Assorted links


You're really plugging this Super-Economy blog. I thought this discussion was not meant to be about raising anyone's status, whether they be a Nobel laureate or a new right-wing polemical blogger?

When an economist discusses "safe assets" and not once mentions productive capital, I see the reason the US economy has failed to deliver real income growth and security to the majority of Americans.

Everything mentioned in the discussion were derived from productive capital, which increasingly in the US is a derive productive capital asset created by government fiat, eg., copyright and patents, or derivatives of derivatives. Remember, stock in a firm is not a productive asset, but a derivative that is priced based on perceptions of present and future profit and revenue of assets that are increasingly effectively owned by bond holders, which are themselves derivatives of the value of the productive assets and the perceived ability of the corporations ability to generate the revenue to maintain the payments required by the bond contracts.

The "ownership society" derives from the quest for land several centuries ago that is the American Dream. The land wasn't something that would produce wealth by going up in prices in the context of the American Dream, (but speculators got the nearly free land from the government with that in mind), but it represented a secure asset. If one owned 40 acres of land and a mule, one could harvest wood to build a home, wood to heat it, wood to cook with, and with the mule able to plow the land cleared to grow food to eat, along with the wildlife that could be harvested for food and goods like clothing.

In the series e-squared, one episode focused on the farmers in the northern plains who are building their own wind farms owned by the farmers and often serviced by the farmers. The farmer increases the security of his land holding assets by adding another revenue stream, electricity, to his crop revenue.

If one buys a house based solely on its productive value, purely based on the imputed rent without considering the possible rise or fall in property value, you will have a safe asset. The property will always be worth the imputed rental fee you assumed when you bought the property, or rather the perpetual lease. (And by the way, one must look at property tax as "rent" paid on an asset that is owned by the state with a perpetual lease granted to the owner - if you fail to pay the rent, you will be evicted. The history of the US is continuous in the view that the government can take any land the ruling class wants to take and then spread the wealth according to the needs of the ruling class with the land ultimately the property of the sovereign.)

Adam Smith's big idea was stating that the wealth of a nation wasn't in its accumulated assets stashed in warehouses, but instead in the revenue produced from employing the assets. Too much American economic thought seems driven by the mercantilism Adam Smith was refuting, but instead of goods accumulated in warehouses, it is the accumulation of derivatives. While economists point to the foolishness of the tulip bubble, they actively promote a derivatives bubble of stocks and bonds.

Instead of government providing the retirement system, the argment is that it is unsustainable because the number of workers supporting retirees is falling. So, as the alternative, everyone buys stocks and because the increase in people buying stocks for pension funds and then 401Ks is driving up stock prices, stock prices will continue to rise even when the boomers start selling stocks, because even if only two workers are buying for each retiree selling, stocks have always gone up, so they must go up, and stock are a safer bet than government.

The new mercantilism of Wall Street derivatives accumulation as the means to wealth creation has produced multiple bubbles since 1980 - I don't think it is a coincidence that the 80s represents a shift in the nature of bubbles and the emphasis on stock ownership as wealth creating in 401Ks and IRAs. Wall Street is great at pump and dump, and has gained a lot of allies in government and influencing government leaders in adopting laws to promote pump and dump. The crashes in the early part of the 20th century brought laws to wall off the pump and dump to the fringe while denying Wall Street access to the general public. But the laws have been changed at Wall Street's request to keep the profits flowing and increasing profits to Wall Street by making pump and dump ponzi schemes legal. Wall Street just can't function these days if forced to deal with only real property productive capital assets, so nothing coming out of Wall Street can be secure.

Without disputing the fact that printer ink is overpriced I would nevertheless like to point out that printer ink is sold in cartridges, which include printheads and other electronic components. Without taking the cost of these parts into account the comparison in that chart is dubious at best.

mulp - I certainly don't have a clue, but who's job is it to promote a decrease in excessive derivatives? Is it something that should just happen based on other sound economic activities that have not currently occurred? Do we need government oversight? Something else?

3. Warren Buffett on sex.

I'd rather hear from Charlie Munger on sex.

The posting on growth rates for the poor and rich ignores the literature on convergence and conditional convergence from the late 80's and early 90's. Supereconomy hasn't read Delong's reply to Baumol; there is a convergence club and
the OECD members belong to it; Argentina, for example, doesn't. Where should Supereconomy go to learn something? The grad growth books aren't best.
The Barro undergrad macro text would be a good place for Supereconomy to start so that his comments might reflect what is known by the profession.

This is the first "Assorted Links" I can remember where I clicked every link. So at least ex ante, well done!

@y81: Your debt levels are about 50% higher as a percentage of GDP. You (=Americans) borrow from the rest of the world while France, Germany, etc lend to it. If i'm running down my savings I can look really rich as well.

Im no EU-fan, but ignoring the U.S.'s international imbalances in this debate is silly.

Slightly poorer doesn't sound like a bad deal if it makes us more like Europe...Just kidding.

Keep in mind you are talking to some of the people that want the debt reduced, partly because the money is (almost) completely squandered and we don't think it has added to productivity.

If Kling is right and the government subsidizes savings, maybe the Keynesians should take note. I also think the government shouldn't subsidize savings/debt, and don't think it really does because riskless investments aren't.

1. I promise that I won't nag Tylwer Cowen in the foreseeable future for traffic. It is interesting however that you are more bothered by him linking to me twice (once after doing something he suggested) than Paul Krugman spitting on decades of accumulated research into growth theory. (Yglesius may not be aware of this, but Krugman must surely be)

2. Here are the p statics, R-square and correlation coefficient of simple linear regressions of starting per capita GDP and average growth, so you are not forced to rely on your eyes:

Growth 1980-2008,
24 OECD countries:
Correlation-coefficient= -0.575

Growth 1995-2008,
35 OECD countries:
Correlation-coefficient= -0.570

Growth 1990-2008,
50 US states:
R-Square= 0.4206
Correlation-coefficient= -0.6485

I think most economist would consider a correlation of -0.57 pretty decent.
Still want to deny the relationship between levels and growth?

3. Conditional Convergence as a theory and its empirical support among the OECD are not things I made up. It is standard growth theory (otherwise I would not have known it). They debate is not even centered around the existence of conditional convergence anymore, just the exact rate. Krugman cannot be allowed to make up economics as he goes along, asserting whatever suits him that day (if he does, he better have data on his side).

Here is Bob Lucas, in the Journal of Economic Literature:

" the model fits the fact that in the postwar period growth rates vary much less among the advanced economies than among the poor and middle income economies. It presupposes the existence of an ever-growing "convergence club": a set of rich economies within which income inequality is falling, even in a world in which overall inequality is rising or not changing very much. It can be interpreted as implying a focus on conditional convergence, since conditional on both having left the stagnation state, any two economies are getting closer to each other."

Robert E. Lucas (2000). "Some Macroeconomics for the 21st Century," Journal of Economic Perspectives

More empirical support

Andres, Javier, Domenech, Rafael & Molinas, Cesar (1996). "Macroeconomic performance and convergence in OECD countries," European Economic Review, 40(9)

Islam, Nazrul, (1995). "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, 110(4),

Robert E. Lucas, (2009). "Trade and the Diffusion of the Industrial Revolution," American Economic Journal: Macroeconomics, 1(1)

I can't even tell what this argument is about anymore.

Initially, Jim Manzi said that Europe had grown more slowly than the US in recent decades, and that this shows that social democratic policies are bad. Krugman observed that it's not true that the US has grown faster than Europe.

Then Greg Mankiw came along and observed that some European countries with similar growth rates to the US, nonetheless have lower per capita GDP levels, implying that this is the economic problem with social democracy.

So I observed that the per capita GDP gap between the US and countries like Germany and Italy long predates the emergence of post-WWII social democracy.

Now you're "rebutting" this, I guess, with references to the conditional convergence literature. But what does this rebut. Go back and read my post and you'll see that, exactly as you're saying, the US-Europe gap was bigger in 1900 than it is in 2010. This makes it hard for me to see evidence for the claim that the adoption of social democratic policies in the postwar era can be to blame for European countries having lower per capita GDP than we have in the United States. The existence of the gap is longstanding and has declined over time even as a substantial "leisure gap" has opened between the US and Europe.

I note that this whole debate could be made much simpler by people saying "what Jim Manzi wrote was wrong, but I still think there are other reasons to believe that free market economic policies are superior."

Matt Yglesias,

If you're still reading, can you point to the specific quotations from Manzi's article that are incorrect? I know Krugman said some things that were demonstrably false, but so far I've seen a bunch of, "What Manzi is really trying to say is..."

I am willing to believe he said something false, but so far I haven't seen it. I saw Krugman accuse him of botching his calculation, Manzi show that he didn't, and Krugman dismiss this as "quibbling."


1. You are making erroneous claims to begin with. Krugman did not only question Mazis claims about growth. He went much further.

Here are Krugmans claims:

" the image of Europe the economic failure is so ingrained on the right that it’s never questioned,"
" the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works."

If you want to evaluate "economic success", you simply cannot rely entirely on growth rates. Levels are what we ultimately consume. By that measure Alabama is an economic success story and Delaware is economic failure.
Krugman pay no heed to the fact that Americans each year, each month, each day produce 36% more than Europeans.
The difference between levels is 8 times as high as all the yearly output lost in the recent crisis. This makes Europe an economic "failure" when compared to America.

And if Krugman thinks a 36% is too low to count as success, he should explicitly say that. Instead he simply IGNORED the most relevant figure for his claim.

2. Krugmans argument ignores a salient fact about growth theory, that with functioning economies poorer countries grow faster that richer ones. This has been the trend the entire century. When it comes to America and Europe, this has been true for the entire post-war period, up until the 1980.

Here something strange happened. Not only did Europe stop naturally (according to growth theory and historical patterns) converging, it started to lose ground. the US grew 6% faster than Europe, when the lower starting level of Europe suggested it should grow.

This phenomenon has been noted by economist, and policy makers in Europe. They are discussing ways to turn it around (the Lisabon Strategy), with explicit reference to this pattern.

Instead Krugman pretends the entire controversy is due to faster population change. But of course economists and policy makers across the world are not stupid, they knew how to adjust for population growth. The striking fact was Europe stopping to converge in a per capita basis.

Note, the pattern of convergence did not stop. Within Europe and for other OECD countries it continued. Only America was doing better than it should have based on levels alone, and EU.15 worse.

3. Up until now I am pointing out distortions so blatant that even the left cannot deny them. Now a subtle argument, that I don't really expect non-economist liberals to:

The central debate is about the effects of Social Democratic policy on living standard. Economic theory basically predict that your level increases each year with technological improvement, and also converges in response to exogenous changed.

Once the convergence is finished, the country will again grow at the rate of technological improvement, but with a different level.

If we for example believe that high taxes reduce hours work by 10% and that this is reflected fully in GDP, the effect of a tax increase is to first lead to a few years of reduced growth (lower than what it should be, not necessarily negative) and, once the economy is 10% below where it would have been, to AGAIN start growing at the rate of technological change.

Do you see now why Krugmans comparison of growth rates is deeply misleading? Once the effects of Social Democratic policies have taken hold already (they certainly have had plenty of time), there is no reason we should expect Europe to grow slower. But that does not mean they had no cost! They still produce less, year after year.

The standard theory of the right is that taxes reduce living standard, reflected in a few years of lower growth followed by a lower level. If bad American policy also reduced the long run rate of technological increase it will do so by the same numbers for the US and Europe alike.

@Thomas & anon: I guess you guys are right. Maybe you should email the freshman remedial math class students tell them they screwed up (again)?

Oh boo hoo! You meanies!

Maybe the math teacher shouldn't try loading so much BS politics and misleading economics into the lesson and misleading the remedial math students? Ah, but it's just easier to say, "You meanies!"

Stop hiding behind your much superior morals and far bigger heart and good intentions. Sheesh.

1. This debate would be much simpler if Krugman acknowledged that the policies he proposes would, as a best guess compared to Europe, lead to a 35% decline in American per capita income. Once his policies have taken their toll on the economy the growth rate would return to normal, but at levels forever below where they would have been.

2. But *why* other than Social Democratic policies has Europe stopped converging?! Do you have an alternative theory? Isn't it remarkable that much of the differences in levels can be directly attributed to Social Democratic policies (high taxes, fewer hours worked)?

3. "Leisure time"

Leisure time is not unfalsifiable. The magnitude are just exagerated. There are measures of Leisure time. Most importantly "Harmonised European Time Use Survey" contains leisure data for Europe, and "American Time Use Survey" for the US.

Kelly Ragan compares leisure time between the US and Europe (note: she does not have Italy).
Look at pages 26 and 44.

If we weight her figures by population, she finds a difference of 289 hours per year in leisure between US and Europe. (My own additions, where I included Italy and a few other countries, was 278 hours.) The per capita GDP gap between US and EU.15 is $12.000 per year.

Using Ragans figure, Europeans would have to value leisure at $42 per hour for it to be worth their lower income. The actual hourly wage in the EU.15 is about $16.

Also, much of this "leisure" is involuntary unemployment, where the value of the marginal hour for the individual is lower than the market price.

PS. The GDP gap is around $19.000 for European-Americans. European-Americans in 2005 had 65 hours less leisure per year than average Americans. Using these figures, the hourly (average!) value of leisure that would equalize Europe and the US is $55 per hour. I don't value my free time that much, do other people?


But my aim in this debate is simply to refute Krugmans *argument*. It's ultimately not about the people, but the ideas.

(Having said that, the person cannot be fully ignored in evaluating claims. Krugman is a cheater, who will hide data and ignore economic knowledge if it suits him, as he has done here. Matthew yglesias is in contrast a sincere and thoughtful writer, whose views I don't share).


Taxes as a share of GDP are 13% in Singapore, one third of Europe and less than half the US. The highest marginal income tax is 26%. Singapore is less of a welfare state than any western country, including the US.

Thanks for all the analysis Tino.

I wish the left would just man up and say "It is likely that our policies will reduce total output" BUT will not harm the median person as much as the average, will help some of the worst off (although unemployment seems to hit the bottom of the rung very hard), and will not harm life satisfaction much and may improve it.

I would still disagree with those policies on other grounds, but at least it would be an intelectually honest position. This "We can meddle in the economy as much as we want with no cost" is just BS.

Also they could say, though I don't hear many US liberals advocating this, that we can learn from the Nordic countries how to minimize the impact of our policies by keeping as many free market incentives as possible imbeded in our social democratic policies.

1. When I was young I would say, "hmmm, that seems odd to me. I must be odd." As I got older I thought to myself "that can't be, I must be misjudging things." Now at I'm more like "damn, I'm shocked that I've been right and they really are a dirty SOB."

If Krugman doesn't like polemic, it's very easy. Stop making people like me think they are right on. (Krugman of course loves polemic)

For me personally, I feel like Europe is the University Studies department of the planet. That's fine.

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