Category: History
Cities at or near their all-time peaks of excellence
I would cite a few:
1. Berlin
2. Kuala Lumpur
3. Mexico City
4. San Francisco
5. Seoul
6. Toronto
7. Stockholm
8. Lagos
Higher living standards count toward this designation, but they are not enough. Vienna’s general excellence was higher in the 20s, even though the city was much poorer back then, and so Vienna cannot make the list.
Los Angeles probably peaked in the 80s and New York arguably peaked in the postwar period through the 1970s or 80s. Chicago might have a claim. Can you think of others? Does Shanghai have a chance, or did it peak around 2000 or so, before it got so polluted and crowded?
Is the lack of war hurting economic growth?
I have a new piece for The Upshot on that topic, here is one excerpt:
Counterintuitive though it may sound, the greater peacefulness of the world may make the attainment of higher rates of economic growth less urgent and thus less likely. This view does not claim that fighting wars improves economies, as of course the actual conflict brings death and destruction. The claim is also distinct from the Keynesian argument that preparing for war lifts government spending and puts people to work. Rather, the very possibility of war focuses the attention of governments on getting some basic decisions right — whether investing in science or simply liberalizing the economy. Such focus ends up improving a nation’s longer-run prospects.
It may seem repugnant to find a positive side to war in this regard, but a look at American history suggests we cannot dismiss the idea so easily. Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth.
I also discuss new books by Ian Morris, Kwasi Kwarteng, and some research by my colleague Mark Koyama, as well as Azar Gat. I did not have room in the piece to point out there is an interior solution concerning this issue. That is, if the chance of war is too high, and property rights are too insecure, that isn’t good for economic growth either.
More Matt Rognlie on Piketty — the most important point
Matt has what is probably the single best, focused technical critique of Piketty. Here are his concluding remarks:
Compared to the grand scope of Piketty (2014), the objective of this note has been quite narrow: to systematically explore the relevant evidence on diminishing returns to capital. Technical and uninspiring as this question may be, it is an essential step in knowing whether the prediction of rising capital income and inequality through accumulation—a prediction that gives Capital in the Twenty-First Century its title—will really come to pass. And given the evidence here that Piketty (2014) understates the role of diminishing returns, some skepticism is certainly in order.
But rejection of this specific mechanism does not constitute rejection of all Piketty (2014)’s themes. Inequality of labor income, for instance, is a very different issue—one that remains valid and important. Capital itself remains an important topic of study. Among large developed economies, the remarkably consistent trend toward rising capital values and income is undeniable. As Sections 3.3 and 3.4 establish, this trend is a story of rising capital prices and the ever greater cost of housing—not the secular accumulation emphasized in Capital — but it has distributional consequences all the same. Policymakers would do well to keep this in mind.
The full piece is here (pdf), excellent and on target throughout.
To be perfectly frank on this one, Matt here is completely correct and Piketty has not produced any effective response to this point, either within the book or without. The internal response “I still think we need to worry about inequality therefore I side with Piketty” simply represents a misunderstanding of Matt’s argument. Piketty’s mechanism of accumulation, as laid out in his book, is simply the wrong mechanism for understanding growing inequality, both theoretically and empirically. And it is a shame that the Giles critique from the FT has attracted so much attention because it has distracted everyone from the more serious problems with the argument of the book.
Charlie Stross unintentionally explains why Scottish independence is a bad idea
Here is one of the end paragraphs of his “interesting throughout” but unsettling piece in favor of independence:
Which brings me to the punch-line: I’ll be voting “yes” for an independence Scotland in September. Not with great enthusiasm (as I noted earlier, if Devo Max was on the ballot I’d be voting for that) but because everything I see around me suggests that there is some very bad craziness in the near future of England, and I don’t want the little country I live in to be dragged down the rabbit hole by the same dark forces of reaction that are cropping up across Europe, from Hungary to Greece. The failure modes of democracy, it seems to me, are less damaging the smaller the democracy.
Stross is a smart guy and I am an admirer of his writing. But my view remains pretty straightforward: when dislike of the policy choices of the electorate leads to a serious movement for secession, something has gone deeply wrong with the preconditions for democratic attachment. The UK is hardly the Third Reich, it has a long tradition of honest elections, and for left-leaning individuals the share of British government in gdp is likely to stay well over 40% in all plausible futures and furthermore most of the conservatives are relatively liberal on social questions. For those who favor independence for the Scots, what kind of general principle might you lay out for when other peoples also should seek secession? Do they think that the strongly red states in America also should consider secession? How about Vermont? I understand the libertarian case for such secessions, but most supporters of Scottish independence are not arguing from libertarian premises. How much secession do they think should be happening? Or do they hold particularist views which do not admit of any generalization at all? Either way, I consider this a true crisis of governance.
Addendum: Scottish wealth seems to be lower than they have been claiming: “More than 70% of Scotland’s total economic output – excluding banking and finance and the public sector – is controlled by non-Scottish-owned firms, according to Scottish government data.”
Growth mindsets
Scott Young writes:
In logarithmic domains, two mindsets are important. In the beginning, high-growth phase, the emphasis needs to be on maintaining long-term habits. Since growth is fast initially, care needs to be taken so that it won’t slide back down once effort is removed.
In the later, low-growth phase, the emphasis needs to be on habit breaking. Since low-growth is often caused by calcifying routines, deliberate effort needs to be taken to break out of that comfort zone.
In exponential domains, the mindset of resilience and endurance are critical. Since feedback is sparse and generally negative during the initial part of the curve, it takes dedication to persist. Part of the reason, entrepreneurs are often consumed by their own vision is that it helps block out the negative feedback until they can reach the exponential part of their growth.
There is more here, and for the pointer I thank R.
New MRU course on the economics of the Soviet Union
It is taught by Guinevere Liberty Nell, and you will find it here. Here is Guinevere’s biography:
Guinevere Liberty Nell earned an MA from the University of Warwick in Soviet economic history after studying the subject independently for several years, as well as studying and publishing in the field of Austrian economics. She is the author of Rediscovering Fire: Basic Economic Lessons from the Soviet Experiment (Algora, 2010) and Spontaneous Order and the Utopian Collective, which focuses on Lenin’s utopian ideas and the early years of the Soviet experiment (Palgrave-Macmillan, 2014).
We will have a class (mostly by me) on International Finance , coming soon, other offerings too.
Donald N. Michael on our future cybernation
He wrote:
[When] computers acquire the necessary capabilities…speeded-up data processing and interpretation will be necessary if professional services are to be rendered with any adequacy. Once the computers are in operation, the need for additional professional people may be only moderate…
There will be a small, almost separate, society of people in rapport with the advanced computers. These cyberneticians will have established a relationship with their machines that cannot be shared with the average man any more than the average man today can understand the problems of molecular biology, nuclear physics, or neuropsychiatry. Indeed, many scholars will not have the capacity to share their knowledge or feeling about this new man-machine relationship. Those with the talent for the work probably will have to develop it from childhood and will be trained as intensively as the classical ballerina.
Michael then discusses what will happen to those people who cannot work productively with the machines. Some will still work in person-to-person interactions, but the others will end up in government-designed public tasks and work short hours and subsist on the public dole. He also considers the possibility of sending some of these individuals to poorer countries where automation is not so far advanced.
Michael wrote all of that and more in his book Cybernation: The Silent Conquest in…1962.
Very good Larry Summers FT review of Mian and Sufi
It is here, he mostly really likes the book but thinks they are not sophisticated enough in their policy prescriptions. Here is one good excerpt on whether the federal government should have worked harder to institute mortgage cramdowns:
First, there was the risk of bringing down the system in an effort to save it. Banks had substantial mortgage holdings and especially large quantities of subordinated second mortgages and home equity lines of credit, which would have been wiped out if mortgage principal had been reduced in a way that respected the seniority of first mortgages. We recognised that large-scale principal reduction would draw in a large number of mortgages that were not delinquent and would otherwise be paid in full. As a consequence, there was the risk of sucking hundreds of billions of dollars out of the banking system. Given that government funds for capital infusions were scarce and that each dollar of bank capital supports $12 of lending, we worried that the spending gains from reducing mortgage debt might well be exceeded by the spending losses from reducing the flow of capital. This fear may have been exaggerated. If they think so, Mian and Sufi owe an explanation as to why.
Second, there was the issue of chilling future lending… This was not a small concern, as the automobile industry was in freefall and consumer confidence was deteriorating very rapidly.
Third, there was the danger of prolonging the housing market’s problems. Even the relatively limited programmes in place have spent as much as a third of their money delaying, rather than avoiding, foreclosures. All that we heard at the time suggested that a significant part of the reason why the housing market was dead was that no one wanted to buy because of a fear that it had further to fall. Delaying inevitable foreclosures with relief risked exacerbating this problem and risked larger foreclosure discounts when houses were ultimately sold.
Why am I reminded of The Clean Air Act of 1963?
Here is one very brief history:
Each state was given primary responsibility for assuring that emissions sources from within their borders are consistent with the levels designated by the NAAQS. In order to achieve these goals, each state is required to submit a State Implementation Plan (SIP) to the EPA to ensure the implementation of primary and secondary air quality standards…Since many states failed to meet mandated air quality standards first set by the Clean Air Act, Congress created the 1977 amendments to aid states in achieving their original goals.
That is just one bit of course. More broadly, people focus on The Clean Air Act of 1970, but of course the original legislation was from 1963 and it was extremely ineffective because it had inadequate popular support and the issue was not yet a major concern. It had to be revised/amended in 1965 and 1967 and 1970 and then also 1977 and 1990. Yet the 1963 act did set definite standards for stationary (but not mobile) pollution sources and mandated a timetable for adoption, albeit with a lot of state flexibility for meeting the new standards. All of that went nowhere. And that was an act passed directly by Congress, not just an Executive Order. Even in those days, a lot of actual progress in the fight against air pollution came through the replacement of dirty coal by natural gas, a process which had started in the 1920s and spread through America in successive waves.
Here is a typical paragraph about early policy ineffectiveness, from a useful essay:
By 1970, it was “abundantly clear” to Congress that federal legislative efforts to fight air pollution were inadequate. State planning and implementation under the 1967 Act had made little progress.Congress attributed this “regrettably slow” progress to a number of other factors including the “cumbersome and time-consuming procedures” in the 1967 Act, inadequate funding at the federal, state, and local levels, and the lack of skilled personnel to enforce pollution requirements. Commentators have also suggested that federal legislation prior to 1970 failed because of both an inability and an unwillingness on the part of the states to deal with air pollution.
When I read about the new Obama plan, I am reminded of 1963, and also 1965 and 1967. For all of the hullaballoo you are hearing — whether positive or negative — keep this in mind.
Addendum: Most of the best sources on the 1963 Act are off-line. But here is an interesting essay about some of the federalistic issues behind the enforcement of the various Clean Air Acts, mostly post-1963. Here is the text of the 1963 law, for one thing it is amazing how short it is.
The new Godzilla movie, *Godzilla* (minor spoilers in post)
I know I am late on this one, but I thought it was pretty damned good, well above expectations. I feel comfortable placing it in the top five Godzilla movies of all time. The visuals are spectacular but not overdone, and it pays appropriate homage to its sources, including the Japanese original but also Hitchcock’s The Birds. The movie also treats nuclear weapons use with the moral seriousness it deserves, which is rare these days.
And is there a Straussian reading? Well, yes (did you have to ask?). The film is really a plea for an extended and revitalized Japanese-American alliance. The real threat to the world are the Mutos, not Godzilla, who ends up defending America, after the lead Japanese character in the movie promises the American military Godzilla will be there as our friend (don’t kill me, that is not a major spoiler as it is telegraphed way in advance).
The Mutos, by the way, are basically Chinese mythological dragons, and an image of two kissing Muto-like beings is shown over the gate of San Francisco’s Chinatown three different times in the movie, each time with greater conspicuousness. The Mutos base themselves in Chinatown in fact. Note that the Mutos can beat up on Godzilla because of their greater numbers, but as for one-on-one there is no doubt Godzilla is more fierce. And the name of the being — Muto — what does that mean? I believe loyal MR readers already know, and apologies for reminding you. General Akira Muto led the worst excesses committed by Japanese troops during the Rape of Nanjing, perhaps the single biggest Chinese grievance against The Land of the Rising Sun, and thus the beings are a sign of the Chinese desire for redress and revenge. Unless of course the right military alliance comes along to contain them and save the world…
The references to Pearl Harbor and the Philippines are not accidents either.
*Becoming Freud*
That is the new and excellent book by Adam Phillips, in the US available on Kindle only. Here is one bit:
…Freud was discovering that we obscure ourselves from ourselves in our life stories; that that is their function. So we will often find that the most dogmatic thing about Freud as a writer is his skepticism. He is always pointing out his ignorance, without ever needing to boast about it. He is always showing us what our knowing keeps coming up against; what our desire to know might be a desire for.
And later:
Psychoanalysis would one day be Freud’s proof that biography is the worst kind of fiction, that biography is what we suffer from; that we need to cure ourselves of the wish for biography, and our belief in it. We should not be substituting the truths of our desire with trumped-up life stories, stories that we publicize.
Recommended.
Sweden has lots of wealth inequality
Sweden is viewed as an egalitarian utopia by outsiders, but reality is complex. In some ways Sweden has less social equality than the United States. While the American upper class is largely meritocratic, the upper class in Sweden are still mostly defined by birth.
Historically, Sweden, Norway and Finland alone in Europe never developed Feudalism (Denmark was closer to continental Europe). The Nordic nobility was a small share of the population and not as powerful as the nobility in continental Europe, though still influential. The upper class in Sweden today consists of the nobility and of wealthy bourgeoisie families that socially merged with them. Wealthy bourgeois families live in the same neighborhoods and have adopted similar behavior and identity as the nobility. Despite long Social Democratic dominance they remain a coherent social group, with a distinct and recognizable accent, way of dressing, values etc.
Belonging to the upper-class is not defined merely by wealth, depending more on blood. Just as in historical times, a Nouveau riche member of the middle class will not automatically be accepted as a member of the upper-classes, unless they actively adapt their behavior and are accepted by the upper-classes socially.
The upper classes in Sweden retain a disproportional hold on wealth and power. The formal nobility in Sweden constitutes around 0.2% of the population. A couple of years ago I looked through the list of the wealthiest Swedes. Fully 10% of the richest Swedes are members of the nobility. By contrast not a single one of the richest Swedes was a non-European immigrant. Of Sweden’s prime-ministers Sweden during the modern era 20% belonged to the nobility.
Sweden is known for income equality. Increasingly, studies also point to Sweden as a country characterized by high intergenerational mobility of income. Income-distribution and wealth distribution are however not the same thing. What some may not know is that wealth-inequality is relatively high in Sweden. The top one percent own around 35% of wealth in the United States. In Sweden, because of extensive tax evasion, the number is harder to calculate. When including estimates of wealth held outside of Sweden, Roine and Waldenström estimate that the top one percent richest Swedes own 25-40% of total wealth, not far from American inequality levels, and increasing more rapidly.
At the same time, the intergenerational mobility of top wealth is chokingly low. A recent studyfound that a astonishing 80-90% of inequality of top wealth is transmitted to the next generation in Sweden!
According to one studythe share of the richest Swedes who inherited their wealth is around, 2/3 with 1/3 being entrepreneurs, while in the United States it was the opposite, with 1/3 of the wealthiest inherited their wealth while around 2/3 are entrepreneurs.
Thus while the Swedish middle class is large and has a compressed earning distribution, at the very top you have a small number of aristocratic families controlling much of the wealth. Mobility into this group is rare, probably rares than it is in the United States. One reason are stronger informal class-barriers, merely earning wealth is not enough to be accepted a member of the aristocratic upper-class. Another more interesting reason may be the unintended effect of welfare-state economic policies.
During the era of Social Democratic dominance, they wondered how to deal with wealth inequality. The dilemma facing the Social Democrats was this: The upper-class business families did a very good job managing Swedish export industry, the key to Sweden’s wealth. This is especially true for the Wallenberg family, the leading industrial family in Sweden, controlling amongst others ABB, Ericsson, Electrolux, Atlas Copco, SKF, AstraZeneca and Saab and doing an excellent job.
The Social Democrats decided to accept the unequal distribution of assets, but simply make these assets worth less using punitive high tax rates. Because of high inflation capital taxes were often 80-100%.
The upper-class families still owned most of private industry, but because of taxes those assets were simply not worth much. Paradoxically the high taxes and capital regulations which prevented foreign investments seem to have helped freeze the asset distribution into place, with the share of wealth owned by the rich being fairly constant between 1970 to the 1990s.
The OECD also reports that Sweden is quite unequal in wealth, hat tips go to Old Whig and Luis Pedro Coelho.
Piketty responds to critics
Is Piketty’s “Second Law of Capitalism” fundamental?
Per Krusell and Tony Smith have a new paper on Piketty (pdf), which I take to be reflecting a crystallization of opinion on the theory side. Here is one excerpt:
There are no errors in the formula Piketty uses, and it is actually consistent with the very earliest formulations of the neoclassical growth model, but it is not consistent with the textbook model as it is generally understood by macroeconomists. An important purpose of this note is precisely to relate Piketty’s theory to the textbook theory. Those of you with standard modern training have probably already noticed the difference between Piketty’s equation and the textbook version that we are used to. In the textbook model, the capital-to-income ratio is not s=g but rather s/(g+ δ), where δ is the rate at which capital depreciates. With the textbook formula, growth approaching zero would increase the capital-output ratio but only very marginally; when growth falls all the way to zero, the denominator would not go to zero but instead would go from, say 0.12—with g around 0.02 and δ = 0.1 as reasonable estimates—to 0.1. As it turns out, however, the two formulas are not inconsistent because Piketty defines his variables, such as income, y, not as the gross income (i.e., GDP) that appears in the textbook model but rather as income, i.e., income net of depreciation. Similarly, the saving rate that appears in the second law is not the gross saving rate as in the textbook model but instead what Piketty calls the “net saving rate”, i.e., the ratio of net saving to net income.
Contrary to what Piketty suggests in his book and papers, this distinction between net and gross variables is quite crucial for his interpretation of the second law when the growth rate falls towards zero. This turns out to be a subtle point, because on an economy’s balanced growth path, for any positive growth rate g, one can map any net saving rate into a gross saving rate, and vice versa, without changing the behavior of capital accumulation. The range of net saving rates constructed from gross saving rates, however, shrinks to zero as g goes to zero: at g = 0, the net saving rate has to be zero no matter what the gross rate is, as long as it is less than 100%. Conversely, if a positive net saving rate is maintained as g goes to zero, the gross rate has to be 100%. Thus, at g = 0, either the net rate is 0 or the gross rate is 100%. As a theory of saving, we maintain that the former is fully plausible whereas the latter is all but plausible.
With the upshot coming just a wee bit later:
…Moreover, whether one uses the textbook assumption of a historically plausible 30% saving rate or an optimizing rate, when growth falls drastically—say, from 2% to 1% or even all the way to zero—then the capital-to-income ratio, the centerpiece of Piketty’s analysis of capitalism, does not explode but rather increases only modestly. In conclusion, at least from the perspective of the theory that we are more used to and find more a priori plausible, the second law of capitalism turns out to be neither alarming nor worrisome, and Piketty’s argument that the capital-to-income ratio is poised to skyrocket does not seem well-founded. [emphasis added by TC]
Krusell and Smith really know their stuff on this topic and their arguments to me seem completely correct.
By the way, here is a Chris Giles follow-up post from The FT, very useful.
More cars, fewer pedestrian deaths
Michael Blastland and David Spiegelhalter have a new book about risk — The Norm Chronicles: Stories and Numbers About Dangers and Death — and it does actually have new material on what is by now a somewhat worn out topic. Here is one example:
In 1951 there were fewer than 4 million registered vehicles on the roads in Britain. They meandered the highways free of restrictions such as road markings, traffic calming, certificates for roadworthiness, or low-impact bumpers. Children played in the streets and walked to school. The result was that 907 children under 15 were killed on the roads in 1951, including 707 pedestrians and 130 cyclists. Even this was less than the 1,400 a year killed before the war.
The carnage had dropped to 533 child deaths in 1995, to 124 in 2008, to 81 in 2009, and in 2010 to 55 — each a tragedy for the family, but still a staggering 90 percent fall over 60 years.
You can buy the book here.