growth

Scalability and inequality

pnrj core principles, inequality, mathematical models, statistics , , , , , , , , , , , , , ,

May 15 JDN 2459715

Why are some molecules (e.g. DNA) billions of times larger than others (e.g. H2O), but all atoms are within a much narrower range of sizes (only a few hundred)?

Why are some animals (e.g. elephants) millions of times as heavy as other (e.g. mice), but their cells are basically the same size?

Why does capital income vary so much more (factors of thousands or millions) than wages (factors of tens or hundreds)?

These three questions turn out to have much the same answer: Scalability.

Atoms are not very scalable: Adding another proton to a nucleus causes interactions with all the other protons, which makes the whole atom unstable after a hundred protons or so. But molecules, particularly organic polymers such as DNA, are tremendously scalable: You can add another piece to one end without affecting anything else in the molecule, and keep on doing that more or less forever.

Cells are not very scalable: Even with the aid of active transport mechanisms and complex cellular machinery, a cell’s functionality is still very much limited by its surface area. But animals are tremendously scalable: The same exponential growth that got you from a zygote to a mouse only needs to continue a couple years longer and it’ll get you all the way to an elephant. (A baby elephant, anyway; an adult will require a dozen or so years—remarkably comparable to humans, in fact.)

Labor income is not very scalable: There are only so many hours in a day, and the more hours you work the less productive you’ll be in each additional hour. But capital income is perfectly scalable: We can add another digit to that brokerage account with nothing more than a few milliseconds of electronic pulses, and keep doing that basically forever (due to the way integer storage works, above 2^63 it would require special coding, but it can be done; and seeing as that’s over 9 quintillion, it’s not likely to be a problem any time soon—though I am vaguely tempted to write a short story about an interplanetary corporation that gets thrown into turmoil by an integer overflow error).

This isn’t just an effect of our accounting either. Capital is scalable in a way that labor is not. When your contribution to production is owning a factory, there’s really nothing to stop you from owning another factory, and then another, and another. But when your contribution is working at a factory, you can only work so hard for so many hours.

When a phenomenon is highly scalable, it can take on a wide range of outcomes—as we see in molecules, animals, and capital income. When it’s not, it will only take on a narrow range of outcomes—as we see in atoms, cells, and labor income.

Exponential growth is also part of the story here: Animals certainly grow exponentially, and so can capital when invested; even some polymers function that way (e.g. under polymerase chain reaction). But I think the scalability is actually more important: Growing rapidly isn’t so useful if you’re going to immediately be blocked by a scalability constraint. (This actually relates to the difference between r- and K- evolutionary strategies, and offers further insight into the differences between mice and elephants.) Conversely, even if you grow slowly, given enough time, you’ll reach whatever constraint you’re up against.

Indeed, we can even say something about the probability distribution we are likely to get from random processes that are scalable or non-scalable.

A non-scalable random process will generally converge toward the familiar normal distribution, a “bell curve”:

[Image from Wikipedia: By Inductiveload – self-made, Mathematica, Inkscape, Public Domain, https://commons.wikimedia.org/w/index.php?curid=3817954]

The normal distribution has most of its weight near the middle; most of the population ends up near there. This is clearly the case for labor income: Most people are middle class, while some are poor and a few are rich.

But a scalable random process will typically converge toward quite a different distribution, a Pareto distribution:

[Image from Wikipedia: By Danvildanvil – Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=31096324]

A Pareto distribution has most of its weight near zero, but covers an extremely wide range. Indeed it is what we call fat tailed, meaning that really extreme events occur often enough to have a meaningful effect on the average. A Pareto distribution has most of the people at the bottom, but the ones at the top are really on top.

And indeed, that’s exactly how capital income works: Most people have little or no capital income (indeed only about half of Americans and only a third(!) of Brits own any stocks at all), while a handful of hectobillionaires make utterly ludicrous amounts of money literally in their sleep.

Indeed, it turns out that income in general is pretty close to distributed normally (or maybe lognormally) for most of the income range, and then becomes very much Pareto at the top—where nearly all the income is capital income.

This fundamental difference in scalability between capital and labor underlies much of what makes income inequality so difficult to fight. Capital is scalable, and begets more capital. Labor is non-scalable, and we only have to much to give.

It would require a radically different system of capital ownership to really eliminate this gap—and, well, that’s been tried, and so far, it hasn’t worked out so well. Our best option is probably to let people continue to own whatever amounts of capital, and then tax the proceeds in order to redistribute the resulting income. That certainly has its own downsides, but they seem to be a lot more manageable than either unfettered anarcho-capitalism or totalitarian communism.

The alienation of labor

pnrj core principles, critique of neoclassical economics, development economics, ethics, futurism, inequality, public policy, science and academia , , , , , , , ,

Apr 10 JDN 2459680

Marx famously wrote that capitalism “alienates labor”. Much ink has been spilled over interpreting exactly what he meant by that, but I think the most useful and charitable reading goes something like the following:

When you make something for yourself, it feels fully yours. The effort you put into it feels valuable and meaningful. Whether you’re building a house to live in it or just cooking an omelet to eat it, your labor is directly reflected in your rewards, and you have a clear sense of purpose and value in what you are doing.

But when you make something for an employer, it feels like theirs, not yours. You have been instructed by your superiors to make a certain thing a certain way, for reasons you may or may not understand (and may or may not even agree with). Once you deliver the product—which may be as concrete as a carburetor or as abstract as an accounting report—you will likely never see it again; it will be used or not by someone else somewhere else whom you may not even ever get the chance to meet. Such labor feels tedious, effortful, exhausting—and also often empty, pointless, and meaningless.

On that reading, Marx isn’t wrong. There really is something to this. (I don’t know if this is really Marx’s intended meaning or not, and really I don’t much care—this is a valid thing and we should be addressing it, whether Marx meant to or not.)

There is a little parable about this, which I can’t quite remember where I heard:

Three men are moving heavy stones from one place to another. A traveler passes by and asks them, “What are you doing?”

The first man sighs and says, “We do whatever the boss tells us to do.”

The second man shrugs and says, “We pick up the rocks here, we move them over there.”

The third man smiles and says, “We’re building a cathedral.”

The three answers are quite different—yet all three men may be telling the truth as they see it.

The first man is fully alienated from his labor: he does whatever the boss says, following instructions that he considers arbitrary and mechanical. The second man is partially alienated: he knows the mechanics of what he is trying to accomplish, which may allow him to improve efficiency in some way (e.g. devise better ways to transport the rocks faster or with less effort), but he doesn’t understand the purpose behind it all, so ultimately his work still feels meaningless. But the third man is not alienated: he understands the purpose of his work, and he values that purpose. He sees that what he is doing is contributing to a greater whole that he considers worthwhile. It’s not hard to imagine that the third man will be the happiest, and the first will be the unhappiest.

There really is something about the capitalist wage-labor structure that can easily feed into this sort of alienation. You get a job because you need money to live, not because you necessarily value whatever the job does. You do as you are told so that you can keep your job and continue to get paid.

Some jobs are much more alienating than others. Most teachers and nurses see their work as a vocation, even a calling—their work has deep meaning for them and they value its purpose. At the other extreme there are corporate lawyers and derivatives traders, who must on some level understand that their work contributes almost nothing to the world (may in fact actively cause harm), but they continue to do the work because it pays them very well.

But there are many jobs in between which can be experienced both ways. Working in retail can be an agonizing grind where you must face a grueling gauntlet of ungrateful customers day in and day out—or it can be a way to participate in your local community and help your neighbors get the things they need. Working in manufacturing can be a mechanical process of inserting tab A into slot B and screwing it into place over, and over, and over again—or it can be a chance to create something, convert raw materials into something useful and valuable that other people can cherish.

And while individual perspective and framing surely matter here—those three men were all working in the same quarry, building the same cathedral—there is also an important objective component as well. Working as an artisan is not as alienating as working on an assembly line. Hosting a tent at a farmer’s market is not as alienating as working the register at Walmart. Tutoring an individual student is more purposeful than recording video lectures for a MOOC. Running a quirky local book store is more fulfilling than stocking shelves at Barnes & Noble.

Moreover, capitalism really does seem to push us more toward the alienating side of the spectrum. Assembly lines are far more efficient than artisans, so we make most of our products on assembly lines. Buying food at Walmart is cheaper and more convenient than at farmer’s markets, so more people shop there. Hiring one video lecturer for 10,000 students is a lot cheaper than paying 100 in-person lecturers, let alone 1,000 private tutors. And Barnes & Noble doesn’t drive out local book stores by some nefarious means: It just provides better service at lower prices. If you want a specific book for a good price right now, you’re much more likely to find it at Barnes & Noble. (And even more likely to find it on Amazon.)

Finding meaning in your work is very important for human happiness. Indeed, along with health and social relationships, it’s one of the biggest determinants of happiness. For most people in First World countries, it seems to be more important than income (though income certainly does matter).

Yet the increased efficiency and productivity upon which our modern standard of living depends seems to be based upon a system of production—in a word, capitalism—that systematically alienates us from meaning in our work.

This puts us in a dilemma: Do we keep things as they are, accepting that we will feel an increasing sense of alienation and ennui as our wealth continues to grow and we get ever-fancier toys to occupy our meaningless lives? Or do we turn back the clock, returning to a world where work once again has meaning, but at the cost of making everyone poorer—and some people desperately so?

Well, first of all, to some extent this is a false dichotomy. There are jobs that are highly meaningful but also highly productive, such as teaching and engineering. (Even recording a video lecture is a lot more fulfilling than plenty of jobs out there.) We could try to direct more people into jobs like these. There are jobs that are neither particularly fulfilling nor especially productive, like driving trucks, washing floors and waiting tables. We could redouble our efforts into automating such jobs out of existence. There are meaningless jobs that are lucrative only by rent-seeking, producing little or no genuine value, like the aforementioned corporate lawyers and derivatives traders. These, quite frankly, could simply be banned—or if there is some need for them in particular circumstances (I guess someone should defend corporations when they get sued; but they far more often go unjustly unpunished than unjustly punished!), strictly regulated and their numbers and pay rates curtailed.

Nevertheless, we still have decisions to make, as a society, about what we value most. Do we want a world of cheap, mostly adequate education, that feels alienating even to the people producing it? Then MOOCs are clearly the way to go; pennies on the dollar for education that could well be half as good! Or do we want a world of high-quality, personalized teaching, by highly-qualified academics, that will help students learn better and feel more fulfilling for the teachers? More pointedly—are we willing to pay for that higher-quality education, knowing it will be more expensive?

Moreover, in the First World at least, our standard of living is… pretty high already? Like seriously, what do we really need that we don’t already have? We could always imagine more, of course—a bigger house, a nicer car, dining at fancier restaurants, and so on. But most of us have roofs over our heads, clothes on our backs, and food on our tables.

Economic growth has done amazing things for us—but maybe we’re kind of… done? Maybe we don’t need to keep growing like this, and should start redirecting our efforts away from greater efficiency and toward greater fulfillment. Maybe there are economic possibilities we haven’t been considering.

Note that I specifically mean First World countries here. In Third World countries it’s totally different—they need growth, lots of it, as fast as possible. Fulfillment at work ends up being a pretty low priority when your children are starving and dying of malaria.

But then, you may wonder: If we stop buying cheap plastic toys to fill the emptiness in our hearts, won’t that throw all those Chinese factory workers back into poverty?

In the system as it stands? Yes, that’s a real concern. A sudden drop in consumption spending in general, or even imports in particular, in First World countries could be economically devastating for millions of people in Third World countries.

But there’s nothing inherent about this arrangement. There are less-alienating ways of working that can still provide a decent standard of living, and there’s no fundamental reason why people around the world couldn’t all be doing them. If they aren’t, it’s in the short run because they don’t have the education or the physical machinery—and in the long run it’s usually because their government is corrupt and authoritarian. A functional democratic government can get you capital and education remarkably fast—it certainly did in South Korea, Taiwan, and Japan.

Automation is clearly a big part of the answer here. Many people in the First World seem to suspect that our way of life depends upon the exploited labor of impoverished people in Third World countries, but this is largely untrue. Most of that work could be done by robots and highly-skilled technicians and engineers; it just isn’t because that would cost more. Yes, that higher cost would mean some reduction in standard of living—but it wouldn’t be nearly as dramatic as many people seem to think. We would have slightly smaller houses and slightly older cars and slightly slower laptops, but we’d still have houses and cars and laptops.

So I don’t think we should all cast off our worldly possessions just yet. Whether or not it would make us better off, it would cause great harm to countries that depend on their exports to us. But in the long run, I do think we should be working to achieve a future for humanity that isn’t so obsessed with efficiency and growth, and instead tries to provide both a decent standard of living and a life of meaning and purpose.

If you stop destroying jobs, you will stop economic growth

pnrj core principles, development economics, futurism, inequality, macroeconomics, Uncategorized , , , , , ,

Dec 30 JDN 2458483

One thing that endlessly frustrates me (and probably most economists) about the public conversation on economics is the fact that people seem to think “destroying jobs” is bad. Indeed, not simply a downside to be weighed, but a knock-down argument: If something “destroys jobs”, that’s a sufficient reason to opposite it, whether it be a new technology, an environmental regulation, or a trade agreement. So then we tie ourselves up in knots trying to argue that the policy won’t really destroy jobs, or it will create more than it destroys—but it will destroy jobs, and we don’t actually know how many it will create.

Destroying jobs is good. Destroying jobs is the only way that economic growth ever happens.

I realize I’m probably fighting an uphill battle here, so let me start at the beginning: What do I mean when I say “destroying jobs”? What exactly is a “job”, anyway?
At its most basic level, a job is something that needs done. It’s a task that someone wants to perform, but is unwilling or unable to perform on their own, and is therefore willing to give up some of what they have in order to get someone else to do it for them.

Capitalism has blinded us to this basic reality. We have become so accustomed to getting the vast majority of our goods via jobs that we come to think of having a job as something intrinsically valuable. It is not. Working at a job is a downside. It is something to be minimized.

There is a kind of work that is valuable: Creative, fulfilling work that you do for the joy of it. This is what we are talking about when we refer to something as a “vocation” or even a “hobby”. Whether it’s building ships in bottles, molding things from polymer clay, or coding video games for your friends, there is a lot of work in the world that has intrinsic value. But these things aren’t jobs. No one will pay them to do these things—or need to; you’ll do them anyway.

The value we get from jobs is actually obtained from goods: Everything from houses to underwear to televisions to antibiotics. The reason you want to have a job is that you want the money from that job to give you access to markets for all the goods that are actually valuable to you.

Jobs are the input—the cost—of producing all of those goods. The more jobs it takes to make a good, the more expensive that good is. This is not a rule-of-thumb statement of what usually or typically occurs. This is the most fundamental definition of cost. The more people you have to pay to do something, the harder it was to do that thing. If you can do it with fewer people (or the same people working with less effort), you should. Money is the approximation; money is the rule-of-thumb. We use money as an accounting mechanism to keep track of how much effort was put into accomplishing something. But what really matters is the “sweat of our laborers, the genius of our scientists, the hopes of our children”.

Economic growth means that we produce more goods at less cost.

That is, we produce more goods with fewer jobs.

All new technologies destroy jobs—if they are worth anything at all. The entire purpose of a new technology is to let us do things faster, better, easier—to let us have more things with less work.

This has been true since at least the dawn of the Industrial Revolution.

The Luddites weren’t wrong that automated looms would destroy weaver jobs. They were wrong to think that this was a bad thing. Of course, they weren’t crazy. Their livelihoods were genuinely in jeopardy. And this brings me to what the conversation should be about when we instead waste time talking about “destroying jobs”.

Here’s a slogan for you: Kill the jobs. Save the workers.

We shouldn’t be disappointed to lose a job; we should think of that as an opportunity to give a worker a better life. For however many years, you’ve been toiling to do this thing; well, now it’s done. As a civilization, we have finally accomplished the task that you and so many others set out to do. We have not “replaced you with a machine”; we have built a machine that now frees you from your toil and allows you to do something better with your life. Your purpose in life wasn’t to be a weaver or a coal miner or a steelworker; it was to be a friend and a lover and a parent. You can now get more chance to do the things that really matter because you won’t have to spend all your time working some job.

When we replaced weavers with looms, plows with combine harvesters, computers-the-people with computers-the-machines (a transformation now so complete most people don’t even seem to know that the word used to refer to a person—the award-winning film Hidden Figures is about computers-the-people), tollbooth operators with automated transponders—all these things meant that the job was now done. For the first time in the history of human civilization, nobody had to do that job anymore. Think of how miserable life is for someone pushing a plow or sitting in a tollbooth for 10 hours a day; aren’t you glad we don’t have to do that anymore (in this country, anyway)?

And the same will be true if we replace radiologists with AI diagnostic algorithms (we will; it’s probably not even 10 years away), or truckers with automated trucks (we will; I give it 20 years), or cognitive therapists with conversational AI (we might, but I’m more skeptical), or construction workers with building-printers (we probably won’t anytime soon, but it would be nice), the same principle applies: This is something we’ve finally accomplished as a civilization. We can check off the box on our to-do list and move on to the next thing.

But we shouldn’t simply throw away the people who were working on that noble task as if they were garbage. Their job is done—they did it well, and they should be rewarded. Yes, of course, the people responsible for performing the automation should be rewarded: The engineers, programmers, technicians. But also the people who were doing the task in the meantime, making sure that the work got done while those other people were spending all that time getting the machine to work: They should be rewarded too.

Losing your job to a machine should be the best thing that ever happened to you. You should still get to receive most of your income, and also get the chance to find a new job or retire.

How can such a thing be economically feasible? That’s the whole point: The machines are more efficient. We have more stuff now. That’s what economic growth is. So there’s literally no reason we can’t give every single person in the world at least as much wealth as we did before—there is now more wealth.

There’s a subtler argument against this, which is that diverting some of the surplus of automation to the workers who get displaced would reduce the incentives to create automation. This is true, so far as it goes. But you know what else reduces the incentives to create automation? Political opposition. Luddism. Naive populism. Trade protectionism.

Moreover, these forces are clearly more powerful, because they attack the opportunity to innovate: Trade protection can make it illegal to share knowledge with other countries. Luddist policies can make it impossible to automate a factory.

Whereas, sharing the wealth would only reduce the incentive to create automation; it would still be possible, simply less lucrative. Instead of making $40 billion, you’d only make $10 billion—you poor thing. I sincerely doubt there is a single human being on Earth with a meaningful contribution to make to humanity who would make that contribution if they were paid $40 billion but not if they were only paid $10 billion.

This is something that could be required by regulation, or negotiated into labor contracts. If your job is eliminated by automation, for the next year you get laid off but still paid your full salary. Then, your salary is converted into shares in the company that are projected to provide at least 50% of your previous salary in dividends—forever. By that time, you should be able to find another job, and as long as it pays at least half of what your old job did, you will be better off. Or, you can retire, and live off that 50% plus whatever else you were getting as a pension.

From the perspective of the employer, this does make automation a bit less attractive: The up-front cost in the first year has been increased by everyone’s salary, and the long-term cost has been increased by all those dividends. Would this reduce the number of jobs that get automated, relative to some imaginary ideal? Sure. But we don’t live in that ideal world anyway; plenty of other obstacles to innovation were in the way, and by solving the political conflict, this will remove as many as it adds. We might actually end up with more automation this way; and even if we don’t, we will certainly end up with less political conflict as well as less wealth and income inequality.

Fighting the zero-sum paradigm

pnrj development economics, ethics, heuristics and biases, inequality, public policy, tribal paradigm , , , , , , , , , , , ,

Dec 2 JDN 2458455

It should be obvious at this point that there are deep, perhaps even fundamental, divides between the attitudes and beliefs of different political factions. It can be very difficult to even understand, much less sympathize, with the concerns of people who are racist, misogynistic, homophobic, xenophobic, and authoritarian.
But at the end of the day we still have to live in the same country as these people, so we’d better try to understand how they think. And maybe, just maybe, that understanding will help us to change them.

There is one fundamental belief system that I believe underlies almost all forms of extremism. Right now right-wing extremism is the major threat to global democracy, but left-wing extremism subscribes to the same core paradigm (consistent with Horseshoe Theory).

I think the best term for this is the zero-sum paradigm. The idea is quite simple: There is a certain amount of valuable “stuff” (money, goods, land, status, happiness) in the world, and the only political question is who gets how much.

Thus, any improvement in anyone’s life must, necessarily, come at someone else’s expense. If I become richer, you become poorer. If I become stronger, you become weaker. Any improvement in my standard of living is a threat to your status.

If this belief were true, it would justify, or at least rationalize, all sorts of destructive behavior: Any harm I can inflict upon someone else will yield a benefit for me, by some fundamental conservation law of the universe.

Viewed in this light, beliefs like patriarchy and White supremacy suddenly become much more comprehensible: Why would you want to spend so much effort hurting women and Black people? Because, by the fundamental law of zero-sum, any harm to women is a benefit to men, and any harm to Black people is a benefit to White people. The world is made of “teams”, and you are fighting for your own against all the others.

And I can even see why such an attitude is seductive: It’s simple and easy to understand. And there are many circumstances where it can be approximately true.
When you are bargaining with your boss over a wage, one dollar more for you is one dollar less for your boss.
When your factory outsources production to China, one more job for China is one less job for you.

When we vote for President, one more vote for the Democrats is one less vote for the Republicans.

But of course the world is not actually zero-sum. Both you and your boss would be worse off if your job were to disappear; they need your work and you need their money. For every job that is outsourced to China, another job is created in the United States. And democracy itself is such a profound public good that it basically overwhelms all others.

In fact, it is precisely when a system is running well that the zero-sum paradigm becomes closest to true. In the space of all possible allocations, it is the efficient ones that behave in something like a zero-sum way, because when the system is efficient, we are already producing as much as we can.

This may be part of why populist extremism always seems to assert itself during periods of global prosperity, as in the 1920s and today: It is precisely when the world is running at its full capacity that it feels most like someone else’s gain must come at your loss.

Yet if we live according to the zero-sum paradigm, we will rapidly destroy the prosperity that made that paradigm seem plausible. A trade war between the US and China would put millions out of work in both countries. A real war with conventional weapons would kill millions. A nuclear war would kill billions.

This is what we must convey: We must show people just how good things are right now.

This is not an easy task; when people want to believe the world is falling apart, they can very easily find excuses to do so. You can point to the statistics showing a global decline in homicide, but one dramatic shooting on the TV news will wipe that all away. You can show the worldwide rise in real incomes across the board, but that won’t console someone who just lost their job and blames outsourcing or immigrants.

Indeed, many people will be offended by the attempt—the mere suggestion that the world is actually in very good shape and overall getting better will be perceived as an attempt to deny or dismiss the problems and injustices that still exist.

I encounter this especially from the left: Simply pointing out the objective fact that the wealth gap between White and Black households is slowly closing is often taken as a claim that racism no longer exists or doesn’t matter. Congratulating the meteoric rise in women’s empowerment around the world is often paradoxically viewed as dismissing feminism instead of lauding it.

I think the best case against progress can be made with regard to global climate change: Carbon emissions are not falling nearly fast enough, and the world is getting closer to the brink of truly catastrophic ecological damage. Yet even here the zero-sum paradigm is clearly holding us back; workers in fossil-fuel industries think that the only way to reduce carbon emissions is to make their families suffer, but that’s simply not true. We can make them better off too.

Talking about injustice feels righteous. Talking about progress doesn’t. Yet I think what the world needs most right now—the one thing that might actually pull us back from the brink of fascism or even war—is people talking about progress.

If people think that the world is full of failure and suffering and injustice, they will want to tear down the whole system and start over with something else. In a world that is largely democratic, that very likely means switching to authoritarianism. If people think that this is as bad as it gets, they will be willing to accept or even instigate violence in order to change to almost anything else.

But if people realize that in fact the world is full of success and prosperity and progress, that things are right now quite literally better in almost every way for almost every person in almost every country than they were a hundred—or even fifty—years ago, they will not be so eager to tear the system down and start anew. Centrism is often mocked (partly because it is confused with false equivalence), but in a world where life is improving this quickly for this many people, “stay the course” sounds awfully attractive to me.
That doesn’t mean we should ignore the real problems and injustices that still exist, of course. There is still a great deal of progress left to be made.  But I believe we are more likely to make progress if we acknowledge and seek to continue the progress we have already made, than if we allow ourselves to fall into despair as if that progress did not exist.

Will China’s growth continue forever?

pnrj current events, development economics , , , , , , , , ,

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.

What we lose by aggregating

pnrj core principles, critique of neoclassical economics, inequality, macroeconomics , , , , , , , , , , , , , , ,

Jun 25, JDN 2457930

One of the central premises of current neoclassical macroeconomics is the representative agent: Rather than trying to keep track of all the thousands of firms, millions of people, and billions of goods and in a national economy, we aggregate everything up into a single worker/consumer and a single firm producing and consuming a single commodity.

This sometimes goes under the baffling misnomer of microfoundations, which would seem to suggest that it carries detailed information about the microeconomic behavior underlying it; in fact what this means is that the large-scale behavior is determined by some sort of (perfectly) rational optimization process as if there were just one person running the entire economy optimally.

First of all, let me say that some degree of aggregation is obviously necessary. Literally keeping track of every single transaction by every single person in an entire economy would require absurd amounts of data and calculation. We might have enough computing power to theoretically try this nowadays, but then again we might not—and in any case such a model would very rapidly lose sight of the forest for the trees.

But it is also clearly possible to aggregate too much, and most economists don’t seem to appreciate this. They cite a couple of famous theorems (like the Gorman Aggregation Theorem) involving perfectly-competitive firms and perfectly-rational identical consumers that offer a thin veneer of justification for aggregating everything into one, and then go on with their work as if this meant everything were fine.

What’s wrong with such an approach?

Well, first of all, a representative agent model can’t talk about inequality at all. It’s not even that a representative agent model says inequality is good, or not a problem; it lacks the capacity to even formulate the concept. Trying to talk about income or wealth inequality in a representative agent model would be like trying to decide whether your left hand is richer than your right hand.

It’s also nearly impossible to talk about poverty in a representative agent model; the best you can do is talk about a country’s overall level of development, and assume (not without reason) that a country with a per-capita GDP of $1,000 probably has a lot more poverty than a country with a per-capita GDP of $50,000. But two countries with the same per-capita GDP can have very different poverty rates—and indeed, the cynic in me wonders if the reason we’re reluctant to use inequality-adjusted measures of development is precisely that many American economists fear where this might put the US in the rankings. The Human Development Index was a step in the right direction because it includes things other than money (and as a result Saudi Arabia looks much worse and Cuba much better), but it still aggregates and averages everything, so as long as your rich people are doing well enough they can compensate for how badly your poor people are doing.

Nor can you talk about oligopoly in a representative agent model, as there is always only one firm, which for some reason chooses to act as if it were facing competition instead of rationally behaving as a monopoly. (This is not quite as nonsensical as it sounds, as the aggregation actually does kind of work if there truly are so many firms that they are all forced down to zero profit by fierce competition—but then again, what market is actually like that?) There is no market share, no market power; all are at the mercy of the One True Price.

You can still talk about externalities, sort of; but in order to do so you have to set up this weird doublethink phenomenon where the representative consumer keeps polluting their backyard and then can’t figure out why their backyard is so darn polluted. (I suppose humans do seem to behave like that sometimes; but wait, I thought you believed people were rational?) I think this probably confuses many an undergrad, in fact; the models we teach them about externalities generally use this baffling assumption that people consider one set of costs when making their decisions and then bear a different set of costs from the outcome. If you can conceptualize the idea that we’re aggregating across people and thinking “as if” there were a representative agent, you can ultimately make sense of this; but I think a lot of students get really confused by it.

Indeed, what can you talk about with a representative agent model? Economic growth and business cycles. That’s… about it. These are not minor issues, of course; indeed, as Robert Lucas famously said:

The consequences for human welfare involved in questions like these [on economic growth] are simply staggering: once one starts to think about them, it is hard to think about anything else.

I certainly do think that studying economic growth and business cycles should be among the top priorities of macroeconomics. But then, I also think that poverty and inequality should be among the top priorities, and they haven’t been—perhaps because the obsession with representative agent models make that basically impossible.

I want to be constructive here; I appreciate that aggregating makes things much easier. So what could we do to include some heterogeneity without too much cost in complexity?

Here’s one: How about we have p firms, making q types of goods, sold to n consumers? If you want you can start by setting all these numbers equal to 2; simply going from 1 to 2 has an enormous effect, as it allows you to at least say something about inequality. Getting them as high as 100 or even 1000 still shouldn’t be a problem for computing the model on an ordinary laptop. (There are “econophysicists” who like to use these sorts of agent-based models, but so far very few economists take them seriously. Partly that is justified by their lack of foundational knowledge in economics—the arrogance of physicists taking on a new field is legendary—but partly it is also interdepartmental turf war, as economists don’t like the idea of physicists treading on their sacred ground.) One thing that really baffles me about this is that economists routinely use computers to solve models that can’t be calculated by hand, but it never seems to occur to them that they could have started at the beginning planning to make the model solvable only by computer, and that would spare them from making the sort of heroic assumptions they are accustomed to making—assumptions that only made sense when they were used to make a model solvable that otherwise wouldn’t be.

You could also assign a probability distribution over incomes; that can get messy quickly, but we actually are fortunate that the constant relative risk aversion utility function and the Pareto distribution over incomes seem to fit the data quite well—as the product of those two things is integrable by hand. As long as you can model how your policy affects this distribution without making that integral impossible (which is surprisingly tricky), you can aggregate over utility instead of over income, which is a lot more reasonable as a measure of welfare.

And really I’m only scratching the surface here. There are a vast array of possible new approaches that would allow us to extend macroeconomic models to cover heterogeneity; the real problem is an apparent lack of will in the community to make such an attempt. Most economists still seem very happy with representative agent models, and reluctant to consider anything else—often arguing, in fact, that anything else would make the model less microfounded when plainly the opposite is the case.

 

Should we give up on growth?

pnrj core principles, development economics, ethics, futurism, macroeconomics, public policy , , , , , , , , , , , , , , , , , , , ,

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:

Solow_growth

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

Solow_capital

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

Solow_logGDP

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.

How Reagan ruined America

pnrj inequality, macroeconomics, public policy , , , , , , , , , , , , , , , , ,

JDN 2457408

Or maybe it’s Ford?

The title is intentionally hyperbolic; despite the best efforts of Reagan and his ilk, America does yet survive. Indeed, as Obama aptly pointed out in his recent State of the Union, we appear to be on an upward trajectory once more. And as you’ll see in a moment, many of the turning points actually seem to be Gerald Ford, though it was under Reagan that the trends really gained steam.

But I think it’s quite remarkable just how much damage Reaganomics did to the economy and society of the United States. It’s actually a turning point in all sorts of different economic policy measures; things were going well from the 1940s to the 1970s, and then suddenly in the 1980s they take a turn for the worse.

The clearest example is inequality. From the World Top Incomes Database, here’s the graph I featured on my Patreon page of income shares in the United States:

top_income_shares_pretty.png

Inequality was really bad during the Roaring Twenties (no surprise to anyone who has read The Great Gatsby), then after the turmoil of the Great Depression, the New Deal, and World War 2, inequality was reduced to a much lower level.

During this period, what I like to call the Golden Age of American Capitalism:

Instead of almost 50% in the 1920s, the top 10% now received about 33%.

Instead of over 20% in the 1920s, the top 1% now received about 10%.

Instead of almost 5% in the 1920s, the top 0.01% now received about 1%.

This pattern continued to hold, remarkably stable, until 1980. Then, it completely unraveled. Income shares of the top brackets rose, and continued to rise, ever since (fluctuating with the stock market of course). Now, we’re basically back right where we were in the 1920s; the top 10% gets 50%, the top 1% gets 20%, and the top 0.01% gets 4%.

Not coincidentally, we see the same pattern if we look at the ratio of CEO pay to average worker pay, as shown here in a graph from the Economic Policy Institute:

Snapshot_CEO_pay_main

Up until 1980, the ratio in pay between CEOs and their average workers was steady around 20 to 1. From that point forward, it began to rise—and rise, and rise. It continued to rise under every Presidential administration, and actually hit its peak in 2000, under Bill Clinton, at an astonishing 411 to 1 ratio. In the 2000s it fell to about 250 to 1 (hurray?), and has slightly declined since then to about 230 to 1.

By either measure, we can see a clear turning point in US inequality—it was low and stable, until Reagan came along, when it began to explode.

Part of this no doubt is the sudden shift in tax rates. The top marginal tax rates on income were over 90% from WW2 to the 1960s; then JFK reduced them to 70%, which is probably close to the revenue-maximizing rate. There they stayed, until—you know the refrain—along came Reagan, and by the end of his administration he had dropped the top marginal rate to 28%. It then was brought back up to about 35%, where it has basically remained, sometimes getting as high as 40%.

US_income_tax_rates

Another striking example is the ratio between worker productivity and wages. The Economic Policy Institute has a very detailed analysis of this, but I think their graph by itself is quite striking:

productivity_wages

Starting around the 1970s, and then rapidly accelerating from the 1980s onward, we see a decoupling of productivity from wages. Productivity has continued to rise at more or less the same rate, but wages flatten out completely, even falling for part of the period.

For those who still somehow think Republicans are fiscally conservative, take a look at this graph of the US national debt:

US_federal_debt

We were at a comfortable 30-40% of GDP range, actually slowly decreasing—until Reagan. We got back on track to reduce the debt during the mid-1990s—under Bill Clinton—and then went back to raising it again once George W. Bush got in office. It ballooned as a result of the Great Recession, and for the past few years Obama has been trying to bring it back under control.

Of course, national debt is not nearly as bad as most people imagine it to be. If Reagan had only raised the national debt in order to stop unemployment, that would have been fine—but he did not.

Unemployment had never been above 10% since World War 2 (and in fact reached below 4% in the 1960s!) and yet all the sudden hit almost 11%, shortly after Reagan:
US_unemployment
Let’s look at that graph a little closer. Right now the Federal Reserve uses 5% as their target unemployment rate, the supposed “natural rate of unemployment” (a lot of economists use this notion, despite there being almost no empirical support for it whatsoever). If I draw red lines at 5% unemployment and at 1981, the year Reagan took office, look at what happens.

US_unemployment_annotated

For most of the period before 1981, we spent most of our time below the 5% line, jumping above it during recessions and then coming back down; for most of the period after 1981, we spent most of our time above the 5% line, even during economic booms.

I’ve drawn another line (green) where the most natural break appears, and it actually seems to be the Ford administration; so maybe I can’t just blame Reagan. But something happened in the last quarter of the 20th century that dramatically changed the shape of unemployment in America.

Inflation is at least ambiguous; it was pretty bad in the 1940s and 1950s, and then settled down in the 1960s for awhile before picking up in the 1970s, and actually hit its worst just before Reagan took office:

US_inflation

Then there’s GDP growth.

US_GDP_growth

After World War 2, our growth rate was quite volatile, rising as high as 8% (!) in some years, but sometimes falling to zero or slightly negative. Rates over 6% were common during booms. On average GDP growth was quite good, around 4% per year.

In 1981—the year Reagan took office—we had the worst growth rate in postwar history, an awful -1.9%. Coming out of that recession we had very high growth of about 7%, but then settled into the new normal: More stable growth rates, yes, but also much lower. Never again did our growth rate exceed 4%, and on average it was more like 2%. In 2009, Reagan’s record recession was broken with the Great Recession, a drop of almost 3% in a single year.

GDP per capita tells a similar story, of volatile but fast growth before Reagan followed by stable but slow growth thereafter:

US_GDP_per_capita

Of course, it wouldn’t be fair to blame Reagan for all of this. A lot of things have happened in the late 20th century, after all. In particular, the OPEC oil crisis is probably responsible for many of these 1970s shocks, and when Nixon moved us at last off the Bretton Woods gold standard, it was probably the right decision, but done at a moment of crisis instead of as the result of careful planning.

Also, while the classical gold standard was terrible, the Bretton Woods system actually had some things to recommend it. It required strict capital controls and currency exchange regulations, but the period of highest economic growth and lowest inequality in the United States—the period I’m calling the Golden Age of American Capitalism—was in fact the same period as the Bretton Woods system.

Some of these trends started before Reagan, and all of them continued in his absence—many of them worsening as much or more under Clinton. Reagan took office during a terrible recession, and either contributed to the recovery or at least did not prevent it.

The President only has very limited control over the economy in any case; he can set a policy agenda, but Congress must actually implement it, and policy can take years to show its true effects. Yet given Reagan’s agenda of cutting top tax rates, crushing unions, and generally giving large corporations whatever they want, I think he bears at least some responsibility for turning our economy in this very bad direction.

The power of exponential growth

pnrj cognitive science, core principles, statistics , , , , , , , , , ,

JDN 2457390

There’s a famous riddle: If the water in a lakebed doubles in volume every day, and the lakebed started filling on January 1, and is half full on June 17, when will it be full?

The answer is of course June 18—if it doubles every day, it will go from half full to full in a single day.

But most people assume that half the work takes about half the time, so they usually give answers in December. Others try to correct, but don’t go far enough, and say something like October.

Human brains are programmed to understand linear processes. We expect things to come in direct proportion: If you work twice as hard, you expect to get twice as much done. If you study twice as long, you expect to learn twice as much. If you pay twice as much, you expect to get twice as much stuff.

We tend to apply this same intuition to situations where it does not belong, processes that are not actually linear but exponential. As a result, when we extrapolate the slow growth early in the process, we wildly underestimate the total growth in the long run.

For example, suppose we have two countries. Arcadia has a GDP of $100 billion per year, and they grow at 4% per year. Berkland has a GDP of $200 billion, and they grow at 2% per year. Assuming that they maintain these growth rates, how long will it take for Arcadia’s GDP to exceed Berkland’s?

If we do this intuitively, we might sort of guess that at 4% you’d add 100% in 25 years, and at 2% you’d add 100% in 50 years; so it should be something like 75 years, because then Arcadia will have added $300 million while Berkland added $200 million. You might even just fudge the numbers in your head and say “about a century”.

In fact, it is only 35 years. You could solve this exactly by setting (100)(1.04^x) = (200)(1.02^x); but I have an intuitive method that I think may help you to estimate exponential processes in the future.

Divide the percentage into 69. (For some numbers it’s easier to use 70 or 72; remember, these are just to be approximate. The exact figure is 100*ln(2) = 69.3147… and then it wouldn’t be the percentage p but 100*ln(1+p/100); try plotting those and you’ll see why using p works.) This is the time it will take to double.

So at 4%, Arcadia will double in about 17.5 years, quadrupling in 35 years. At 2%, Berkland will double in about 35 years. Thus, in 35 years, Arcadia will quadruple and Berkland will double, so their GDPs will be equal.

Economics is full of exponential processes: Compound interest is exponential, and over moderately long periods GDP and population both tend to grow exponentially. (In fact they grow logistically, which is similar to exponential until it gets very large and begins to slow down. If you smooth out our recessions, you can get a sense that since the 1940s, US GDP growth has slowed down from about 4% per year to about 2% per year.) It is therefore quite important to understand how exponential growth works.

Let’s try another one. If one account has $1 million, growing at 5% per year, and another has $1,000, growing at 10% per year, how long will it take for the second account to have more money in it?

69/5 is about 14, so the first account doubles in 14 years. 69/10 is about 7, so the second account doubles in 7 years. A factor of 1000 is about 10 doublings (2^10 = 1024), so the second account needs to have doubled 10 times more than the first account. Since it doubles twice as often, this means that it must have doubled 20 times while the other doubled 10 times. Therefore, it will take about 140 years.

In fact, it takes 141—so our quick approximation is actually remarkably good.

This example is instructive in another way; 141 years is a pretty long time, isn’t it? You can’t just assume that exponential growth is “as fast as you want it to be”. Once people realize that exponential growth is very fast, they often overcorrect, assuming that exponential growth automatically means growth that is absurdly—or arbitrarily—fast. (XKCD made a similar point in this comic.)

I think the worst examples of this mistake are among Singularitarians. They—correctly—note that computing power has become exponentially greater and cheaper over time, doubling about every 18 months, which has been dubbed Moore’s Law. They assume that this will continue into the indefinite future (this is already problematic; the growth rate seems to be already slowing down). And therefore they conclude there will be a sudden moment, a technological singularity, at which computers will suddenly outstrip humans in every way and bring about a new world order of artificial intelligence basically overnight. They call it a “hard takeoff”; here’s a direct quote:

But many thinkers in this field including Nick Bostrom and Eliezer Yudkowsky worry that AI won’t work like this at all. Instead there could be a “hard takeoff”, a huge subjective discontinuity in the function mapping AI research progress to intelligence as measured in ability-to-get-things-done. If on January 1 you have a toy AI as smart as a cow, one which can identify certain objects in pictures and navigate a complex environment, and on February 1 it’s proved the Riemann hypothesis and started building a ring around the sun, that was a hard takeoff.

Wait… what? For someone like me who understands exponential growth, the last part is a baffling non sequitur. If computers start half as smart as us and double every 18 months, in 18 months, they will be as smart as us. In 36 months, they will be twice as smart as us. Twice as smart as us literally means that two people working together perfectly can match them—certainly a few dozen working realistically can. We’re not in danger of total AI domination from that. With millions of people working against the AI, we should be able to keep up with it for at least another 30 years. So are you assuming that this trend is continuing or not? (Oh, and by the way, we’ve had AIs that can identify objects and navigate complex environments for a couple years now, and so far, no ringworld around the Sun.)

That same essay make a biological argument, which misunderstands human evolution in a way that is surprisingly subtle yet ultimately fundamental:

If you were to come up with a sort of objective zoological IQ based on amount of evolutionary work required to reach a certain level, complexity of brain structures, etc, you might put nematodes at 1, cows at 90, chimps at 99, homo erectus at 99.9, and modern humans at 100. The difference between 99.9 and 100 is the difference between “frequently eaten by lions” and “has to pass anti-poaching laws to prevent all lions from being wiped out”.

No, actually, what makes humans what we are is not that we are 1% smarter than chimpanzees.

First of all, we’re actually more like 200% smarter than chimpanzees, measured by encephalization quotient; they clock in at 2.49 while we hit 7.44. If you simply measure by raw volume, they have about 400 mL to our 1300 mL, so again roughly 3 times as big. But that’s relatively unimportant; with Moore’s Law, tripling only takes about 2.5 years.

But even having triple the brain power is not what makes humans different. It was a necessary condition, but not a sufficient one. Indeed, it was so insufficient that for about 200,000 years we had brains just as powerful as we do now and yet we did basically nothing in technological or economic terms—total, complete stagnation on a global scale. This is a conservative estimate of when we had brains of the same size and structure as we do today.

What makes humans what we are? Cooperation. We are what we are because we are together.
The capacity of human intelligence today is not 1300 mL of brain. It’s more like 1.3 gigaliters of brain, where a gigaliter, a billion liters, is about the volume of the Empire State Building. We have the intellectual capacity we do not because we are individually geniuses, but because we have built institutions of research and education that combine, synthesize, and share the knowledge of billions of people who came before us. Isaac Newton didn’t understand the world as well as the average third-grader in the 21st century does today. Does the third-grader have more brain? Of course not. But they absolutely do have more knowledge.

(I recently finished my first playthrough of Legacy of the Void, in which a central point concerns whether the Protoss should detach themselves from the Khala, a psychic union which combines all their knowledge and experience into one. I won’t spoil the ending, but let me say this: I can understand their hesitation, for it is basically our equivalent of the Khala—first literacy, and now the Internet—that has made us what we are. It would no doubt be the Khala that made them what they are as well.)

Is AI still dangerous? Absolutely. There are all sorts of damaging effects AI could have, culturally, economically, militarily—and some of them are already beginning to happen. I even agree with the basic conclusion of that essay that OpenAI is a bad idea because the cost of making AI available to people who will abuse it or create one that is dangerous is higher than the benefit of making AI available to everyone. But exponential growth not only isn’t the same thing as instantaneous takeoff, it isn’t even compatible with it.

The next time you encounter an example of exponential growth, try this. Don’t just fudge it in your head, don’t overcorrect and assume everything will be fast—just divide the percentage into 69 to see how long it will take to double.

Why immigration is good

pnrj public policy , , , , , , , , , , , , , ,

JDN 2456977 PST 12:31.

The big topic in policy news today is immigration. After years of getting nothing done on the issue, Obama has finally decided to bypass Congress and reform our immigration system by executive order. Republicans are threatening to impeach him if he does. His decision to go forward without Congressional approval may have something to do with the fact that Republicans just took control of both houses of Congress. Naturally, Fox News is predicting economic disaster due to the expansion of the welfare state. (When is that not true?) A more legitimate critique comes from the New York Times, who point out how this sudden shift demonstrates a number of serious problems in our political system and how it is financed.

So let’s talk about immigration, and why it is almost always a good thing for a society and its economy. There are a couple of downsides, but they are far outweighed by the upsides.

I’ll start with the obvious: Immigration is good for the immigrants. That’s why they’re doing it. Uprooting yourself from your home and moving thousands of miles isn’t easy under the best circumstances (like I when I moved from Michigan to California for grad school); now imagine doing it when you are in crushing poverty and you have to learn a whole new language and culture once you arrive. People are only willing to do this when the stakes are high. The most extreme example is of course the children refugees from Latin America, who are finally getting some of the asylum they so greatly deserve, but even the “ordinary” immigrants coming from Mexico are leaving a society racked with poverty, endemic with corruption, and bathed in violence—most recently erupting in riots that have set fire to government buildings. These people are desperate; they are crossing our border despite the fences and guns because they feel they have no other choice. As a fundamental question of human rights, it is not clear to me that we even have the right to turn these people away. Forget the effect on our economy; forget the rate of assimilation; what right do we have to say to these people that their suffering should go on because they were born on the wrong side of an arbitrary line?

There are wealthier immigrants—many of them here, in fact, for grad school—whose circumstances are not so desperate; but hardly anyone even considers turning them away, because we want their money and their skills in our society. Americans who fear brain drain have it all backwards; the United States is where the brains drain to. This trend may be reversing more recently as our right-wing economic policy pulls funding away from education and science, but it would likely only reach the point where we export as many intelligent people as we import; we’re not talking about creating a deficit here, only reducing our world-dominating surplus. And anyway I’m not so concerned about those people; yes, the world needs them, but they don’t need much help from the world.

My concern is for our tired, our poor, our huddled masses yearning to breathe free. These are the people we are thinking about turning away—and these are the people who most desperately need us to take them in. That alone should be enough reason to open our borders, but apparently it isn’t for most people, so let’s talk about some of the ways that America stands to gain from such a decision.

First of all, immigration increases economic growth. Immigrants don’t just take in money; they also spend it back out, which further increases output and creates jobs. Immigrants are more likely than native citizens to be entrepreneurs, perhaps because taking the chance to start a business isn’t so scary after you’ve already taken the chance to travel thousands of miles to a new country. Our farming system is highly dependent upon cheap immigrant labor (that’s a little disturbing, but if as far as the US economy, we get cheap food by hiring immigrants on farms). On average, immigrants are younger than our current population, so they are more likely to work and less likely to retire, which has helped save the US from the economic malaise that afflicts nations like Japan where the aging population is straining the retirement system. More open immigration wouldn’t just increase the number of immigrants coming here to do these things; it would also make the immigrants who are already here more productive by opening up opportunities for education and entrepreneurship. Immigration could speed the recovery from the Second Depression and maybe even revitalize our dying Rust Belt cities.

Now, what about the downsides? By increasing the supply of labor faster than they increase the demand for labor, immigrants could reduce wages. There is some evidence that immigrants reduce wages, particularly for low-skill workers. This effect is rather small, however; in many studies it’s not even statistically significant (PDF link). A 10% increase in low-skill immigrants leads to about a 3% decrease in low-skill wages (PDF link). The total economy grows, but wages decrease at the bottom, so there is a net redistribution of wealth upward.

Immigration is one of the ways that globalization increases within-nation inequality even as it decreases between-nation inequality; you move the poor people to rich countries, and they become less poor than they were, but still poorer than most of the people in those rich countries, which increases the inequality there. On average the world becomes better off, but it can seem bad for the rich countries, especially the people in rich countries who were already relatively poor. Because they distribute wealth by birthright, national borders actually create something analogous to the privilege of feudal lords, albeit to a much larger segment of the population. (Much larger: Here’s a right-wing site trying to argue that the median American is in the top 1% of income by world standards; neat trick, because Americans comprise 4% of the world population—so our top half makes up 2% of the world’s population by themselves. Yet somehow apparently that 2% of the population is the top 1%? Also, the US isn’t the only rich country; have you heard of, say, Europe?)

There’s also a lot of variation in the literature as to the size—or even direction—of the effect of immigration on low-skill wages. But since the theory makes sense and the preponderance of the evidence is toward a moderate reduction in wages for low-skill native workers, let’s assume that this is indeed the case.

First of all I have to go back to my original point: These immigrants are getting higher wages than they would have in the countries they left. (That part is usually even true of the high-skill immigrants.) So if you’re worried about low wages for low-skill workers, why are you only worried about that for workers who were born on this side of the fence? There’s something deeply nationalistic—if not outright racist—inherent in the complaint that Americans will have lower pay or lose their jobs when Mexicans come here. Don’t Mexicans also deserve jobs and higher pay?

Aside from that, do we really want to preserve higher wages at the cost of economic efficiency? Are high wages an end in themselves? It seems to me that what we’re really concerned about is welfare—we want the people of our society to live better lives. High wages are one way to do that, but not the only way; a basic income could reverse that upward redistribution of wealth, taking the economic benefits of the immigration that normally accrue toward the top and giving them to the bottom. As I already talked about in an earlier post, a basic income is a lot more efficient than trying to mess around with wages. Markets are very powerful; we shouldn’t always accept what they do, but we should also be careful when we interfere with them. If the market is trying to drive certain wages down, that means that there is more desire to do that kind of work then there is work of that kind that needs done. The wage change creates a market incentive for people to switch to more productive kinds of work. We should also be working to create opportunities to make that switch—funding free education, for instance—because an incentive without an opportunity is a bit like pointing a gun at someone’s head and ordering them to give birth to a unicorn.

So on the one hand we have the increase in local inequality and the potential reduction in low-skill wages; those are basically the only downsides. On the other hand, we have increases in short-term and long-term economic growth, lower global inequality, more spending, more jobs, a younger population with less strain on the retirement system, more entrepreneurship, and above all, the enormous lifelong benefits to the immigrants themselves that motivated them to move in the first place. It seems pretty obvious to me: we can enact policies to reduce the downsides, but above all we must open our borders.