Category: Current Affairs
The Labor Share Fell. So What?
The share of Gross Domestic Income accruing to labor has been declining in recent decades while the share accruing to capital has been rising. In the graph below, I show labor compensation as a share of GDI (left axis). Labor share has indeed been trending down–some of this could be an artifact of the data, e.g. an increase in proprietor’s income (labor) mislabeled as capital income, more pass throughs and so forth—but for the purposes of this post I will accept that the labor share has declined. What does this mean?
The natural response is to think that because the share going to labor has fallen and the share going to capital has risen that there has been a transfer of income from labor to capital. That is possible but it is not the only interpretation and it does not follow mechanically from the share data.
I have also plotted total compensation to labor (in real terms) in the graph above and far from shrinking it is higher than ever and growing. Moreover the right axis is logged so you can also see that outside of recessions the growth rate of labor compensation looks quite steady (similar slope over time). (Labor compensation per member of the labor force is noisier but looks similar).
The recessions in 2008 and 2020 are worth noting because these are periods when the labor share was high and locally at a maximum! The reason, of course, is that GDI was shrinking in these periods more than labor compensation. In other words, capital takes a bigger hit than labor in a recession. This is a good reminder that a high share of GDI is not what workers most care about–a high absolute level of GDI is more important for the bottom line.
In short, the data are consistent—not proof of, but consistent with—a story in which capital has become more productive, raising output. More productive capital also raises the demand for labor, so while more of the new output goes to capital in the first instance, the pie is growing and labor’s absolute compensation has grown with it. Yes, if the shares had stayed constant and output had grown just as much, labor compensation would have been higher still. And if my grandmother had wheels, she would have been a bicycle.
Sao Paulo notes
The old saw “Brazil is the country of the future, and always will be” now seems so wrong. The place feels increasingly conservative, and it is aging rapidly. In the domestic airport you see couples with only a single kid, not two or three kids, never mind four.
Country and Western music, in their Brazilian incarnations, are very popular.
It does not feel like the next Pelé will be coming from Brazil.
Sao Paulo as a city is much improved. The murder rate has plummeted, and the nice neighborhoods are very nice and are growing in size. The business community is strong, interesting architecture abounds, and there is a real arts scene. It is arguably Latin America’s number one city, with only Mexico City as a rival. It has, along with Mexico City, evolved into a “must know” global city, though it is rarely treated that way by outsiders. In the three days I spent there, going around to many places, I did not see a single person who was evidently a foreign tourist. That is crazy, but also a sign there is good value here.
Sao Paulo has food to die for. It is top tier for Brazilian (of course), meat/steak, Japanese, and Italian, and pretty good in many other offerings as well. I had a wonderful fifteen-course omikase for $110 at a Michelin star restaurant. The establishment, Kan Suke, has only eight seats, but I could get a table by inquiring only an hour in advance.
For Italian food it is probably the second best country in the world? For meats it might be number one, at least if you are willing to put aside the small country of Uruguay. For beans it is top two, and the fruits are excellent as well. Chocolate ice cream and gelato abound. All constraints considered, I would rather spend a week dining out here than in London or Paris or Rome, or for that matter New York City.
People are very friendly, surprising few speak decent English, and Brazilian warmth still abounds.
I was very pleased with my stay at Hotel Unique, due to its architecture and also a perfect location.
Observers should be more optimistic about the Brazilian economy. Yes it is overregulated and the government is locked into far too much spending. But hyperinflation is now a distant memory, a reasonable fiscal consolidation occurred in the 1990s, and the country has plenty of its own energy. Keep in mind that for emerging economies, years of negative growth are a major problem. Brazil now has sidestepped most (not all!) of those risks. Slow, steady growth should be able to get them somewhere, albeit at a langorous pace.
My biggest worry about Brazil is demographics and shrinking population. In recent times TFR has been in the 1.3 to 1.4 range, hardly satisfactory. A shrinking population is bad per se, and also it will hurt many regions of the country due to imperfect market integration, both nationally and globally. More importantly, the country does not have an obvious and easy option for pulling in a higher number of desirable immigrants, at least not relative to its size. There is Venezuela and Bolivia, but the former of those may go away as a major source of people.
Will Brazilian fertility tick back up? Will Brazil re-attain its status as a highly influential culture on the world scene, as it was in the 1960s through early 1990s? Unclear. But if the question is “should you go visit?”, the answer is a definite yes.
Should you move to Argentina? (from my email)
My name is Josh Neuman, and I’m writing from Buenos Aires, Argentina where Peter Thiel’s move is all over the news here. He lives in [redacted], only a xx minute drive from my own apartment in Recoleta.
I want to pitch a piece…arguing that Thiel is right to be in Argentina, but wrong about why. The libertarian revolution he thinks he’s found simply doesn’t exist in the way it’s being advertised in the international press. Milei has accomplished some real things since December 2023, such as lower inflation and a fiscal surplus, in part underwritten by Washington. But the effect of many of his policies has been exaggerated by both supporters and opponents alike, with widespread pessimism across all parts of society.
Much of the Argentine status quo he sought to abolish remains intact, such as retenciones on agricultural exports, union control over the labor market, while many of his reforms have had little impact beyond Buenos Aires, particularly in the northern provinces still dominated by entrenched Peronista governors. Distrust of the peso remains high, while much of the economy is still black market, with the informal sector still being around 40-50% of employment. The lines outside the Spanish and Italian consulates of Argentines reclaiming European citizenship are as long as ever, while major business figures like Marcos Galperin still live in neighboring Uruguay. Peronism as I’m sure you know has mutated several times throughout its history to each contemporary crisis, and will prove far more durable in the long run as a social identity as much as a political machine.
Argentina’s retenciones are export taxes levied on agricultural commodities like soybeans, wheat, and corn at the point of sale, before producers receive any income, which goes towards the government, and is how Argentine governments (especially Peronista ones) have historically paid for the country’s welfare state. The system also functions as a price mechanism because by taxing exports, the government keeps more supply in the domestic market, suppressing local food prices. The retenciones are deeply unpopular among the crop producers and landowners, and Milei campaigned on eliminating them. He has largely kept them, because he needs the revenue to maintain the fiscal surplus that is the centerpiece of his program.
But I think there’s a deeper cultural dynamic that I’m not sure Thiel understands. Argentine youth aspire much more towards la dolce vita than towards Weber’s protestant work ethic. They essentially want their country to be like Spain or Italy, with a chill work-life balance, high leisure and consumption, underwritten by a generous welfare state, even if that model is becoming fiscally and demographically unsustainable in Europe. I think it’s a completely reasonable and in many ways admirable goal, but companies like Paypal, Palantir, and Facebook did not come out of Spain or Italy.
Among my Argentine peers, I hardly meet anyone who aspires to move to the United States. When I tell friends that the American economy has been growing at twice the rate of Europe in recent years, I am met with genuine disbelief. I think Thiel may have been captivated by a small teleological elite in Milei’s inner circle who do not necessarily represent the country they govern. The average Argentine who voted for Milei did not vote for Austrian economics or for a libertarian revolution. They voted out of exhaustion with Peronism, as many of Milei’s supporters were former Peronists themselves, much as many Trump supporters in the American Rust Belt were former Obama voters.
Argentina’s genuine case for Thiel rests on things that have nothing to do with Milei: a younger demographic than Europe, world-class human capital, abundant lithium and rare earths, and geographic isolation from great power conflict. He may be right for entirely the wrong reasons, on a longer timeline than he expects, through considerably more turbulence than the current narrative suggests. Argentina’s laid-back mentality is precisely what makes it exciting to foreigners. But as a project for civilizational renewal? Unless you’re talking about surviving a nuclear war, absolutely not.
I’m an Argentine-American master’s student in international relations at Universidad Torcuato Di Tella…
Best,
Joshua Raoul Neuman
Tyler and Alex Speak to OpenAI
We were honored to speak to OpenAI about the economics of AI. Lots of good material here. Self-recommending.
Western hemisphere fact of the day
Overall, the Western Hemisphere now produces more oil than the Middle East did before the crisis. Canada is the world’s fourth-largest oil producer. Brazil produces four times as much oil as Venezuela; and in Guyana, where production began only seven years ago, output almost equals Venezuela’s. In Argentina’s Vaca Muerta region, shale oil production has grown sixfold since 2020. The current disruption will propel more oil and gas investment in the Western Hemisphere and Africa.
Here is more from Daniel Yergin in the WSJ.
CA Logic
In California a 17 year-old can drive a car but can’t ride alone in an Uber or a Waymo.
I long for the days when you could put a kid in the post. We have weakened as a civilization.
Should we recriminalize marijuana?
That is the topic of my latest Free Press column. Here is one excerpt:
The present and also future of mankind is a world where reasonably high levels of self-discipline are needed to do well. The journalist Daniel Akst pointed this out in his 2011 book Temptation: Finding Self-Control in an Age of Excess, and we are now living it full force.
I would rather cope with that world than face the full nanny state, backed by modern, AI-intensified surveillance techniques to boot. Concentrating more power in political authorities hardly solves the basic problem. If marijuana and sports gambling can manipulate weak individuals, so can unscrupulous political leaders. A greater realization of individual weakness does not translate into a case for more government action; if anything, it suggests the opposite. Better to allow our social problems to fester in a more decentralized fashion, rather than reinforce our social pathologies through a manipulative and dysfunctional leader at the very top.
In the longer term, we may need to look to medications, such as GLP-1 drugs and their offshoots, which seem to curb some forms of addictive behavior beyond the appetite for food. Alternatively, some individuals may choose self-surveillance, with self-imposed penalties for bad or addictive behavior. Perhaps your AI, or a hired third party, docks your bank account every time you puff on a joint. I am not convinced such services ever will become popular, but that should be taken seriously as an indicator of what people really want to do. We can at least give them better options for self-constraint. If they rarely choose such options, then perhaps for many of those people, marijuana consumption is not a matter of weakness but a very well-established preference, whether we like it or not…
In short, it is time to realize that paternalism is far less workable than in times past. Our government does not have the credibility, the control over information, or the control over our lives to pull it off.
I do understand that is in some significant ways bad news, as voluntary choice is overwhelming some of us with bad outcomes.
My response is to start by accepting some steps backward, holding paternalist tyranny at bay, and hoping some longer-run cultural and technological adjustments will make this all more workable.
If you have a better solution, I would love to hear it.
Recommended.
The US Exports Intelligence
Most Americans work in the service sector so it’s not surprising that most export-related jobs are in the service sector (The U.S. exports about $2.2 trillion of goods and $1.2 trillion of services, but services are more labor intensive than manufacturing so they support more export jobs per dollar.)
Richard Baldwin writes:
In 2022, US service exports supported 8.9 million American jobs.
US manufacturing exports supported 2.2 million.
That’s four-to-one in favour of services. Yet in the national narrative, ‘export jobs’ almost always means things done in steel mills and factories.
…When a household in Germany pays for Netflix, that is an American export. When a Brazilian retailer buys Microsoft cloud capacity, that is an American export. When JPMorgan structures a financial deal in London, or an American consulting firm advises a company in Singapore, those are American exports too.
None of these is shipped in a container. No customs official records them as they clear the customshouse. Yet they are exports since they earn foreign income for America just as surely as the ‘Boeings, Beans and Beef’ that President Trump sold on his recent China trip.
Need I remind you that when OpenAI sells intelligence to people abroad, that is a US export? N.B. this is the future.
World trade in goods expanded roughly five-fold between 1990 and 2020. Trade in digitally enabled services expanded more than eleven-fold over the same period. These are the modern services.
The trade debate is fixated on manufacturing—where America is doing fine—while largely ignoring services, where America is crushing. Increasingly, our most valuable exports travel not on container ships but at the speed of light over fiber.
UK facts of the day
At the peak, the year to March 2023, almost 1.5m immigrants came. The Office for National Statistics thinks that far fewer people left, so net migration amounted to 944,000.
…Net migration to Britain last year amounted to 171,000—the lowest level since 2012, if the pandemic years are excluded. The human haul will probably be even lower this year, largely because the number of economic migrants continues to fall fast…James Bowes of Warwick University thinks net migration might even turn negative in 2026…
The government’s attempt to filter for highly desirable immigrants is not working in practice. As expected, the number of visas given to care workers has plunged. But the number of visas given to IT professionals has also fallen, from about 28,000 in 2022 to 10,000 last year.
According to The Economist, most Britons still think immigration to the country is rising. And it seems economically productive immigrants are being restricted too?:
Regardless of whether he or she arrived with a work visa or by other means, the average India-born employee in Britain earns £32,400 a year, whereas the average Nigeria-born employee earns £34,000. British-born people lag behind both, with average earnings of £30,900…
The Migration Observatory, a think-tank, has shown that people who arrive from outside the EU often earn little at first. Yet the wages of recent migrants have quickly exceeded the national average…
One of my fears is that, for informational and public choice reasons, it is unduly hard to crack down on unproductive immigrants only.
The political right continues to gain ground in Latin America
A leftist senator and a rightwing populist outsider who calls himself “The Tiger” will go to a run-off presidential election in Colombia this month after no candidate won outright in the first round of voting on Sunday.
Iván Cepeda, a close ally of outgoing leftist president Gustavo Petro, will face Abelardo de la Espriella, a combative former criminal defence lawyer who won the largest share of the vote on Sunday with 10.3mn votes, a 43.7 per cent share, though he fell short of the 50 per cent plus one required to win outright.
Cepeda came in second with 9.6mn votes, a 40.9 per cent share, with 99.9 per cent of ballots counted on Sunday evening. No other candidate reached 7 per cent of the vote.
Here is more from the FT. Note the right-wing candidate was not expected to do this well, though at current margins I am not sure why people keep ending up surprised.
Lifestyle and living standards arbitrage
Since the Eisenhower administration, the U.S. hasn’t collected comprehensive statistics on the number of citizens leaving. Yet data on residence permits, foreign home purchases, student enrollments and other metrics from more than 50 countries show that Americans are voting with their feet to an unprecedented degree. A millions-strong diaspora is studying, telecommuting and retiring overseas.
The new American dream, for some of its citizens, is to no longer live there.
In the cobblestoned streets of Lisbon, so many Americans are snapping up apartments that the newest arrivals complain they mostly hear their own language—not Portuguese. One of every 15 residents in Dublin’s trendy Grand Canal Dock district was born in the U.S., according to realtors, higher than the percentage of Americans born in Ireland during the 19th-century influx following the Potato Famine. In Bali, Colombia and Thailand, the strains of housing American remote workers paid in dollars have inspired locals to mount protests against a wave of gentrification.
More than 100,000 young students are enrolled abroad for a more affordable university degree. In nursing homes mushrooming across the Mexican border, elderly Americans are turning up for low-cost care.
On a conference call last month hosted by Expatsi, a relocation company, almost 400 Americans signed up to learn how to move to Albania. The former Stalinist state offers a special visa allowing U.S. citizens to live and work there, with no tax on foreign income for a year, no questions asked.
“Previously, the Americans leaving were super-adventurous and well-credentialed,” said Expatsi founder Jen Barnett, a 54-year-old Alabama native who moved to Yucatán, Mexico, in 2024.
“Now they’re ordinary people, like me,” she said as she ticked through growth numbers.
Here is more from the WSJ. And we are not yet into the era of “AI-savvy Americans being paid lots to help foreign countries manage their own transitions.”
How to improve British procurement
Until two years ago, West London’s Greenford Tube station used to flood whenever it rained heavily. The train tracks are aboveground, but the ticket office would often get inundated. Sandbags still line the corridor.
But in October 2023, a new family moved in nearby, determined to halt the water. The family members built their house from scratch with local wood and kept odd hours, sleeping all day and working only at dawn and dusk. They even put their young children to work.
The new neighbors were beavers.
In West London, conservationists got a government license to resettle a family of five beavers in a 20-acre urban park near the Greenford Tube station. It used to be a golf course, with a creek running through it. Within weeks, the beavers dammed up the creek, creating a pond that holds water and stops it from spilling into the city. They also diverted the creek’s flow into smaller tributaries, creating a wetland that better absorbs heavy rainfall — mitigating the risk of flooding downstream…
The beavers have also allowed the city to scrap expensive plans to dig a reservoir and levee.
Here is the full story, via Mike Doherty. Should you need a government license to resettle beavers?
Supply is elastic, installment #1637
With deadly precision, the Trump administration has launched dozens of attacks on small boats in the waters off South America, killing nearly 200 people in a campaign U.S. officials say is meant to curb the flow of illicit drugs to the United States.
But almost nine months into the operation, epidemiologists, addiction scientists and public health experts say cocaine, by far the top drug smuggled out of South America, is as easy to get in much of the United States as it was before the strikes began.
The findings — based on evaluations of street prices, lethal overdoses, purity of samples and drug seizures at U.S. borders — raise questions about the effectiveness of the largest U.S. military deployment in Latin America in decades.
Here is more from the NYT. And here is another report on supply elasticity, note that European airlines are still flying.
Why are Murders Down in Baltimore?
In 2015 I wrote Baltimore Arrests are Down and Crime is Way Up and, as I predicted, Baltimore tipped into an high crime equilibrium. After the Freddie Gray riots, arrests declined and crime shot up but crime stayed high even after arrests rebounded. In my view, the surge fed on itself: higher crime strained police resources, and that strain—in and of itself—reduced the probability of punishment, sustaining the high-crime equilibrium, as in my crime wave paper.
Yet, beginning around 2022 crime in Baltimore—most especially murders—began to fall.
In April, Baltimore had four homicides, the lowest total for any single month since at least 1970. So far this year, there were 38, compared with 51 in the same period last year. At the current rate, Baltimore would end 2026 with fewer than 100 homicides. There were 323 just four years ago.
How did we get from a city in which the question was how high can crime rise, to one where the question is how low can it go? The answer might be linked to the nationwide decline in murder, spurred by a restoration of policing as the excesses of the George Floyd years recede. But that raises the question of what cities across the country are doing right.
So what caused the decline? We can’t be entirely sure as national trends confound but Charles Fain Lehman has a good piece in the FP arguing plausibly that the answer boils down to carrots, sticks and the non-random nature of murder. Begin with the latter. A significant subset of murders are highly predictable. A gang member gets gunned down today. Next week, you can expect retaliation. Moreover, you know who is going to do the murder even more than you know who is going to be murdered. Namely, a close associate—a fellow gang or family member—will be the one to do the killing. Sometimes pre-Cog is not so hard.
So with this in mind, Baltimore, under a new mayor and tough on crime prosecutor, began to intervene in the murder cycle before it happened, i.e. a focused deterrence program based on Boston’s Operation Ceasefire.
The approach involves a detailed investigation of every shooting that happens in the city. Every week, the Baltimore Police Department and its partners review the week’s incidents….For every shooting, GVRS prescribes reaching out to known associates of the victim.
…At one recent coordination meeting, about 20 people gathered around the table of the conference room at Baltimore’s Doxa Ministries Church Without Walls. Under the direction of Reginald Williams from the Mayor’s Office of Neighborhood Safety and Engagement, they talked through two new “referrals” associated with the victim of a recent shooting. One had a long criminal history and was on house arrest. Another, barely an adult, was himself a victim a few years earlier.
Both men will have their doors knocked on by several of the meeting’s attendees. They will be offered services—job training, tattoo removal, relocation, whatever they need to get out of the “life.” But they will also get a clear message, delivered verbally and in the form of a letter from Mayor Scott: Baltimore is watching them—and will come after them.
Carrots, sticks, and a little Pre-Cog. Together they appear to be working.
Those new service sector economics jobs?
Russia has passed a law authorizing its central bank and other financial institutions to repel drone attacks with their own defense systems, as the country struggles to defend against Ukrainian strikes.
The law, passed by Russia’s lower house of parliament on Tuesday, will allow staff at Russia’s central bank to be armed and to operate the systems used to down unmanned aerial vehicle (UAV, or drone) attacks without the involvement of special forces.
Here is the full story.