Krugman = Dystopian?

I really don't want to start a Paul Krugman watch on this blog. But I may not be able to help myself. I learned a LOT from reading his popular econ books in the early 90s when I was a young Air Force officer stationed overseas and dreaming about becoming an economist someday. Then I learned even more from his high-level research as a Ph.D. grad student. My guess is the man will win the Nobel prize someday. Not only is a great writer and economist, but he grew up loving science fiction. And was inspired by it! Some of his essays from his "unofficial" website are must reading.

So, it makes me a little sad to see him positioned so solidly on the partisan fringe nowadays. I can't help but feel some irony in that. The stereotype is that academic economists are calm, objective, balanced souls. The other stereotype is that political economists are partisan, subjective, hyperventilating types.

But you have to say this for Krugman: he's provacative and asks good questions. So I was happy to see that he is also starting a blog, and happy that he penned a note on our favorite topic of perceptions of the economy. PK says:

The people at Polling Report have a convenient page that, for example, gives you the Gallup results on state of the economy back to the late 1990s. Gallup’s question is subtly different: “How would you rate economic conditions in this country today — as excellent, good, only fair, or poor?”

In the latest poll, only 31% said the economy is either excellent or good; 69% said fair or poor. Responses to the same question taken in 1998 were almost the reverse: 65% or more said excellent or good, around 35% said fair or poor. What’s interesting is that the average unemployment rate in 1998 was 4.5%, basically the same as it is now. So why were people so much happier?

That's a great question. My recollection from Econ 101 says that appetites are insatiable, so no amount of material wealth will ever make you truly happy (though I am willing to test that theory, honey). I also recollect something about decreasing marginal utility. So doubling wealth will improve utils (our way of counting happiness) by less than 100 percent. The standard "liberal" argument is that incomes are becoming less equal meaning the poor are being (note the rhetoric, kids) "left behind."

Time for a thought experiment. Suppoese every citizen's incomes increase by the same percentage. The rich get richer, and the poor get richer. But the rich get absolutely richer. What would happen to relative utility? Assuming all citizens share a similarly shaped utility-income curve, then will the rich or poor have higher absolute utility gains?

That would make a nice paper. Maybe it has already been done? I know the counterpoint is that incomes have not risen by the same percentages because the rich have REALLY gotten richer, which is a good point. But if we're going to get all sensitive about what the REAL data are, then why (oh why) does Krugman keep trying to suggest that the current unemployment rate of 4.7 is flawed?

Measuring jobs is demographically sensitive, so the ideal measure would be a measure of labor market utilization that is demographically neutral. This is why economists pay such close attention to the unemployment rate, and also one of the reasons I argue that the payroll measures of net job gains is less important.

Krugman's blog says "the low unemployment rate masks a relatively low rate of employment" (original italics), and he may actually be right. But here are three reasons that he may be wrong:

1. Teen workforce participation rates plummeted after 9/11 (see above). Importantly, these are not teens who were working and have become discouraged. The 16-19 year olds who are not working today were 10-13 year olds in 2001.

2. Employment levels do not measure work preferences or demographiucs, and those matter. Increasing college attendance rates, early retirment, longevity, lower infant mortality, will drive raw unemployment rates down. Would you implement government policies to reverse course on these things?

3. It's a free country. People shouldn't have to work if they don't want to. And I am dedicating this comment to mom, who retired early and is living large in Florida.

Actually, the third point I want to make ties back to rising inequality. That too has demographic roots. A recent paper in the the Brookings Papers on Economic Activity by Bill Gale (wish I could link to it) leaves a powerful impression that rising inequality is not so simple as the rich getting richer, rather it looks unmistakably like the "Old getting richer" and the young being left behind. No wonder they kids have left the U.S. labor force. The deck is stacked against 'em!

I think a more honest debate would say: American unemployment rates are low and that's great news, but inequality is rising between the generations and something has gone off kilter. Should the younger generations feel stressed? Probably so because they can see the income disparity between themselves and their elders, and they can barely pay for college, let alone a house someday. Their future doesn't look grim so much as it looks unaffordable. They are told that higher human capital is essential to get ahead, yet tuition keeps rising faster than inflation. They're also chided for leaving the labor force, and also for dismal savings rates, and also for not getting good enough SATs. How should they feel? More imortantly, what is Krugman going to do to encourage smart policies that rebalance young-old incomes?

Greenspan Cites the 2007 Index

Did you all see this? In Alan Greenspan's book "The Age of Turbulence" on page 275-77, our 2007 Index of Economic Freedom is cited very generously. A highlight:

"There is no direct measure of the impact of cultural mores on economic activity. But a joint venture of the Heritage Foundation and the Wall Street Journal has in recent years combined statistics from the IMF, the Economist Intelligence Unit, and the World Bank to calculate the Index of Economic Freedom for 161 countries. The index combines, among other considerations, the estimated strength and enforcement of property rights, the ease of starting and closing a business, the stability of the currency, the state of labor practices, openness to investment and international trade, freedom from corruption, and the share of the nation;s outputappropriated for public purposes. There is of course a great deal of subjectivity in placing such numbers on such qualitative attributes. But, as best I can judge, their evaluations drawn from the data do seem to square with my more casual observations.

"The index for 2007 lists the United Sates as the most 'free' of the larger economies; ironically Hong Kong, now a part of undemocratic China, is also at the top of the list. It is perhaps not a coincidence that the top seven economies (Hong Kong, Singapore, Australia, the United States, the United Kingdom, New Zealand, and Ireland) all have roots in Britain - the home of Adam Smith and the British Enlightenment. But Britishness obviously does not convey a permanent imprint. Zimbabwe, a former British colony (as Southern Rhodesia), ranks almost dead last."

"The greater the economic freedom, the greater the scope for business risk and its reward ...."

I was thrilled to see that Greenspan not only knew about the Index (which I co-authored), but supported it and took its ideas to a new level. Since I happened across the section, I realized that historians will read this autobiography centuries from now and track down our book. Looks like the 2007 edition is literally a footnote to history (in a good way!). Kudos to my team at Heritage that put the Index together last year, and especially to the online content team (led by Ted Morgan) that built the website that the Maestro references.

Welcome to Dystopia

What leads a person to launch a blog? Probably the same impulse that leads one to write a book, make a phone call, or get out of bed in the morning -- the desire to communicate and participate in the world. My goal for this effort is to present an honest view of the impact of technology and economic growth on the United States as well as other socieites.

Every day the newspapers seem to tell us the world is a gloomy place. That post-milennial gloom is in the air. My theory is that people feel the future happening all around them and it's dizzying. We still remember the ways things were in the gentler era (you remember: the good old days when all you had to worry about was nuclear holocaust happening any milisecond?). But the 70s and 80s were a radically different, and quieter, time. Everyone wasn't hyperconnected. You could only watch movies at the theater (remember the lines in 1977?) or on ABC's Sunday Night Special.

We're living in the future. Fair enough, but what has the culture been telling us the future would be? Seems to me, the culture has been pretty clear. "Welcome to Dystoipia!"

Remember the Morlocks? The Time Machine was written by H.G. Wells in 1895, and he anticiapted a future where class warfare had gone genetic by nature.

Aldous Huxley imagined the class division would go genetic thanks to artificial intervention in Brave New World. Well, come to think of it, "I don't want to be a Beta." Clockwork Orange by Anthony Burgess shows a pretty nasty, empty life for the Cheloveks. And most famously, George Orwell's vision may be the bleakest in 1984, with doublespeak and big brother.

Many contemporary SF films borrow directly from this theme: The economy is hard on the underclass, and the state has eroded freedoms in the perverse defense of freedom. The basic idea is that employment will be rare due to robotics, and so the classes will be even more deeply split among the owner haves and the labor have-nots.

How does that square with our reality, which is reflected by absolute and constant improvement in incomes? I'll return to this question frequently in this blog, and would enjoy your thoughts. I am haunted by the human tendency to pretend things are bad when they are not, mainly because the pretense is an intellectual laziness that turns to the ever-larger central state for solutions. An ever larger state? ... Welcome to Dystopia.