The Fault Is Not in Our Stuff But in Ourselves

Bruce Sacerdote‘s NBER Working Paper, “Fifty Years of Growth in American Consumption, Income, and Wages” provides a nice update on the measurement of CPI Bias.  The punchline should be obvious, but it’s great to hear such an eminent economist say it: “Meaningful growth in consumption for below median income families has occurred even in a prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.”

Highlights:

Table 3 shows estimates of annualized growth rates in wages by decade. The first column shows growth in real wages using CPI deflation. This column show real wages fell by 0.8 percent per year during the ten years January 1975-January 1985 and fell by 0.6 percent per year during the ten years ended in 1995.10 In the subsequent two decades wage growth is positive 0.8 percent per year and 0.7 percent per year respectively.

The next three columns calculate growth in real wages using a) PCE adjustment, b) an assumption of 20% upward bias in CPI growth, and c) Hamilton/ Costa adjustment to CPI. The picture looks progressively more optimistic as we move from left to right. PCE adjustment still has negative wage growth in the first two decades (75-85 and 85-95) but the decreases in real wages are smaller. Hamilton/ Costa bias adjustment implies annual real wage growth of 1.4% during 1975-1985, .2 percent per year during 1985-1995, 1.4 percent during 1995-2005 and .8 percent in the most recent decade.

The table in question:

More:

Consumption for below median income families has seen steady progress since 1960. My preferred point estimates are based on CEX measures of consumption where the price index has been de-biased following Hamilton and Costa. These estimates suggest that consumption is up 1.7 percent per year or 164 percent over the whole time period. These estimates of growth strike me as consistent with the significant increases in quality and quantity of goods enjoyed by Americans over the last half century. And my conclusions are consistent with the findings of Broda and Weinstein (2008). Estimates of slow and steady growth seem more plausible than media headlines which suggest that median American households face declining living standards.

The bias adjusted estimates also provide a more positive outlook on real wage growth in the last 40 years than standard media headlines. PCE adjusted wages appear to have grown at .5% per year during 1975-2015 while the de-biased CPI adjusted wages grew at 1% per year over the same time period.

Key caveat:

Importantly these estimates do not tell us anything about why wages grew more slowly than GDP or why inequality increased. CPI bias does not explain decreases in labor’s share of income (Krueger 1999) or the associated rise in inequality (Pikkety and Saez 2003). Adjusting the price index downward leads to higher estimated real wage growth and higher estimated real GDP growth.

The big unanswered question:

What I do not address here is why Americans feel worse off if consumption is actually rising. There are at least four important explanations that may be at work. First, I am only examining consumption within very large sections of the income distribution and there may be specific groups (for example less than high school educated men) for whom consumption is actually falling. Second, it’s possible that the quality of some services such as public education or health care could be falling for some groups. Third, the rise in income inequality coupled with increased information flow about other people’s consumption may be making Americans feel worse off in a relative sense even if their material goods consumption is rising. Fourth, changes in family structure (e.g. the rise of single parent households), increases in the prison population, or increases in substance addiction could make people worse off even in the face of rising material wealth. A deep future research agenda would be to understand how America has lost its sense of optimism about living standards and whether the problem is one of consumption, relative consumption (relative to other people) or something entirely different.

My favorite candidate for “something entirely different”: false consciousness.  Most people embrace a dogmatic pessimistic ideology, and believing is seeing.  Hedonic adaptation amplifies the problem.  After all, it’s easier to deny that your standard of living is great than to admit that you’re unhappy despite your affluence.  The fault is not in our stuff but in ourselves.

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The Great Successor: Inside North Korea

I highly recommend Anna Fifield’s The Great Successor.  It’s full of information about not only the life of Kim Jong Un, but what’s happened inside North Korea since his ascent to the Red Throne.  Most readers will be shocked by her description of the North Korean hell-state, but that’s all old hat to me.  Here’s what surprised me in Fifield’s book:

1. Kim Jong Un didn’t just attend a fancy English-language school in Switzerland.  After his expat guardians – his maternal aunt and her husband – defected, Kim was actually switched over to a German-language Swiss public school.  Weird.

2. Kim’s top interest as a boy was basketball.  His eagerness to befriend American basketball stars really is the fulfillment of a childish dream.

3. “Kim Jong Il spoke in public only once, and then only a single phrase, during his entire seventeen years in power.  ‘Glory to the heroic soldiers of the Korean People’s Army!’ he said during a military parade in 1992.”  Kim Jong Un started giving lengthy public speeches almost immediately.

4. Kim Jong Un has deliberately fostered a revolution of rising expectations:

North Koreans “will never have to tighten their belts again,” the Great Successor declared when he delivered his first public speech, marking the occasion of his grandfather’s one hundredth birthday.  Kim Jong Un told the bedraggled populace that they would be able to “enjoy the wealth and prosperity of socialism as much as they like.”

5. Kim’s execution of his uncle Jang Song Thaek was part of a much larger purge.  “Dozens, perhaps even hundreds, of Jang’s associates disappeared around the same time.  Some of them were not just purged from the system but more likely executed.  Those outside North Korea at the time fled.”  Note: This probably means that the runners’ families were sent to slave labor camps or executed.

6. Just as Stalin stole Trotsky’s economic plan after purging him, Kim went on to implement Jang’s vision of watered-down Deng-style economic reforms.  The Communist elite now openly enjoys a much higher standard of living.  Some of this gain is trickling down to the commoners.

7. Kim Jong Un is eager to win over the millennial elite with capitalist luxuries and entertainment.  “It was fun to be a rich kid in Kim Jong Un’s North Korea.  The richest kid of all was making sure of it.”

8. Kim rushed to get a credible nuclear deterrent, then declared himself satisfied.  And his behavior seems consistent with his intentions.

Just a week before his summit meeting with South Korea’s President Moon, Kim Jong Un delivered a speech to a Workers’ Party meeting in Pyongyang in which he declared the “byungjin” or “simultaneous advance” policy to be over.  He no longer needed to pursue nuclear weapons – he had achieved them.  He declared an immediate end to nuclear tests and intercontinental ballistic missiles launches…

From now on, Kim Jong Un said, he would be focusing on a “new strategic line.”  He would be concentrating on the economy.  And for that, he would need an “international environment favorable for the socialist economic construction…

In 2013, he had boldly elevated the economy to level pegging with the nuclear program after decades of “military first” policy.  Five years later, almost to the day, he was unequivocally making economic development his top priority.

Before reading this book, I was already 85% confident that Kim Jong Un would rule North Korea for life.  Now I’d go up to 90%.  Despite his youth, he’s a skilled tyrant.  However, I’m not quite as pessimistic about the fate of the North Korean people.  Kim has dramatically relaxed the regime’s war on consumerism, and it is very hard to confine this rising abundance to the inner circle.  People who think Kim will give up his nuclear arsenal are dreaming (or lying); while he lives, the best nuclear outcome we can hope for is “Don’t ask, don’t tell.”  Kim may die young due to poor health; he might even be assassinated, though I doubt it.  When he dies, North Korea – and the world – will get to throw the dice one more time.  Until his death, however, Kim will stay the course.

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Is There a Market for an ISA Marketplace?

I love the idea of better and clearer markets in everything.

There already are markets in everything, but most lack clear information flow, have fuzzy incentives, and weak to no liquidity or money prices.

Individual earning potential is no different. There is so much that could be done to better allocate money across time slices to get capital to its highest time value location for individuals. When you need money isn’t always when you have it and vice versa. I’ve blogged before about a world where you can sell shares in yourself and securitize your future potential wealth.

But I want to know who would do it.

I want a marketplace where individuals can share their info and sell shares to one or many investors.

It’s gonna be hard to test the demand. It’s a new category and requires a lot of comfort with the idea, not to mention some parameters and assurances that legal issues won’t kill it. How to test quickly and easily if there are enough people who’d try it on both sides of the market?

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Codifying Our Worst Impulses: The Ideas that Started World War II

 

Yesterday was the 80th anniversary of the start of World War II, the deadliest violent conflict in human history.  Death tolls vary, but often reach 80 million souls.  What caused it?  Lists of proximate causes never end, but the only credible “root cause” is simply: ideas.  Three countries started World War II: Japan, Germany, and the Soviet Union.  While popular summaries rarely list the Soviets as initiators because Hitler double-crossed Stalin two years later, Molotov and Ribbentrop’s  so-called Treaty of Non-Aggression Between Germany and the Union of Soviet Socialist Republics was a Treaty of Aggression Against Poland, Finland, Latvia, Lithuania, Estonia, and Romania.  Don’t let anyone tell you otherwise.

What ideas led the leaders of Japan, Germany, and the Soviet Union to war?  The obvious answer is extreme nationalism – the view any action is morally praiseworthy if it advances the interests of your nation-state.  Heinrich Himmler said it best:

For the SS Man, one principle must apply absolutely: we must be honest, decent, loyal, and comradely to members of our own blood, and to no one else. What happens to the Russians, the Czechs, is totally indifferent to me… Whether other races live well or die of hunger is only of interest to me insofar as we need them as slaves for our culture; otherwise that doesn’t interest me. Whether 10,000 Russian women fall down from exhaustion in building a tank ditch is of interest to me only insofar as the tank ditches are finished for Germany.

…When somebody comes to me and says, I can’t build tank ditches with children or women. That’s inhumane, they’ll die doing it. Then I must say: You are a murderer of your own blood, since, if the tank ditches are not built, then German soldiers will die, and they are the sons of German mothers. That is our blood. That is how I would like to indoctrinate this SS, and, I believe, have indoctrinated, as one of the holiest laws of the future: our concern, our duty, is to our Folk, and to our blood. That is what we must care for and think about, work for and fight for, and nothing else. Everything else can be indifferent to us.

Almost everyone understands that Japan and Germany grew extremely nationalistic during the 1930s.  Few realize that the same holds for the Soviet Union as well.  Under Stalinism, anything that advanced the interests of the Soviet Union was the moral imperative – starting with the reabsorption of all the breakaway territories of the Russian Empire.

By itself, however, extreme nationalism need not generate war.  Rationally speaking, the best way to advance the national interest is with peace and consumerism.  The leadership of Japan, Germany, and the Soviet Union, however, all angrily rejected this bourgeois, “shopkeepers’” perspective.  Instead, they equated the national interest with the power and glory of the government – and angrily denounced Western “plutocracies.”

This was most obvious in the USSR, which deliberately eradicated the rich, business, and private property itself in order to build a totalitarian militarized society.  But Germany’s National Socialists had a similar vision.  Their goal was not to build an idyllic consumer society, but a mighty war machine.  Unlike the Soviets, however, the Nazis had the common-sense to harness the rich, business, and private property rather than destroy them.   As Hitler told Nazi defector Hermann Rauschning:

He had no intention, like Russia, of “liquidating” the possessing class. On the contrary, he would compel it to contribute by its abilities towards the building up of the new order. He could not afford to allow Germany to vegetate for years, as Russia had done, in famine and misery. Besides, the present owners of property would be grateful that their lives had been spared. They would be dependent and in a condition of permanent fear of worse things to come.

The same holds for Japan: Its leaders equated the national interest with the power and glory of the Japanese government, not the safety and prosperity of the Japanese people.  So while the Japanese government happily used the domestic rich and domestic business, it truly bled them dry during the war.  As Walter Scheidel explains in The Great Leveler:

Japan was once one of the most unequal countries on earth. In 1938, the country’s “1 percent” received 19.9 percent of all reported income before taxes and transfers. Within the next seven years, their share dropped by two-thirds, all the way down to 6.4 percent. More than half of this loss was incurred by the richest tenth of that top bracket: their income share collapsed from 9.2 percent to 1.9 percent in the same period, a decline by almost four-fifths.

However rapid and massive these shifts in the distribution of income, they pale in comparison to the even more dramatic destruction of the elite’s wealth. The declared real value of the largest 1 percent of estates in Japan fell by 90 percent between 1936 and 1945 and by almost 97 percent between 1936 and 1949. The top 0.1 percent of all estates lost even more—93 percent and more than 98 percent, respectively. In real terms, the amount of wealth required to count a household among the richest 0.01 percent (or one in 10,000) in 1949 would have put it in only the top 5 percent back in 1936. Fortunes had shrunk so much that what used to count as mere affluence was now out of reach for all but a very few.

What’s the right word for “equating the national interest with the power and glory of the government rather than peace and consumerism”?  There are many candidate labels  – “statism,” “romanticism,” “populism,” “communitarianism,” “anti-capitalism.”  But none is quite right, so we might as well stick with the label that activists who equated the national interest with the power and glory of the government have preferred throughout the 20th century: socialism.  Obviously, there are many kinds of self-identified socialists – including socialists who unequivocally seek a peaceful, consumerist society.  Historically, however, these are rare – and since I’m not a socialist, I say that “real socialism” equals “what most self-styled socialists do when they have power.” Whatever label you prefer, the key point is that all the regimes that started World War II praised the power and glory of the government to the skies – and brought traditional elites – the rich and business – to their knees.  Or their graves.

Before you join me in blaming World War II on nationalism and socialism, though, there’s an obvious objection: These ideas have been ubiquitous for ages.  My response: The emotional impulses behind nationalism and socialism – impulses like xenophobia and anti-market bias – are indeed long-lived and widespread.  Far more children dream of being warriors than merchants.  But the initiators of World War II turned these knee-jerk feelings into bodies of thought.  They codified humanity’s worst impulses into explicit, militant, self-conscious ideologies.  And they took their ideologies seriously enough to kill for them – and often to die for them.

Does this mean that every latter-day nationalist and socialist is morally comparable to the architects of World War II?  No; that’s absurd.  The reason for this moral non-comparability, though, is disturbing.  The rhetoric of modern nationalism and socialism remains grotesque.  Anyone who says “By any means necessary” is, by implication, saying, “If it takes 80 million deaths for us to win, then so be it.”  The saving grace of latter-day nationalists and socialists is that almost all of them are hypocrites.  They may say, “By any means necessary,” but thankfully few have the stomach for it.  As I’ve said before, if your ideas are bad, hypocrisy makes them less bad.

Still, I am dismayed by the renewed popularity of nationalism and socialism.  I don’t think World War III is coming this century.  If it does come, however, I will blame the nationalists and socialists who take their scary slogans to heart.

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Dominance: Material vs. Rhetorical

Do the rich dominate our society?

In one sense, they obviously do.  Rich people run most of the business world, own most of the wealth, and are vastly more likely to be powerful politicians.

In another sense, however, the rich aren’t dominant at all.  If you get in public and loudly say, “Rich people are great.  We owe them everything.  They deserve every penny they’ve got – and more.  People who criticize the rich are just jealous failures,” almost everyone will recoil in horror.

Do males dominate our society?

In one sense, they obviously do.  Males run most of the business world, hold most of the top political offices, hold a supermajority of the most prestigious jobs, and make a lot more money on average.

In another sense, however, males aren’t dominant at all.  If you get in public and loudly say, “Males are the superior sex.  We owe them everything.  We need to protect males from women’s emotional abuse and financial exploitation, and show them the great deference they deserve,” almost everyone will recoil in horror.

Do whites dominate our society?

In one sense, they obviously do.  Whites run most of the business world, hold most of the top political offices, hold a clear majority of the most prestigious jobs, and earn above-average incomes.

In another sense, however, whites aren’t dominant at all.  If you get in public and loudly say, “Whites have built Western civilization, the glory of the modern world.  Almost everything good in the modern world builds on white Europeans’ efforts.  The people of the world need to acknowledge how much they owe to the white race, and apologize for their many insults fueled by their own sense of inferiority,” almost everyone will recoil in horror.

My point: There are two very distinct kinds of dominance.*  There is material dominance – control of economic wealth and political power.  And there is rhetorical dominance – control of words and ideas.  Intuitively, you would expect the two to correlate highly.  At least in the modern world, however, they don’t.  Indeed, the correlation is plausibly negative: The groups with high material dominance now tend to have low rhetorical dominance.

Isn’t material dominance clearly more enviable than mere rhetorical dominance?  On balance, I suspect so.  Still, many people who could have won material dominance invest their lives in acquiring rhetorical dominance instead: intellectuals, activists, and religious leaders are all prime examples.  Why do they bother?  Because man does not live by bread alone.  Material dominance gives you luxuries, but rhetorical dominance makes you feel like you’re on top of the world: “I can loudly praise what I like and blame what I dislike – and expect the people who demur to meekly keep their objections to themselves.  Or even feign agreement!”

Conflation of material and rhetorical dominance helps explain why liberals and conservatives so often talk past each.  Liberals feel like conservatives dominate the world, because conservatives run the government half the time, and conservative-leaning groups – the rich, males, whites – have disproportionate influence over the economy.  Conservatives feel like liberals dominate the world, because liberals run the media, schools, and human resources departments.  In a sense, both groups are right.  Conservatives have the lion’s share of material dominance; liberals have more than the lion’s share of rhetorical dominance.  In another sense, though, both groups are wrong.  In the contest for overall dominance, both groups are roughly tied.  Both groups feel like underdogs because both yearn from the kind of dominance they lack.

Due to the endowment effect, moreover, both sides get angry when the other intrudes on “their” territory.  Thus, even though leftists have a near-stranglehold over research universities, the rare academic center that promotes free markets or social conservatism blinds them with rage.  99% rhetorical dominance?  We’re supposed to have 100% rhetorical dominance!  Conservatives have a similar, though less hyperbolic, reaction when business adopts liberal causes.  “Sensitivity training?!  Give me a break.”

The dream of both movements, naturally, is to hold all the dominances.  The conservative dream is a world where they consolidate their lead in the world of business and take over the whole culture.  The liberal dream is a world where they purge the last vestiges of conservative culture and bring business and the rich to their knees.  (The latter rarely means outright expropriation; I think even America’s far left would be satisfied if they could sharply increase regulation and regulation – and hear business and the rich repeatedly shout, “Thank you, may I have another?”)

When you put it this way, of course, both dreams sound like nightmares.  Neither liberals nor conservatives even dimly internalize Spiderman’s principle that “With great power comes great responsibility.” Both are epistemically vicious to the core, so habitually drunk with emotion they don’t even know what sober rationality looks like.  Frankly, I’d like to see both of these secular religions fade away like Norse mythology.  Since that’s unlikely to happen, however, I’m grateful to live in a world with an uneasy balance of power.  Or to be more precise, an uneasy balance of dominance.

* I suspect Robin Hanson will say that I’m conflating dominance and prestige.  Maybe a little, but when I picture “rhetorical dominance,” I’m picturing words and ideas that intimidate more than they inspire.  General point: You can have material prestige and rhetorical prestige as well as material dominance and rhetorical dominance.

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Sneering at “Conspiracy Theories” is a Lazy Substitute for Seeking the Truth

On the morning of August 10, a wealthy sex crimes defendant  was reportedly found dead in his cell at New York’s Metropolitan Correctional Center.

“New York City’s chief medical examiner,” the New York Times reported on August 11, “is confident Jeffrey Epstein died by hanging himself in the jail cell where he was being held without bail on sex-trafficking charges, but is awaiting more information before releasing her determination …”

That same day, the Times published an op-ed by Charlie Warzel complaining that “[e]ven on an internet bursting at the seams with conspiracy theories and hyperpartisanship, Saturday marked a new chapter in our post-truth, ‘choose your own reality’ crisis story.”

After three years of continuously beating the drum for its own  now-discredited conspiracy theory —  that the President of the United States conspired with Vladimir Putin’s regime to rig the 2016 presidential election — the Times doesn’t have much standing to whine about, or sneer at, “conspiracy theories and hyperpartisanship.”

Is Jeffrey Epstein really dead? If so, did he kill himself or was he murdered? If he was murdered, whodunit and why?

Those are legitimate questions. Calling everyone who asks them, or proposes possible answers to them, a “conspiracy theorist” isn’t an argument, it’s intellectual laziness.

Yes, some theories fit the available evidence better than others. And yes, some theories just sound crazy. If someone says a UFO beamed Epstein up, or that Hillary Clinton and Donald Trump posed as corrections officers and personally strangled him, I suggest setting those claims aside absent very strong evidence.

But there are plenty of good  reasons to question the “official account.”

Yes, prisoners have committed suicide at federal jails and prisons. But prisoners have also escaped from, and been killed at, such facilities. In fact, notorious Boston gangster Whitey Bulger was murdered in a federal prison just last year.

Given Epstein’s wealth and power, the wealth and power of persons accused of serious crimes in recently unsealed court documents, the claim of one of his prosecutors that Epstein “belonged to” the US intelligence community, the well-established inability of the federal government to secure its facilities or prevent criminal activity inside those facilities (including the corruption of its own personnel), the equally well-established unreliability of claims made by government agencies and officials in general, and the already flowing stream of admissions that the Metropolitan Correctional Center’s procedures weren’t followed where Jeffrey Epstein was concerned, the question is not why “conspiracy theories” are circulating — it’s why on earth they WOULDN’T be.

No, I’m not saying that Epstein is alive and living it up in “witness protection,” or that he was murdered by a hit team on behalf of one of his “Lolita Express” cronies. I just don’t know. Neither, probably, do you. Nor do those screaming “conspiracy theory!” at every musing contrary to the suicide theory.

Maybe we’ll find out the truth someday. Maybe we won’t. Pretending we already have, and shouting down those who suggest we haven’t, isn’t a method of seeking knowledge. It’s a method of avoiding knowledge.

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