More Russ Roberts on TGS

by on October 9, 2011 at 7:56 am in Economics, Uncategorized | Permalink

Russ has written a reply to my response, read his whole piece, using his numbers I will put a few follow-up responses under the fold…

1. Male median wage data (down since 1969) suggest divorce is not the main issue; in any case divorce is an economic and psychological catastrophe for many people, and defending living standards by invoking the effects of divorce in the data strikes me as actually more pessimistic than my view.  I suspect Russ’s own cultural values are in accord with this perspective.  Russ’s postulated effect also does not explain 1998-2011 median wage stagnation very well.

3. The key question is the net bias of statistics, not the bias for consumer durables alone.  Our real economic performance on a lot of services — a huge and growing part of the economy — is extremely weak.  As durables get cheaper, the biases in measuring their quality become less important.

4. I don’t see that Russ has made an actual counter to my argument here.

6. In successful periods growth shows up in the major mainstream economic statistics, including the median.  If it doesn’t, at the very least we should conclude that growth is considerably slower than usual.

9. There is no measured median income progress since 1997 and very little since 1973; that’s not just a cyclical phenomenon.  The supposedly good years of the noughties now look like a bubble, not the reality.

On panel data, I read the Pew Report which Russ cites.  Over a more than thirty year time period, only 63 percent of children had incomes exceeding those of their parents, and that comparison includes some pre-TGS, quite high-growth years.  I don’t find that number impressive at all.  In any case the key question is a comparative one, and while the study has not been done, it is highly likely one would find much stronger cross-generational measures of progress for earlier generations.

On reconciling the per capita gdp and median stories, the concept of rent-seeking — most of all through the service sectors and finance and government — will suffice.  I know that Russ already agrees with the finance side of this story, maybe the government side too and who knows, perhaps education and medicine as well?

Jon C. October 9, 2011 at 9:00 am

This is how you debate! Notice neither has called the other “tribal” or anything of the sort.

kent October 9, 2011 at 11:49 am

Not surprising for an intra-libertarian debate. Kevin Drum and Paul Krugman don’t sling gratuitous insults at each other, nor do Douthat and Gerson. (Of course Tyler doesn’t generally roll that way, so props to him for that.)

Becky Hargrove October 9, 2011 at 9:03 am

“Very little measured median income progress since 1973″…the reason that seems so clear is it’s the year I graduated high school. I am amazed that people have been as industrious as they have, to overcome the fact that manufacturing and production alone canot pay for the needs of the most important services of our times. But that does not mean all is lost. It just means that production perimeters in services such as health care and education also need to be measured in person to person skills to bring back wealth creation to the economies of developed nations. As it is in the present, holding such services next to the more efficient standards of production and manufacturing is not unlike holding the “less efficient” nations of the European Union to the same monetary standards of the “more efficient” ones.

MikeDC October 9, 2011 at 9:27 am

Russ is right to decouple personal values from the economic truth everyone is trying to get at.

And the assertion that he’s “more pessimestic” seems downright wrong. Certainly it’s less pessimistic to suggest that observed economic stagnation is largely the result of unfixable economic consequences, and oh yeah, divorce rates are skyrocketing too than it is to suggest we suffer from only one of those problems.

The huge increase in divorce rates strikes me as very strong evidence that we were worse off in the past than we thought we were. When divorce became an option, we can see that large numbers of people willingly took the economic hit to get out of bad relationships. Socially, this is an optimistic point: we’ve become wealthy enough to increasingly avoid dangerous or unhappy social relations.

While that slows our observed economic growth, if we think people are generally rational, it’s still utility maximizing.

Yes, it’s an unhappy fact that people have such difficulty maintaining happy social relations, but but we historically had this problem as well. It was just masked by poverty-driven necessity and paternalistic legal structure.

Becky Hargrove October 9, 2011 at 9:35 am

I need a better conclusion to my above comment that makes some sense. The efficiency production gap between many services and production/manufacturing in general continues to widen. As it does, the debts of governments grow as they try to meet the difference. And in the personal realm, people seek ever more financial services that will allow them to overcome the production gap as they age. Looked at in this perspective, the housing crisis falls away from center stage and appears as the coping mechanism it actually was.

Lord October 9, 2011 at 10:55 am

This is implicit in the shift to services which are less productive than manufacturing. Services are that which cannot be automated or scaled to mass levels without more labor input and they are more subject to rent seeking. If services can be scaled and specialized sufficiently to automate again, we may see rejuvenation, but that is a long process.

msgkings October 10, 2011 at 12:14 am

Unfortunately that kind of service automation will spell another round of rising core unemployment. The hyper efficiency of manufacturing has dramatically reduced employment in that sector (as it did in farming before that). Services are the next phase, where the developed countries can employ people. Once the robots can do that, how do we find work for the former service workers?

Please skip the ‘robot building and maintenance’ quip, we all know that’s not going to come close to filling the hole. And the ‘robot services = cheaper services = more money to spend for consumers = more demand = jobs’ doesn’t really hold either. We used to employ folks on the farm. Then it was in the factories. For now it’s in the services. When that is automated, seriously, what is left to use all the human bodies? Do we have to reinvent the concept of ‘work’ at that point? Do we have to accept a plateauing lifestyle? After all, once you have shelter and food and clothing, everything on top is gravy. Is that what’s starting to happen in the developed world?

So in reply, how is automated services ‘rejuvenation’? Productivity figures, no doubt. Overall employment and human welfare? Not so much.

Alleged Wisdom October 9, 2011 at 11:01 am

Do you believe in “The Great Stagnation” or “The Great Rent-Seeking”? These are two different stories with very different policy implications. Would the life of the median worker would be improved if the people in the low-accountability sectors were subject to punitive policy interventions such as those demanded by the “Occupy Wall Street movement”?

msgkings October 10, 2011 at 12:15 am

Astute question…I can’t really say I know the answer.

superflat October 9, 2011 at 11:06 am

it seems odd that fairly impressive tech changes that benefit consumers (i no longer go to a store to buy something they don’t have in stock, without the benefit of user review and advice, but instead buy on amazon) and have the side-effect of destroying certain kinds of jobs (brick and mortar stores of various stripes) are apparently being used as evidence of great stagnation. similarly, it seems odd that impressive tech changes that permit work that used to be limited to local workers to be performed around the world (thereby destroying local jobs) are being used as evidence of stagnation. similarly, it seems odd that the incredible changes in work, living conditions, etc., for nearly the majority of the world’s population (china and india) are being used as evidence of stagnation.

seriously, if you’d told someone in 1980 that a couple billion more people would start competing in the global marketplace, and also that a communications revolution would permit them to compete for work previously considered purely local, would you have predicted we would have done even as well as we have? add in some dumb policy decisions, and it doesn’t look like a great stagnation, but a great revolution (in which, rather than being the beneficiaries, we’re the ones suffering creative destruction).

burger flipper October 9, 2011 at 11:36 am

While sorta amiable, Russ Roberts doesn’t seem like the sort that would warrant a debate. But you also link Henderson occasionally, so I guess you want to reach the religious libertarians and not just thinkers.

Cliff October 10, 2011 at 9:54 am

Russ Roberts is a fellow GMU-er and specifically called Cowen out, I am sure he feels he owes a reply.

Becky Hargrove October 9, 2011 at 11:55 am

Alleged Wisdom,
Rent seeking is a coping strategy just as financial instruments are, it just happens at more powerful levels of society…as such, part of the story in general.

Ironman October 9, 2011 at 12:18 pm

Three observations:

1. Average Lifetime Earning Trajectories

2. Generations

3. A decline in educational quality.

Would the combination of these three things explain what we’ve observed in median incomes over the time period in question?

Slocum October 9, 2011 at 1:57 pm

@3. It’s not the case that durable goods have gotten cheaper (in ways not captured by inflation measures) but that services have gotten more expensive. Since the 1970s, all kinds of important and formerly expensive services have gotten much cheaper — air travel, shipping, and long-distance communications to name three. There are really only two categories of services that have gotten dramatically more expensive — and these are in the rent-seeking, government FUBAR’ed sectors of education and medical care. And note that where there the government *hasn’t* screwed things up, even these categories of services have not grown dramatically more costly. So, laser eye surgery and plastic surgery — which are elective and paid for out of pocket — have not seen astronomical increases. Ditto for veterinarian and dental care. And the cost of non-accredited, non-credentialed education has dropped precipitously since the 1970s. It’s only the legacy, cartelized, rent-seeking forms of education, inflated with government and government-guaranteed money, that have skyrocketed.

msgkings October 10, 2011 at 12:20 am

Very good comment, but also a little depressing. How can sectors as big and misunderstood as those two, with huge constituencies and powerful lobbyists on their side, be in any way reformed in a democracy?

Add in the fact that every adult has experienced some contact with both services, and therefore feel entitled to their subjective, blinkered, passionate opinions on them, and you have a recipe for the most immovable status quo that can be conceived.

Slocum October 10, 2011 at 8:49 am

Between 1938 and 1978, the federal government (in the form of the CAB — the ‘Civil Aeronautics Board’) regulated the operation of airlines down to the routes that particular airlines could fly and the fares they could charge. As a result, flying was extremely expensive, and many airline employees (pilots, for example) were paid far above market wages. There were powerful, entrenched interests with a strong motivation to maintain that system — but it was reformed nevertheless. Reform IS possible.

msgkings October 10, 2011 at 12:33 pm

A decent counterexample, but air travel wasn’t and still isn’t the basic, universal necessity that education and health care are. That’s why everyone has a very strong opinion and there are large, static majorities of people who would fear dramatic change. I don’t think you could say the same for how people felt about flying, especially BECAUSE it was so expensive, and not used by everyone (mainly for the cost reason). The powerful status quo supporters were the pilots and so forth, not the customer.

EVERYONE gets education, and EVERYONE has their health to care for. The customers are the ones who fear change.

Jason October 9, 2011 at 2:07 pm

Regarding the 1998-2011 median wage stagnation, isn’t that part mostly opportunistic disinflation? Or basically that the Fed hasn’t let employment go very far past NAIRU during recoveries (see graph at link)? In 2006 we barely got below NAIRU at all.

(Actually, this seems to me to explain all of TGS.)

http://thinkprogress.org/yglesias/2011/06/22/251619/the-benefits-of-full-employment/

Jason October 9, 2011 at 3:58 pm

I put together a model that said total income growth was proportional to x = (NAIRU – unemployment rate) when x is positive: the times when employment is greater than full employment represent pulses of income growth. The pulses are basically the lower areas between NAIRU and the unemployment rate in the figure in link. You get a stagnation in growth after 1970.

I also compared to a hypothetical NAIRU* = a moving average of the unemployment rate. Then the model above with NAIRU* – unemployment rate leads to roughly constant growth. The constant is lower that the model above before 1970 (when we went way below NAIRU) and higher after 1970.

Charlie October 9, 2011 at 10:02 pm

I don’t understand why Russ likes the Pew data so much, unless he is arguing that TGS only occurs in black families.

“However, a majority of blacks born to middle-income parents grow up to
have less income than their parents. Only 31 percent of black children born
to parents in the middle of the income distribution have family income greater
than their parents,”

He also likes to post a graph that shows middle income white families in 1968 with real wages of $55,800 have children in 2006 with real wages of $73,700. That’s an annual growth rate of .75% and total growth of 32%. In contrast, real gdp grew 3% annually over 300% total. That seems quite compatible with TGS.

Here’s the graph and a Roberts post: http://cafehayek.com/2009/06/absolute-mobility-quantified.html

Charlie October 9, 2011 at 11:21 pm

*the growth should be 200% total. Real incomes are 3 times higher.

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