwhelming scientific evidence in favor of the carbon tax/nuclear power argument, but alas, humans are simply not rational enough for that; and you must go to policy with the public you have. So maybe irrational levels of pessimism are a worthwhile corrective to the irrational levels of optimism coming from the other side, like the execrable sophistry of “in praise of fossil fuels” (yes, we know our economy was built on coal and oil—that’s the problem. We’re “rolling drunk on petroleum”; when we’re trying to quit drinking, reminding us how much we enjoy drinking is not helpful.).

But I worry that this sort of irrational pessimism carries its own risks. First there is the risk of simply giving up, succumbing to learned helplessness and deciding there’s nothing we can possibly do to save ourselves. Second is the risk that we will do something needlessly drastic (like the a radical socialist revolution) that impoverishes or even kills millions of people for no reason. The extreme fear that we are on the verge of ecological collapse could lead people to take a “by any means necessary” stance and end up with a cure worse than the disease. So far the word “ecoterrorism” has mainly been applied to what was really ecovandalism; but if we were in fact on the verge of total civilizational collapse, I can understand why someone would think quite literal terrorism was justified (actually the main reason I don’t is that I just don’t see how it could actually help). Just about anything is worth it to save humanity from destruction.

What is progress? How far have we really come?

JDN 2457534

It is a controversy that has lasted throughout the ages: Is the world getting better? Is it getting worse? Or is it more or less staying the same, changing in ways that don’t really constitute improvements or detriments?

The most obvious and indisputable change in human society over the course of history has been the advancement of technology. At one extreme there are techno-utopians, who believe that technology will solve all the world’s problems and bring about a glorious future; at the other extreme are anarcho-primitivists, who maintain that civilization, technology, and industrialization were all grave mistakes, removing us from our natural state of peace and harmony.

I am not a techno-utopian—I do not believe that technology will solve all our problems—but I am much closer to that end of the scale. Technology has solved a lot of our problems, and will continue to solve a lot more. My aim in this post is to convince you that progress is real, that things really are, on the whole, getting better.

One of the more baffling arguments against progress comes from none other than Jared Diamond, the social scientist most famous for Guns, Germs and Steel (which oddly enough is mainly about horses and goats). About seven months before I was born, Diamond wrote an essay for Discover magazine arguing quite literally that agriculture—and by extension, civilization—was a mistake.

Diamond fortunately avoids the usual argument based solely on modern hunter-gatherers, which is a selection bias if ever I heard one. Instead his main argument seems to be that paleontological evidence shows an overall decrease in health around the same time as agriculture emerged. But that’s still an endogeneity problem, albeit a subtler one. Maybe agriculture emerged as a response to famine and disease. Or maybe they were both triggered by rising populations; higher populations increase disease risk, and are also basically impossible to sustain without agriculture.

I am similarly dubious of the claim that hunter-gatherers are always peaceful and egalitarian. It does seem to be the case that herders are more violent than other cultures, as they tend to form honor cultures that punish all sleights with overwhelming violence. Even after the Industrial Revolution there were herder honor cultures—the Wild West. Yet as Steven Pinker keeps trying to tell people, the death rates due to homicide in all human cultures appear to have steadily declined for thousands of years.

I read an article just a few days ago on the Scientific American blog which included the following claim so astonishingly nonsensical it makes me wonder if the authors can even do arithmetic or read statistical tables correctly:

I keep reminding readers (see Further Reading), the evidence is overwhelming that war is a relatively recent cultural invention. War emerged toward the end of the Paleolithic era, and then only sporadically. A new study by Japanese researchers published in the Royal Society journal Biology Letters corroborates this view.

Six Japanese scholars led by Hisashi Nakao examined the remains of 2,582 hunter-gatherers who lived 12,000 to 2,800 years ago, during Japan’s so-called Jomon Period. The researchers found bashed-in skulls and other marks consistent with violent death on 23 skeletons, for a mortality rate of 0.89 percent.

That is supposed to be evidence that ancient hunter-gatherers were peaceful? The global homicide rate today is 62 homicides per million people per year. Using the worldwide life expectancy of 71 years (which is biasing against modern civilization because our life expectancy is longer), that means that the worldwide lifetime homicide rate is 4,400 homicides per million people, or 0.44%—that’s less than half the homicide rate of these “peaceful” hunter-gatherers. If you compare just against First World countries, the difference is even starker; let’s use the US, which has the highest homicide rate in the First World. Our homicide rate is 38 homicides per million people per year, which at our life expectancy of 79 years is 3,000 homicides per million people, or an overall homicide rate of 0.3%, slightly more than a third of this “peaceful” ancient culture. The most peaceful societies today—notably Japan, where these remains were found—have homicide rates as low as 3 per million people per year, which is a lifetime homicide rate of 0.02%, forty times smaller than their supposedly utopian ancestors. (Yes, all of Japan has fewer total homicides than Chicago. I’m sure it has nothing to do with their extremely strict gun control laws.) Indeed, to get a modern homicide rate as high as these hunter-gatherers, you need to go to a country like Congo, Myanmar, or the Central African Republic. To get a substantially higher homicide rate, you essentially have to be in Latin America. Honduras, the murder capital of the world, has a lifetime homicide rate of about 6.7%.

Again, how did I figure these things out? By reading basic information from publicly-available statistical tables and then doing some simple arithmetic. Apparently these paleoanthropologists couldn’t be bothered to do that, or didn’t know how to do it correctly, before they started proclaiming that human nature is peaceful and civilization is the source of violence. After an oversight as egregious as that, it feels almost petty to note that a sample size of a few thousand people from one particular region and culture isn’t sufficient data to draw such sweeping judgments or speak of “overwhelming” evidence.

Of course, in order to decide whether progress is a real phenomenon, we need a clearer idea of what we mean by progress. It would be presumptuous to use per-capita GDP, though there can be absolutely no doubt that technology and capitalism do in fact raise per-capita GDP. If we measure by inequality, modern society clearly fares much worse (our top 1% share and Gini coefficient may be higher than Classical Rome!), but that is clearly biased in the opposite direction, because the main way we have raised inequality is by raising the ceiling, not lowering the floor. Most of our really good measures (like the Human Development Index) only exist for the last few decades and can barely even be extrapolated back through the 20th century.

How about babies not dying? This is my preferred measure of a society’s value. It seems like something that should be totally uncontroversial: Babies dying is bad. All other things equal, a society is better if fewer babies die.

I suppose it doesn’t immediately follow that all things considered a society is better if fewer babies die; maybe the dying babies could be offset by some greater good. Perhaps a totalitarian society where no babies die is in fact worse than a free society in which a few babies die, or perhaps we should be prepared to accept some small amount of babies dying in order to save adults from poverty, or something like that. But without some really powerful overriding reason, babies not dying probably means your society is doing something right. (And since most ancient societies were in a state of universal poverty and quite frequently tyranny, these exceptions would only strengthen my case.)

Well, get ready for some high-yield truth bombs about infant mortality rates.

It’s hard to get good data for prehistoric cultures, but the best data we have says that infant mortality in ancient hunter-gatherer cultures was about 20-50%, with a best estimate around 30%. This is statistically indistinguishable from early agricultural societies.

Indeed, 30% seems to be the figure humanity had for most of history. Just shy of a third of all babies died for most of history.

In Medieval times, infant mortality was about 30%.

This same rate (fluctuating based on various plagues) persisted into the Enlightenment—Sweden has the best records, and their infant mortality rate in 1750 was about 30%.

The decline in infant mortality began slowly: During the Industrial Era, infant mortality was about 15% in isolated villages, but still as high as 40% in major cities due to high population densities with poor sanitation.

Even as recently as 1900, there were US cities with infant mortality rates as high as 30%, though the overall rate was more like 10%.

Most of the decline was recent and rapid: Just within the US since WW2, infant mortality fell from about 5.5% to 0.7%, though there remains a substantial disparity between White and Black people.

Globally, the infant mortality rate fell from 6.3% to 3.2% within my lifetime, and in Africa today, the region where it is worst, it is about 5.5%—or what it was in the US in the 1940s.

This precipitous decline in babies dying is the main reason ancient societies have such low life expectancies; actually once they reached adulthood they lived to be about 70 years old, not much worse than we do today. So my multiplying everything by 71 actually isn’t too far off even for ancient societies.

Let me make a graph for you here, of the approximate rate of babies dying over time from 10,000 BC to today:


Let’s zoom in on the last 250 years, where the data is much more solid:


I think you may notice something in these graphs. There is quite literally a turning point for humanity, a kink in the curve where we suddenly begin a rapid decline from an otherwise constant mortality rate.

That point occurs around or shortly before 1800—that is, it occurs at industrial capitalism. Adam Smith (not to mention Thomas Jefferson) was writing at just about the point in time when humanity made a sudden and unprecedented shift toward saving the lives of millions of babies.

So now, think about that the next time you are tempted to say that capitalism is an evil system that destroys the world; the evidence points to capitalism quite literally saving babies from dying.

How would it do so? Well, there’s that rising per-capita GDP we previously ignored, for one thing. But more important seems to be the way that industrialization and free markets support technological innovation, and in this case especially medical innovation—antibiotics and vaccines. Our higher rates of literacy and better communication, also a result of raised standard of living and improved technology, surely didn’t hurt. I’m not often in agreement with the Cato Institute, but they’re right about this one: Industrial capitalism is the chief source of human progress.

Billions of babies would have died but we saved them. So yes, I’m going to call that progress. Civilization, and in particular industrialization and free markets, have dramatically improved human life over the last few hundred years.

In a future post I’ll address one of the common retorts to this basically indisputable fact: “You’re making excuses for colonialism and imperialism!” No, I’m not. Saying that modern capitalism is a better system (not least because it saves babies) is not at all the same thing as saying that our ancestors were justified in using murder, slavery, and tyranny to force people into it.

Why is Tatooine poor?

JDN 2457513—May 4, 2016

May the Fourth be with you.

In honor of International Star Wars Day, this post is going to be about Star Wars!

[I wanted to include some images from Star Wars, but here are the copyright issues that made me decide it ultimately wasn’t a good idea.]

But this won’t be as frivolous as it may sound. Star Wars has a lot of important lessons to teach us about economics and other social sciences, and its universal popularity gives us common ground to start with. I could use Zimbabwe and Botswana as examples, and sometimes I do; but a lot of people don’t know much about Zimbabwe and Botswana. A lot more people know about Tatooine and Naboo, so sometimes it’s better to use those instead.

In fact, this post is just a small sample of a much larger work to come; several friends of mine who are social scientists in different fields (I am of course the economist, and we also have a political scientist, a historian, and a psychologist) are writing a book about this; we are going to use Star Wars as a jumping-off point to explain some real-world issues in social science.

So, my topic for today, which may end up forming the basis for a chapter of the book, is quite simple:
Why is Tatooine poor?

First, let me explain why this is such a mystery to begin with. We’re so accustomed to poverty being in the world that we expect to see it, we think of it as normal—and for most of human history, that was probably the correct attitude to have. Up until at least the Industrial Revolution, there simply was no way of raising the standard of living of most people much beyond bare subsistence. A wealthy few could sometimes live better, and most societies have had such an elite; but it was never more than about 1% of the population—and sometimes as little as 0.01%. They could have distributed wealth more evenly than they did, but there simply wasn’t that much to go around.

The “prosperous” “democracy” of Periclean Athens for example was really an aristocratic oligarchy, in which the top 1%—the ones who could read and write, and hence whose opinions we read—owned just about everything (including a fair number of the people—slavery). Their “democracy” was a voting system that only applied to a small portion of the population.

But now we live in a very different age, the Information Age, where we are absolutely basking in wealth thanks to enormous increases in productivity. Indeed, the standard of living of an Athenian philosopher was in many ways worse than that of a single mother on Welfare in the United States today; certainly the single mom has far better medicine, communication, and transportation than the philosopher, but she may even have better nutrition and higher education. Really the only things I can think of that the philosopher has more of are jewelry and real estate. The single mom also surely spends a lot more time doing housework, but a good chunk of her work is automated (dishwasher, microwave, washing machine), while the philosopher simply has slaves for that sort of thing. The smartphone in her pocket (81% of poor households in the US have a cellphone, and about half of these are smartphones) and the car in her driveway (75% of poor households in the US own at least one car) may be older models in disrepair, but they would still be unimaginable marvels to that ancient philosopher.

How is it, then, that we still have poverty in this world? Even if we argued that the poverty line in First World countries is too high because they have cars and smartphones (not an argument I agree with by the way—given our enormous productivity there’s no reason everyone shouldn’t have a car and a smartphone, and the main thing that poor people still can’t afford is housing), there are still over a billion people in the world today who live on less than $2 per day in purchasing-power-adjusted real income. That is poverty, no doubt about it. Indeed, it may in fact be a lower standard of living than most human beings had when we were hunter-gatherers. It may literally be a step downward from the Paleolithic.

Here is where Tatooine may give us some insights.

Productivity in the Star Wars universe is clearly enormous; indeed the proportional gap between Star Wars and us appears to be about the same as the proportional gap between us and hunter-gatherer times. The Death Star II had a diameter of 160 kilometers. Its cost is listed as “over 1 trillion credits”, but that’s almost meaningless because we have no idea what the exchange rate is or how the price of spacecraft varies relative to the price of other goods. (Spacecraft actually seem to be astonishingly cheap; in A New Hope it seems to be that a drink is a couple of credits while 10,000 credits is almost enough to buy an inexpensive starship. Basically their prices seem to be similar to ours for most goods, but spaceships are so cheap they are priced like cars instead of like, well, spacecraft.)

So let’s look at it another way: How much metal would it take to build such a thing, and how much would that cost in today’s money?

We actually see quite a bit of the inner structure of the Death Star II in Return of the Jedi, so I can hazard a guess that about 5% of the volume of the space station is taken up by solid material. Who knows what it’s actually made out of, but for a ballpark figure let’s assume it’s high-grade steel. The volume of a 160 km diameter sphere is 4*pi*r^3 = 4*(3.1415)*(80,000)^3 = 6.43 quadrillion cubic meters. If 5% is filled with material, that’s 320 trillion cubic meters. High-strength steel has a density of about 8000 kg/m^3, so that’s 2.6 quintillion kilograms of steel. A kilogram of high-grade steel costs about $2, so we’re looking at $5 quintillion as the total price just for the raw material of the Death Star II. That’s $5,000,000,000,000,000,000. I’m not even including the labor (droid labor, that is) and transportation costs (oh, the transportation costs!), so this is a very conservative estimate.

To get a sense of how ludicrously much money this is, the population of Coruscant is said to be over 1 trillion people, which is just about plausible for a city that covers an entire planet. The population of the entire galaxy is supposed to be about 400 quadrillion.

Suppose that instead of building the Death Star II, Emperor Palpatine had decided to give a windfall to everyone on Coruscant. How much would he have given each person (in our money)? $5 million.

Suppose instead he had offered the windfall to everyone in the galaxy? $12.50 per person. That’s 50 million worlds with an average population of 8 billion each. Instead of building the Death Star II, Palpatine could have bought the whole galaxy lunch.

Put another way, the cost I just estimated for the Death Star II is about 60 million times the current world GDP. So basically if the average world in the Empire produced as much as we currently produce on Earth, there would still not be enough to build that thing. In order to build the Death Star II in secret, it must be a small portion of the budget, maybe 5% tops. In order for only a small number of systems to revolt, the tax rates can’t be more than say 50%, if that; so total economic output on the average world in the Empire must in fact be more like 50 times what it is on Earth today, for a comparable average population. This puts their per-capita GDP somewhere around $500,000 per person per year.

So, economic output is extremely high in the Star Wars universe. Then why is Tatooine poor? If there’s enough output to make basically everyone a millionaire, why haven’t they?

In a word? Power.

Political power is of course very unequally distributed in the Star Wars universe, especially under the Empire but also even under the Old Republic and New Republic.

Core Worlds like Coruscant appear to have fairly strong centralized governments, and at least until the Emperor seized power and dissolved the Senate (as Tarkin announces in A New Hope) they also seemed to have fairly good representation in the Galactic Senate (though how you make a functioning Senate with millions of member worlds I have no idea—honestly, maybe they didn’t). As a result, Core Worlds are prosperous. Actually, even Naboo seems to be doing all right despite being in the Mid Rim, because of their strong and well-managed constitutional monarchy (“elected queen” is not as weird as it sounds—Sweden did that until the 16th century). They often talk about being a “democracy” even though they’re technically a constitutional monarchy—but the UK and Norway do the same thing with if anything less justification.

But Outer Rim Worlds like Tatooine seem to be out of reach of the central galactic government. (Oh, by the way, what hyperspace route drops you off at Tatooine if you’re going from Naboo to Coruscant? Did they take a wrong turn in addition to having engine trouble? “I knew we should have turned left at Christophsis!”) They even seem to be out of range of the monetary system (“Republic credits are no good out here,” said Watto in The Phantom Menace.), which is pretty extreme. That doesn’t usually happen—if there is a global hegemon, usually their money is better than gold. (“good as gold” isn’t strong enough—US money is better than gold, and that’s why people will accept negative real interest rates to hold onto it.) I guarantee you that if you want to buy something with a US $20 bill in Somalia or Zimbabwe, someone will take it. They might literally take it—i.e. steal it from you, and the government may not do anything to protect you—but it clearly will have value.

So, the Outer Rim worlds are extremely isolated from the central government, and therefore have their own local institutions that operate independently. Tatooine in particular appears to be controlled by the Hutts, who in turn seem to have a clan-based system of organized crime, similar to the Mafia. We never get much detail about the ins and outs of Hutt politics, but it seems pretty clear that Jabba is particularly powerful and may actually be the de facto monarch of a sizeable region or even the whole planet.

Jabba’s government is at the very far extreme of what Daron Acemoglu calls extractive regimes (I’ve been reading his tome Why Nations Fail, and while I agree with its core message, honestly it’s not very well-written or well-argued), systems of government that exist not to achieve overall prosperity or the public good, but to enrich a small elite few at the expense of everyone else. The opposite is inclusive regimes, under which power is widely shared and government exists to advance the public good. Real-world systems are usually somewhere in between; the US is still largely inclusive, but we’ve been getting more extractive over the last few decades and that’s a big problem.

Jabba himself appears to be fantastically wealthy, although even his huge luxury hover-yacht (…thing) is extremely ugly and spartan inside. I infer that he could have made it look however he wanted, and simply has baffling tastes in decor. The fact that he seems to be attracted to female humanoids is already pretty baffling, given the obvious total biological incompatibility; so Jabba is, shall we say, a weird dude. Eccentricity is quite common among despots of extractive regimes, as evidenced by Muammar Qaddafi’s ostentatious outfits, Idi Amin’s love of oranges and Kentucky Fried Chicken, and Kim Jong-Un’s fear of barbers and bond with Dennis Rodman. Maybe we would all be this eccentric if we had unlimited power, but our need to fit in with the rest of society suppresses it.

It’s difficult to put a figure on just how wealthy Jabba is, but it isn’t implausible to say that he has a million times as much as the average person on Tatooine, just as Bill Gates has a million times as much as the average person in the US. Like Qaddafi, before he was killed he probably feared that establishing more inclusive governance would only reduce his power and wealth and spread it to others, even if it did increase overall prosperity.
It’s not hard to make the figures work out so that is so. Suppose that for every 1% of the economy that is claimed by a single rentier despot, overall economic output drops by the same 1%. Then for concreteness, suppose that at optimal efficiency, the whole economy could produce $1 trillion. The amount of money that the despot can claim is determined by the portion he tries to claim, p, times the total amount that the economy will produce, which is (1-p) trillion dollars. So the despot’s wealth will be maximized when p(1-p) is maximized, which is p = 1/2; so the despot would maximize his own wealth at $250 billion if he claimed half of the economy, even though that also means that the economy produces half as much as it could. If he loosened his grip and claimed a smaller share, millions of his subjects would benefit; but he himself would lose more money than he gained. (You can also adjust these figures so that the “optimal” amount for the despot to claim is larger or smaller than half, depending on how severely the rent-seeking disrupts overall productivity.)

It’s important to note that it is not simply geography (galactography?) that makes Tatooine poor. Their sparse, hot desert may be less productive agriculturally, but that doesn’t mean that Tatooine is doomed to poverty. Indeed, today many of the world’s richest countries (such as Qatar) are in deserts, because they produce huge quantities of oil.

I doubt that oil would actually be useful in the Old Republic or the Empire, but energy more generally seems like something you’d always need. Tatooine has enormous flat desert plains and two suns, meaning that its potential to produce solar energy has to be huge. They couldn’t export the energy directly of course, but they could do so indirectly—the cheaper energy could allow them to build huge factories and produce starships at a fraction of the cost that other planets do. They could then sell these starships as exports and import water from planets where it is abundant like Naboo, instead of trying to produce their own water locally through those silly (and surely inefficient) moisture vaporators.

But Jabba likely has fought any efforts to invest in starship production, because it would require a more educated workforce that’s more likely to unionize and less likely to obey his every command. He probably has established a high tariff on water imports (or even banned them outright), so that he can maintain control by rationing the water supply. (Actually one thing I would have liked to see in the movies was Jabba being periodically doused by slaves with vats of expensive imported water. It would not only show an ostentatious display of wealth for a desert culture, but also serve the much more mundane function of keeping his sensitive gastropod skin from dangerously drying out. That’s why salt kills slugs, after all.) He also probably suppressed any attempt to establish new industries of any kind of Tatooine, fearing that with new industry could come a new balance of power.

The weirdest part to me is that the Old Republic didn’t do something about it. The Empire, okay, sure; they don’t much care about humanitarian concerns, so as long as Tatooine is paying its Imperial taxes and staying out of the Emperor’s way maybe he leaves them alone. But surely the Republic would care that this whole planet of millions if not billions of people is being oppressed by the Hutts? And surely the Republic Navy is more than a match for whatever pitiful military forces Jabba and his friends can muster, precisely because they haven’t established themselves as the shipbuilding capital of the galaxy? So why hasn’t the Republic deployed a fleet to Tatooine to unseat the Hutts and establish democracy? (It could be over pretty fast; we’ve seen that one good turbolaser can destroy Jabba’s hover-yacht—and it looks big enough to target from orbit.)

But then, we come full circle, back to the real world: Why hasn’t the US done the same thing in Zimbabwe? Would it not actually work? We sort of tried it in Libya—a lot of people died, and results are still pending I guess. But doesn’t it seem like we should be doing something?

What really happened in Greece

JDN 2457506

I said I’d get back to this issue, so here goes.

Let’s start with what is uncontroversial: Greece is in trouble.

Their per-capita GDP PPP has fallen from a peak of over $32,000 in 2007 to a trough of just over $24,000 in 2013, and only just began to recover over the last 2 years. That’s a fall of 29 log points. Put another way, the average person in Greece has about the same real income now that they had in the year 2000—a decade and a half of economic growth disappeared.

Their unemployment rate surged from about 7% in 2007 to almost 28% in 2013. It remains over 24%. That is, almost one quarter of all adults in Greece are seeking jobs and not finding them. The US has not seen an unemployment rate that high since the Great Depression.

Most shocking of all, over 40% of the population in Greece is now below the national poverty line. They define poverty as 60% of the inflation-adjusted average income in 2009, which works out to 665 Euros per person ($756 at current exchange rates) per month, or about $9000 per year. They also have an absolute poverty line, which 14% of Greeks now fall below, but only 2% did before the crash.

So now, let’s talk about why.

There’s a standard narrative you’ve probably heard many times, which goes something like this:

The Greek government spent too profligately, heaping social services on the population without the tax base to support them. Unemployment insurance was too generous; pensions were too large; it was too hard to fire workers or cut wages. Thus, work incentives were too weak, and there was no way to sustain a high GDP. But they refused to cut back on these social services, and as a result went further and further into debt until it finally became unsustainable. Now they are cutting spending and raising taxes like they needed to, and it will eventually allow them to repay their debt.

Here’s a fellow of the Cato Institute spreading this narrative on the BBC. Here’s ABC with a five bullet-point list: Pension system, benefits, early retirement, “high unemployment and work culture issues” (yes, seriously), and tax evasion. Here the Telegraph says that Greece “went on a spending spree” and “stopped paying taxes”.

That story is almost completely wrong. Almost nothing about it is true. Cato and the Telegraph got basically everything wrong. The only one ABC got right was tax evasion.

Here’s someone else arguing that Greece has a problem with corruption and failed governance; there is something to be said for this, as Greece is fairly corrupt by European standards—though hardly by world standards. For being only a generation removed from an authoritarian military junta, they’re doing quite well actually. They’re about as corrupt as a typical upper-middle income country like Libya or Botswana; and Botswana is widely regarded as the shining city on a hill of transparency as far as Sub-Saharan Africa is concerned. So corruption may have made things worse, but it can’t be the whole story.

First of all, social services in Greece were not particularly extensive compared to the rest of Europe.

Before the crisis, Greece’s government spending was about 44% of GDP.

That was about the same as Germany. It was slightly more than the UK. It was less than Denmark and France, both of which have government spending of about 50% of GDP.

Greece even tried to cut spending to pay down their debt—it didn’t work, because they simply ended up worsening the economic collapse and undermining the tax base they needed to do that.

Europe has fairly extensive social services by world standards—but that’s a major part of why it’s the First World. Even the US, despite spending far less than Europe on social services, still spends a great deal more than most countries—about 36% of GDP.

Second, if work incentives were a problem, you would not have high unemployment. People don’t seem to grasp what the word unemployment actually means, which is part of why I can’t stand it when news outlets just arbitrarily substitute “jobless” to save a couple of syllables. Unemployment does not mean simply that you don’t have a job. It means that you don’t have a job and are trying to get one.

The word you’re looking for to describe simply not having a job is nonemployment, and that’s such a rarely used term my spell-checker complains about it. Yet economists rarely use this term precisely because it doesn’t matter; a high nonemployment rate is not a symptom of a failing economy but a result of high productivity moving us toward the post-scarcity future (kicking and screaming, evidently). If the problem with Greece were that they were too lazy and they retire too early (which is basically what ABC was saying in slightly more polite language), there would be high nonemployment, but there would not be high unemployment. “High unemployment and work culture issues” is actually a contradiction.

Before the crisis, Greece had an employment-to-population ratio of 49%, meaning a nonemployment rate of 51%. If that sounds ludicrously high, you’re not accustomed to nonemployment figures. During the same time, the United States had an employment-to-population ratio of 52% and thus a nonemployment rate of 48%. So the number of people in Greece who were voluntarily choosing to drop out of work before the crisis was just slightly larger than the number in the US—and actually when you adjust for the fact that the US is full of young immigrants and Greece is full of old people (their median age is 10 years older than ours), it begins to look like it’s we Americans who are lazy. (Actually, it’s that we are studious—the US has an extremely high rate of college enrollment and the best colleges in the world. Full-time students are nonemployed, but they are certainly not unemployed.)

But Greece does have an enormously high debt, right? Yes—but it was actually not as bad before the crisis. Their government debt surged from 105% of GDP to almost 180% today. 105% of GDP is about what we have right now in the US; it’s less than what we had right after WW2. This is a little high, but really nothing to worry about, especially if you’ve incurred the debt for the right reasons. (The famous paper by Rogart and Reinhoff arguing that 90% of GDP is a horrible point of no return was literally based on math errors.)

Moreover, Ireland and Spain suffered much the same fate as Greece, despite running primary budget surpluses.

So… what did happen? If it wasn’t their profligate spending that put them in this mess, what was it?

Well, first of all, there was the Second Depression, a worldwide phenomenon triggered by the collapse of derivatives markets in the United States. (You want unsustainable debt? Try 20 to 1 leveraged CDO-squareds and one quadrillion dollars in notional value. Notional value isn’t everything, but it’s a lot.) So it’s mainly our fault, or rather the fault of our largest banks. As far as us voters, it’s “our fault” in the way that if your car gets stolen it’s “your fault” for not locking the doors and installing a LoJack. We could have regulated against this and enforced those regulations, but we didn’t. (Fortunately, Dodd-Frank looks like it might be working.)

Greece was hit particularly hard because they are highly dependent on trade, particularly in services like tourism that are highly sensitive to the business cycle. Before the crash they imported 36% of GDP and exported 23% of GDP. Now they import 35% of GDP and export 33% of GDP—but it’s a much smaller GDP. Their exports have only slightly increased while their imports have plummeted. (This has reduced their “trade deficit”, but that has always been a silly concept. I guess it’s less silly if you don’t control your own currency, but it’s still silly.)

Once the crash happened, the US had sovereign monetary policy and the wherewithal to actually use that monetary policy effectively, so we weathered the crash fairly well, all things considered. Our unemployment rate barely went over 10%. But Greece did not have sovereign monetary policy—they are tied to the Euro—and that severely limited their options for expanding the money supply as a result of the crisis. Raising spending and cutting taxes was the best thing they could do.

But the bank(st?)ers and their derivatives schemes caused the Greek debt crisis a good deal more directly than just that. Part of the condition of joining the Euro was that countries must limit their fiscal deficit to no more than 3% of GDP (which is a totally arbitrary figure with no economic basis in case you were wondering). Greece was unwilling or unable to do so, but wanted to look like they were following the rules—so they called up Goldman Sachs and got them to make some special derivatives that Greece could use to continue borrowing without looking like they were borrowing. The bank could have refused; they could have even reported it to the European Central Bank. But of course they didn’t; they got their brokerage fee, and they knew they’d sell it off to some other bank long before they had to worry about whether Greece could ever actually repay it. And then (as I said I’d get back to in a previous post) they paid off the credit rating agencies to get them to rate these newfangled securities as low-risk.

In other words, Greece is not broke; they are being robbed.

Like homeowners in the US, Greece was offered loans they couldn’t afford to pay, but the banks told them they could, because the banks had lost all incentive to actually bother with the question of whether loans can be repaid. They had “moved on”; their “financial innovation” of securitization and collateralized debt obligations meant that they could collect origination fees and brokerage fees on loans that could never possibly be repaid, then sell them off to some Greater Fool down the line who would end up actually bearing the default. As long as the system was complex enough and opaque enough, the buyers would never realize the garbage they were getting until it was too late. The entire concept of loans was thereby broken: The basic assumption that you only loan money you expect to be repaid no longer held.

And it worked, for awhile, until finally the unpayable loans tried to create more money than there was in the world, and people started demanding repayment that simply wasn’t possible. Then the whole scheme fell apart, and banks began to go under—but of course we saved them, because you’ve got to save the banks, how can you not save the banks?

Honestly I don’t even disagree with saving the banks, actually. It was probably necessary. What bothers me is that we did nothing to save everyone else. We did nothing to keep people in their homes, nothing to stop businesses from collapsing and workers losing their jobs. Precisely because of the absurd over-leveraging of the financial system, the cost to simply refinance every mortgage in America would have been less than the amount we loaned out in bank bailouts. The banks probably would have done fine anyway, but if they didn’t, so what? The banks exist to serve the people—not the other way around.

We can stop this from happening again—here in the US, in Greece, in the rest of Europe, everywhere. But in order to do that we must first understand what actually happened; we must stop blaming the victims and start blaming the perpetrators.

Free trade is not the problem. Billionaires are the problem.

JDN 2457468

One thing that really stuck out to me about the analysis of the outcome of the Michigan primary elections was that people kept talking about trade; when Bernie Sanders, a center-left social democrat, and Donald Trump, a far-right populist nationalist (and maybe even crypto-fascist) are the winners, something strange is at work. The one common element that the two victors seemed to have was their opposition to free trade agreements. And while people give many reasons to support Trump, many quite baffling, his staunch protectionism is one of the stronger voices. While Sanders is not as staunchly protectionist, he definitely has opposed many free-trade agreements.

Most of the American middle class feels as though they are running in place, working as hard as they can to stay where they are and never moving forward. The income statistics back them up on this; as you can see in this graph from FRED, real median household income in the US is actually lower than it was a decade ago; it never really did recover from the Second Depression:


As I talk to people about why they think this is, one of the biggest reasons they always give is some variant of “We keep sending our jobs to China.” There is this deep-seated intuition most Americans seem to have that the degradation of the middle class is the result of trade globalization. Bernie Sanders speaks about ending this by changes in tax policy and stronger labor regulations (which actually makes some sense); Donald Trump speaks of ending this by keeping out all those dirty foreigners (which appeals to the worst in us); but ultimately, they both are working from the narrative that free trade is the problem.

But free trade is not the problem. Like almost all economists, I support free trade. Free trade agreements might be part of the problem—but that’s because a lot of free trade agreements aren’t really about free trade. Many trade agreements, especially the infamous TRIPS accord, were primarily about restricting trade—specifically on “intellectual property” goods like patented drugs and copyrighted books. They were about expanding the monopoly power of corporations over their products so that the monopoly applied not just to the United States, but indeed to the whole world. This is the opposite of free trade and everything that it stands for. The TPP was a mixed bag, with some genuinely free-trade provisions (removing tariffs on imported cars) and some awful anti-trade provisions (making patents on drugs even stronger).

Every product we buy as an import is another product we sell as an export. This is not quite true, as the US does run a trade deficit; but our trade deficit is small compared to our overall volume of trade (which is ludicrously huge). Total US exports for 2014, the last full year we’ve fully tabulated, were $3.306 trillion—roughly the entire budget of the federal government. Total US imports for 2014 were $3.578 trillion. This makes our trade deficit $272 billion, which is 7.6% of our imports, or about 1.5% of our GDP of $18.148 trillion. So to be more precise, every 100 products we buy as imports are 92 products we sell as exports.

If we stopped making all these imports, what would happen? Well, for one thing, millions of people in China would lose their jobs and fall back into poverty. But even if you’re just looking at the US specifically, there’s no reason to think that domestic production would increase nearly as much as the volume of trade was reduced, because the whole point of trade is that it’s more efficient than domestic production alone. It is actually generous to think that by switching to autarky we’d have even half the domestic production that we’re currently buying in imports. And then of course countries we export to would retaliate, and we’d lose all those exports. The net effect of cutting ourselves off from world trade would be a loss of about $1.5 trillion in GDP—average income would drop by 8%.

Now, to be fair, there are winners and losers. Offshoring of manufacturing does destroy the manufacturing jobs that are offshored; but at least when done properly, it also creates new jobs by improved efficiency. These two effects are about the same size, so the overall effect is a small decline in the overall number of US manufacturing jobs. It’s not nearly large enough to account for the collapsing middle class.

Globalization may be one contributor to rising inequality, as may changes in technology that make some workers (software programmers) wildly more productive as they make other workers (cashiers, machinists, and soon truck drivers) obsolete. But those of us who have looked carefully at the causes of rising income inequality know that this is at best a small part of what’s really going on.

The real cause is what Bernie Sanders is always on about: The 1%. Gains in income in the US for the last few decades (roughly as long as I’ve been alive) have been concentrated in a very small minority of the population—in fact, even 1% may be too coarse. Most of the income gains have actually gone to more like the top 0.5% or top 0.25%, and the most spectacular increases in income have all been concentrated in the top 0.01%.

The story that we’ve been told—I dare say sold—by the mainstream media (which is, lets face it, owned by a handful of corporations) is that new technology has made it so that anyone who works hard (or at least anyone who is talented and works hard and gets a bit lucky) can succeed or even excel in this new tech-driven economy.

I just gave up on a piece of drivel called Bold that was seriously trying to argue that anyone with a brilliant idea can become a billionaire if they just try hard enough. (It also seemed positively gleeful about the possibility of a cyberpunk dystopia in which corporations use mass surveillance on their customers and competitors—yes, seriously, this was portrayed as a good thing.) If you must read it, please, don’t give these people any more money. Find it in a library, or find a free ebook version, or something. Instead you should give money to the people who wrote the book I switched to, Raw Deal, whose authors actually understand what’s going on here (though I maintain that the book should in fact be called Uber Capitalism).

When you look at where all the money from the tech-driven “new economy” is going, it’s not to the people who actually make things run. A typical wage for a web developer is about $35 per hour, and that’s relatively good as far as entry-level tech jobs. A typical wage for a social media intern is about $11 per hour, which is probably less than what the minimum wage ought to be. The “sharing economy” doesn’t produce outstandingly high incomes for workers, just outstandingly high income risk because you aren’t given a full-time salary. Uber has claimed that its drivers earn $90,000 per year, but in fact their real take-home pay is about $25 per hour. A typical employee at Airbnb makes $28 per hour. If you do manage to find full-time hours at those rates, you can make a middle-class salary; but that’s a big “if”. “Sharing economy”? Robert Reich has aptly renamed it the “share the crumbs economy”.

So where’s all this money going? CEOs. The CEO of Uber has net wealth of $8 billion. The CEO of Airbnb has net wealth of $3.3 billion. But they are paupers compared to the true giants of the tech industry: Larry Page of Google has $36 billion. Jeff Bezos of Amazon has $49 billion. And of course who can forget Bill Gates, founder of Microsoft, and his mind-boggling $77 billion.

Can we seriously believe that this is because their ideas were so brilliant, or because they are so talented and skilled? Uber’s “brilliant” idea is just to monetize carpooling and automate linking people up. Airbnb’s “revolutionary” concept is an app to advertise your bed-and-breakfast. At least Google invented some very impressive search algorithms, Amazon created one of the most competitive product markets in the world, and Microsoft democratized business computing. Of course, none of these would be possible without the invention of the Internet by government and university projects.

As for what these CEOs do that is so skilled? At this point they basically don’t do… anything. Any real work they did was in the past, and now it’s all delegated to other people; they just rake in money because they own things. They can manage if they want, but most of them have figured out that the best CEOs do very little while CEOS who micromanage typically fail. While I can see some argument for the idea that working hard in the past could merit you owning capital in the future, I have a very hard time seeing how being very good at programming and marketing makes you deserve to have so much money you could buy a new Ferrari every day for the rest of your life.

That’s the heuristic I like to tell people, to help them see the absolutely enormous difference between a millionaire and a billionaire: A millionaire is someone who can buy a Ferrari. A billionaire is someone who can buy a new Ferrari every day for the rest of their life. A high double-digit billionaire like Bezos or Gates could buy a new Ferrari every hour for the rest of their life. (Do the math; a Ferrari is about $250,000. Remember that they get a return on capital typically between 5% and 15% per year. With $1 billion, you get $50 to $150 million just in interest and dividends every year, and $100 million is enough to buy 365 Ferraris. As long as you don’t have several very bad years in a row on your stocks, you can keep doing this more or less forever—and that’s with only $1 billion.)

Immigration and globalization are not what is killing the American middle class. Corporatization is what’s killing the American middle class. Specifically, the use of regulatory capture to enforce monopoly power and thereby appropriate almost all the gains of new technologies into into the hands of a few dozen billionaires. Typically this is achieved through intellectual property, since corporate-owned patents basically just are monopolistic regulatory capture.

Since 1984, US real GDP per capita rose from $28,416 to $46,405 (in 2005 dollars). In that same time period, real median household income only rose from $48,664 to $53,657 (in 2014 dollars). That means that the total amount of income per person in the US rose by 49 log points (63%), while the amount of income that a typical family received only rose 10 log points (10%). If median income had risen at the same rate as per-capita GDP (and if inequality remained constant, it would), it would now be over $79,000, instead of $53,657. That is, a typical family would have $25,000 more than they actually do. The poverty line for a family of 4 is $24,300; so if you’re a family of 4 or less, the billionaires owe you a poverty line. You should have three times the poverty line, and in fact you have only two—because they took the rest.

And let me be very clear: I mean took. I mean stole, in a very real sense. This is not wealth that they created by their brilliance and hard work. This is wealth that they expropriated by exploiting people and manipulating the system in their favor. There is no way that the top 1% deserves to have as much wealth as the bottom 95% combined. They may be talented; they may work hard; but they are not that talented, and they do not work that hard. You speak of “confiscation of wealth” and you mean income taxes? No, this is the confiscation of our nation’s wealth.

Those of us who voted for Bernie Sanders voted for someone who is trying to stop it.

Those of you who voted for Donald Trump? Congratulations on supporting someone who epitomizes it.