One percenters

John, I think the though on the top 1 percenters competing with the state is a gem; but probably it is not so much with the state as from within the state, with the other 99%. Which means that a current democracy is a struggle for dominating the state with everybody having one vote, but 1 percent of everybody only having the means to influence other people’s votes.

There are much more differences from Europe. Using the work of Elizabeth Warren about the split of expenses of a “mean” middl-class” family in the US, a ver high percentage of the income goes to health-care and children education, that is far less in western developed european countries, so, in general, the difference in live standards seems to be higher than the only income consideration

On the other hand, if you analyse from the beginning of the period when the richest tax cut start (the trend start in the beginning of the 80’s), you can see that this act as a multiplier, so the gap is widening with time, and now the gap has the same value than before 1929, and the trend continue…

I don’t know if these comparisons take into consideration the geographical differences between US and the EU. In the US it is not unusual to travel for an hour to work. In Europe there are also commuters, esp. in the larger cities, e.g London, but as a whole on the continent this number is lower than in the USA. And the average time of commuting per person is lower. In general Europeans live closer to their workplaces. Of course, this is only my personal impression and I have no data to back it up. I don’t know if productivity measures take into account not only the hours at the workplace or also the hours needed to get there, but clearly if it is the former and my presumption is right, it tilts statistics in favour of US productivity.

“the proportion going to the very which”
Surely you mean the vewwy which.

Fixed, thanks vewwy much – JQ

“Wikipedia cites Heritage estimates that the US tax revenue share of GDP is 28 per cent compared to 40 per cent for the Netherlands, 41 per cent for Germany and 46 per cent for France..”

Whoa! Is this comparing the percentage of tax revenue that goes to the FEDERAL government in the US with the percentage of tax revenue that goes to both NATIONAL and LOCAL governments in these other countries? I stopped reading at this point. Given that the source is Heritage, that probably is the comparison they are making.

The point of this post which deserves to be shouted from the rooftops is that ordinary Americans have been screwed these past three decades, to a truly mindboggling extent. America is hurting, and it is unbelievable that this fact hardly shows up on the political agenda at all.

“offset by the fact that Europeans do more household work”

Is there any statistics for this?

Isn’t it relevant that a much higher proportion of US taxes (no statistics, but I’m pretty sure it’s true) goes to the military (a disturbing percentage of which is recycled back to the top 1% through outsourcing) than in the EU countries?

That the USA and Western Europe are about equally wealthy makes sense. If there had been a huge gap in wealth, as there is between the USA and Mexico, there would have been a significant net migration over the Atlantic Ocean, just as there is over the US/Mexican border. Because people normally tend to migrate from poor to rich countries. Once upon a time, there was such a huge migration from Europe to the USA. That this has ended, makes it plausible that Europe has been catching up to US living standards. Or that living standards in the USA has declined to European levels.

“. Wikipedia cites Heritage estimates that the US tax revenue share of GDP is 28 per cent compared to 40 per cent for the Netherlands, 41 per cent for Germany and 46 per cent for France. ”

A lot of people on the wikipedia entry’s discussion page say the stats are highly inaccurate.

“Wikipedia cites Heritage estimates that the US tax revenue share of GDP is 28 per cent compared to 40 per cent for the Netherlands, 41 per cent for Germany and 46 per cent for France.”

I’m pretty sure that the 28% is some purely federal number [I can’t figure out exactly what is being cited, but I suspect it is either federal income tax or maybe all federal taxes. ]

So I would think that using such a measure risks dramatically understating the amount of taxation that we are talking about.

Annoyingly my google-fu came up with only very few sources which give combined figures, and none from the kind of source I’d like to cite (official OECD reports or US Treasury or IRS reports). But for what it is worth: this suggests that it is about 35% instead of 28%. Which would put it nearer to the range of the European countries you are talking about.

One way of looking at it is that the real figures suggest a not nearly as large disparity, but another way of looking at it is that if you add in the top 1%, Americans are much worse off. I guess it comes down to the validity of adding in the top 1%. Which is certainly an interesting way of looking at it.

Sebastian: In addition to the OECD link above, you can find detailed US data here. It’s not presented as a share of GDP, but knowing that US GDP was $14.4 trillion in 2010:I and $14.6 trillion in 2010:II, you can do the math yourself.

I ‘m not sure how the site you linked to came up with such wildly erroneous numbers. But it looks like they simply added up total federal, state and local revenues, which of course leads to lots of double- and triple-counting since a large part of state and especially local revenues are transfers from higher levels of government.

And as Lemuel points out, most of the discrepancy is double counting of the $500 billion in federal grants-in-aid to state and local governments. Someone should tell that usgovernmentspending guy, but I kinda think he might be ideologically motivated not to notice.

John Q.-

This is an interesting analysis. But I wonder if it wouldn’t be even more interesting to net out interest, dividends and related income, rather than the top 1 percent.

Well, sure, the international-trade-and-finance side complicates things. For instance, if the goal is to compare standards of living, you also should take into account that America’s “exorbitant privilege” of running perpetual deficits in return for supplying the global reserve currency, means that US consumption plus investment runs several percentage points higher than GDP.

I didn’t realize the double counting issue. Sorry about that.

‘Of course, wealth and therefore capital income are even more unequally distributed than labor income, but I don’t see much use in an analysis based on the premise that owners of capital, as a class, are exploiting workers, as a class defined to include anyone who works for pay.’

Academic Marxists will presumably know more about this than I do, but I don’t think even Marx defined the proletariat as ‘anyone who draws a salary in any shape or form whatsoever, no matter how large that salary might be’. (Did he not define professionals as the Petit-bourgeois?)

IIRC, Hidari is right. The proleteriat are those workers directly involved in the production of surplus use-value. Bankers, lawyers (and I seem to remember and might be wrong, controversially, teachers) are put into a different category along with clowns, court musicians and other providers of entertainment and convenience to the bourgeoisie.

(And Daniel is right that you can not assume that someone who is paid a salary to do x, y or z is any kind of ‘producer’.)

Would anyone care to comment upon this?

http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

They’ve been taking too much opiate of the masses, and lost their class consciousness.

Heroic asumption that IRS fillings represent the actual income. Capital income is much easier to hide. Capital income earners also have the option to just move to a country with no capital gains and estate taxes. Many nations have specific designed tax loopholes to attrackt such foreign rich capital owners with no taxes even when they do tax capital gains for locals. Switzerland, Austria, UK for example. The IKEA founders huge capital income is nowhere to be found in Swedish tax fillings (or those of any other country). He just pays his 50K or so flat inependent of income in the UK, thats it.

(I would also note that income can’t be that easy to hide in the US, since the rich do pay an awful lot of income tax. A different story elsewhere, probably.)

The US has never been anything other than a plutocracy- plutocracy is even an essential part of our national identity.

If you are going to argue this, you are going to need a really good argument. Politics is, in part, the struggle over what the national identity is going to be. There is plenty of political history in the US that supports the idea that the struggle between two visions of national identity is what’s essential: between what you call “plutocracy” and a more democratic version. It’s true that the US never institutionalized guild and similar traditions into written law, as had been the case in Europe, but people brought those institutions over with them, even if few if any of the founders knew about those. Alexander Hamilton and his present-day followers in the conservative movement would be unimaginable if this was true.

This may sound all wishy-washy, over-qualified, and implausible, and it’s true that the rich have more power in a lot of ways, and all that might add up for some people as proof that the burden of proof is on me to argue for this horrifically implausible scenario. But the group that benefits most from the idea that the US has only ever been a plutocracy–apart from, traditionally, the (now nonexistent) communists who wanted to discredit any group on the left that wasn’t themselves–are the right-wing who are only too happy to hear that no real American would dream of opposing them.

Employed Americans work longer hours (offset by the fact that Europeans do more household work)

On the latter point, the definitive source seems to be Freeman and Schettkat, Marketization of Production and the US-Europe Employment Gap. They show, using a mix of time-use surveys and aggregate consumption data, that the difference in employment-population ratios between the US and Europe is largely explained by the greater share of household production in Germany (and by extension other EU countries) and of market production in the US. Less demand for market substitutes for household production in turn means fewer low-paying service jobs.

For instance,

In 1994 both American and German households spent about 30% of their incomes on food and beverages. But they spent this money in different ways. In the US more than half of spending in this area (16.7 points out of 30.3 points) went to restaurants and miscellaneous goods and services. In Germany only 25% of the spending (7.3 points out of 30.2 points) went to restaurants and related goods. … The 9.4 percentage point difference (16.7–7.3) in spending on restaurants and related services implies that at comparable levels of income the US demands considerably more production in that sector, and thus has greater derived demand for labor there. … Germans spend 1.8 hours more time eating than Americans and 2.2 hours more time preparing meals, for a total of 4 hours of extra time per week eating and preparing meals.

IIRC, the position dsquared attributes to Marx, restricting membership of the proletariat to those involved in “productive labour” (in a very narrow sense of that term) is very much an outlier position (didn’t Poulantzas believe something like this?). Plainly, it runs up against the problem that it makes the unemployed and non-working members of families non-proletarian.

Yes, people tend to imagine that all kinds of other occupational categories are unnecessary and unproductive right up to the point when they need (legal advice, ponies, a critical theory of capitalism leading to a revolutionary way out of the crisis, etc, etc).

Ahhh, I was thinking of the passage:

The labour of some of the most respectable orders in the society is, like that of menial servants, unproductive of any value… The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers. They are the servants of the public, and are maintained by a part of the annual produce of the industry of other people… In the same class must be ranked.., churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc.

in “Theories of Surplus-Value, but it appears that Marx was, at this point as at so many others, quoting Smith.

One always has to be careful, reading Marx, to note the point where he tips over into satire.

But note that Marx didn’t say that certain kinds of work are productive or unproductive simply on account of the type of work that they are, as is clear from a famous passage from “The Results of the Immediate Process of Production” (Penguin C v. 1 1044 but text from marxists.org):

bq. Labour with the same content can therefore be both productive and unproductive.

Milton, for example, who did Paradise Lost, was an unproductive worker. In contrast to this, the writer who delivers hackwork for his publisher is a productive worker. Milton produced Paradise Lost in the way that a silkworm produces silk, as the expression of his own nature. Later on he sold the product for £5 and to that extent became a dealer in a commodity. But the Leipzig literary proletarian who produces books, e.g. compendia on political economy, at the instructions of his publisher is roughly speaking a productive worker, in so far as his production is subsumed under capital and only takes place for the purpose of the latter’s valorisation. A singer who sings like a bird is an unproductive worker. If she sells her singing for money, she is to that extent a wage labourer or a commodity dealer. But the same singer, when engaged by an entrepreneur who has her sing in order to make money, is a productive worker, for she directly produces capital. A schoolmaster who educates others is not a productive worker. But a schoolmaster who is engaged as a wage labourer in an institution along with others, in order through his labour to valorise the money of the entrepreneur of the knowledge-mongering institution, is a productive worker. Yet most of these kinds of work, from the formal point of view, are hardly subsumed formally under capital. They belong rather among the transitional forms.

67- maybe because there is something to it?

69- That helps: the goal is to remove the need for any productive work, properly spoken. That is something that I find particularly appealing (cfr lemuel pitkin’s Smith quote on older thread) and I am sure Wilde will have said something witty to that effect.

Surely not: “But the same singer, when engaged by an entrepreneur who has her sing in order to make money, is a productive worker, for she directly produces capital.”

The ‘contractor’ thing is, as you note, just a dodge to get round labour-law definitions of ’employment’, it does not speak to the economic relationship at all. Perhaps your reading of Marx is awry [if not merely wry]?

I like “knowledge-mongering”. You don’t get too much knowledge-mongering on the internet.

Engels, that quote seems to oppose CB’s quote above about Paradise Lost etc.

Their might be a point in saying that soldiers and teachers are only supplying conditions, sort of being “productive-by-proxy”.

But I suspect that with such a definition, hardly anyone in a complex economy is “first-line” productive.

The point of this post – that average income per capita is not the right metric for comparison because the distributions must be taken into account – is so obvious it shouldn’t need mentioning. But why don’t we compare median income? Are there reliable data? Why don’t we overlay the whole income distribution for the US vs. other countries? Are good enough data available for that, e.g. the Luxembourg Income Study?

Smith intuition behind the distinction between productive and unproductive labor is obvious: something must first be produced, before it can be exchanged. A classical political economy was concerned with identifying the sources of productive surpluses and their augmentations, rather than marginal increments balancing supply and demand. Of course, the distinction is invidious as well: are transport workers who haul goods to market unproductive, when Smith attributed the prime source of productive increments to specialization in the division of labor and the extent of the latter to the extent of the market?

On the other hand, Marx’ renewal of the distinction is not pointless: productive labor is commodified labor, enchained to the process of augmenting the stock of commodities for sale by capitalists. Lawyers, accountants, etc. who are concerned with the distributions of surplus-value are not productive labor, which isn’t the same thing as being unnecessary for the process of capitalist reproduction. But then unemployed workers are also unproductive, since there is inadequate surpluses or distributions thereof to employ them. And Marx similarly attributed to the level of unemployment a necessary role in the reproduction of capitalism.

I’m with John C. Halasz. The classical economists had a theory different than the marginalists.

Since John Quiggin rejects that theory, I wouldn’t expect him to accept certain distinctions that arise within that theory.

chris, I assume there is nothing that could ever convince you that markets are not always right. Not even the giant crater in the ground left by the housing bubble. If “the market” calls for a giant crater in the ground, then a giant crater in the ground must have been the most productive use of economic resources. That style of argument is conveniently immune against refutation but that doesn’t make it convincing.

In case of confusion, recall that I have been reluctant to classify transaction costs as unproductive per se.

“It is problematic to classify whole sectors as “unproductive”, such as the financial or the legal sector, because a modern economy cannot do without them, but clearly the relative size of these sectors (also law enforcement, the military, health care) has important implications for the productivity and sustainability of the economy as a whole.”

I used to live next door to a Russian émigré. One day he asked me to explain something that puzzled him about his new country. “This place seems very rich,” he said, “but I never see anyone making anything. How does the country earn its money?”

The answer, these days, is that we make a living by selling each other houses. Since December 2000 employment in U.S. manufacturing has fallen 17 percent, but membership in the National Association of Realtors has risen 58 percent.

Paul Krugman, Safe as Houses, August 12, 2005

>My memory and Lemuel’s numbers didn’t reconcile. Turns out that this time it looks like my memory was right.

No, it wasn’t.

Your link is for government expenditures. Sebastian’s question was about tax revenue. There’s a bit of divergence between the two lately, as you may have heard.

chris, I assume there is nothing that could ever convince you that markets are not always right.

You assume that on the basis that I don’t think selling a house is _per se_ unproductive? That’s a pretty long stretch of an assumption.

Certainly *some* sales of homes probably *are* unproductive, but the argument I was responding to required them to be *categorically* unproductive (“each time a property is sold … absolutely nothing is added to the economy”), which is just silly.

I would go further and say that the whole idea of declaring entire industries categorically unproductive is wrongheaded (entertainment has value to the people entertained, for example), but fraud might be a counterexample. (Although if people really do feel better after visiting a faith healer, homeopath etc., is that valuable *to them* in the same sense entertainment is? In that case even some forms of fraud might be accidentally productive, in a manner of speaking — although still fraudulent in that they purport to offer genuine cures for underlying medical conditions. I think that this kind of philosophical quibble likely leads nowhere, but some people might find it entertaining and, thus, worth engaging in.)

In case of confusion, recall that I have been reluctant to classify transaction costs as unproductive per se.

No, you haven’t. See the sentence I just quoted above, from your post 80. You flat out said that changes in home ownership, categorically, add “absolutely nothing” to the economy. That is only possible (as a categorical statement) if the value of a thing doesn’t depend on who owns it, which amounts to throwing out people’s actual values for things and the differences between them and appointing yourself (or some suitable proxy that will most likely just end up reflecting yourself) Lord High Valuator of Everything.

I think that’s the same mistake Smith made on the way to declaring entertainment unproductive — failing to acknowledge the complexity and diversity of what people actually value. Faux-objective metrics of value and productivity often have this problem.

P.S. This isn’t limited to home sales — if everything has only one true value, then all trade becomes zero-sum. The possibility that I might prefer a banana to an apple and you vice versa is what allows the trade of my apple for your banana to be mutually beneficial and productive. If you deny the reality of our subjective valuations and insist that one of us must really be getting ripped off, you can’t possibly understand actual human economic interactions.

piglet: “In case of confusion, recall that I have been reluctant to classify transaction costs as unproductive per se.”

chris: “No, you haven’t.”
Well I thought the statement I repeated in 85 (“It is problematic to classify whole sectors as “unproductive”) was sufficiently clear but perhaps you know better. I think the statement that transaction overhead “add nothing to the economy” is a fair one but it doesn’t mean (and I explicitly said so) that transaction costs are always unnecessary. What it does mean is that high transaction costs indicate economic inefficiency. In Krugman’s exaggerated account, an economy where most people “make a living by selling each other houses” is clearly inefficient and unproductive. This is not a banal statement because official statistics do treat house-flipping as a highly productive economic activity whereas just living in a house for a long period of time counts little if at all. And legions of housing bubble apologists where actually saying that house-flipping was good for the economy (it may have been for their economy to be sure), the more the merrier. In other words, they were saying that increasing the transaction costs of an economy was increasing economic productivity, which I say is nonsense.

I think the statement that transaction overhead “add nothing to the economy” is a fair one

I think so too, but saying that *the sale itself* adds nothing to the economy is quite different. The transaction cost is the cost of the transaction; the transaction cannot occur without its cost. That doesn’t mean the *transaction* adds nothing to the economy; the transaction and its cost have to be analyzed as a package deal, which may be net productive.

Of course some transactions may not produce as much as their transaction costs, and end up being wasteful. Anyone contemplating a transaction should consider whether it is worth enough to overcome the transaction cost, especially if that is substantial (as it is for real estate deals). But that’s something that can only come out of an individualized analysis, not a blanket judgment.

Maybe I misunderstood what you were saying.

“Each time a property is sold, real estate agents and banks make thousands in fees even though absolutely nothing has been added to the economy.”

…Nope, it’s pretty hard to read that as anything other than a blanket statement that sale of an existing house *never* adds anything to the economy.

Maybe I should just interpret your later positions as abandonment of that overbroad (hyperbolic?) statement; in that case I think we actually agree on quite a bit (albeit rather banal stuff like “trade can produce a net increase in value, if it isn’t wasteful or excessively costly”).

in macroeconomics, we pretend that administrative overhead is a productive enterprise on its own and we count (in GDP accounting) transaction costs as productive output instead as a cost.

This is an interesting point. I think it may result from inability at the macro-level to distinguish between necessary and unnecessary costs — they have already been aggregated together in the statistics available for macro-level analysis.

The necessary overhead involved in making something is baked into the cost to make it at all (and if the cost to make it exceeds the value of having it, then effectively there is no such industry, or it’s a niche industry for people who value that thing much more than most people value it). But unnecessary costs sometimes go along for the ride, and it’s not easy to separate them (and furthermore, a cost can be necessary right up until someone discovers a way to eliminate it without jeopardizing the quality or volume of production, and then it becomes unnecessary). Few people will voluntarily undertake unnecessary costs, but they might do so mistakenly, or be induced to by someone else to whom the unnecessary cost represents their profit. And since mistakes and manipulating others for profit (whether or not that takes the form of actual fraud) are endemic to human economies, every economy has some level of waste and effectively can’t reduce their waste to zero by any actually possible program.

ISTM that however theoretically superior it might be to adjust GDP for waste, in practice it would be nearly impossible, because you would need an impractical level of detail about the operation of every business in the economy. But it certainly is worth mentioning if there’s some good reason to think that waste is trending up or down in a particular economy.

It seems to me that while distribution of commodities does indeed add something to the economy, things like “sale” and “trade” are concepts pertaining to the ways some economies operate. These are rules by which the economy is organized; they can be good rules, or bad rules; they, of course, affect productivity and other characteristics of the economy, but I don’t think a sale transaction creates any value.

Switzerland is a small enough and idiosyncratic enough country to be irrelevant. someguy doesn’t think the difference between 28.2% and 35% (Germany) is significant? It’s fucking HUGE, especially when further corrected for the ridiculous amount of US federal spending that goes to the military. There’s a whole world of unmet social need in that 7 percentage point gap.

someguy,

The weighted average for Europe is 37. This is a whopping 33% higher than the US. Only 5 European countries are below 34: Turkey, Slovakia, Switzerland, Greece and Ireland.

F,

US GDP per capita is also at least 1/3 higher.

Which means that US public expenditures, which is what is really important for now, per capita are roughly equal to Europe. Actually almost certainly higher as a whole.

chris “inability at the macro-level to distinguish between necessary and unnecessary costs”: the problem is deeper. In GDP accounting, there is no such a thing as cost – necessary or unnecessary. There is nothing that is even conceptually perceived as a cost. Everything, however wasteful, adds to GDP.

Suppose that the head of a federal agency came before this committee and reported with pride that agency employees had burned 10 percent more calories at work last year than they did the year before. Not only that–they had spent 10 percent more money too. I have a feeling you would want to know more. What were these employees doing when they burned those calories? What did they spend that money on? Most important, what were the results? Expenditure is a means, not an end, and to assess the health of an agency, or system, you need to know what it has accomplished, not just how much motion it has generated and money it has spent. The point seems obvious, yet Congress ignores it every day when it talks about “the economy.” The administration and the media do it, too. Every time you say that “the economy” is up, or that you want to “stimulate” it, you are urging more expenditure and motion without regard to what that expenditure is and what it might accomplish, and without regard to what it might crowd out or displace in the process.

Jonathan Rowe, Our Phony Economy (http://www.harpers.org/archive/2008/06/0082042)

chris: “ISTM that however theoretically superior it might be to adjust GDP for waste, in practice it would be nearly impossible, because you would need an impractical level of detail about the operation of every business in the economy.”

GDP is conceptually the wrong metric. It is as if you use a thermometer to measure humidity. Technical difficulty getting it right is no excuse for using a conceptually wrong construct. And I don’t think the technical difficulty is so great. Alternative measures of material well-being, such as GPI, have uncertainties to be sure but at least they measure something meaningful. The economy has a purpose: the material provisioning of society. This purpose can be met more or less efficiently (or not at all) and efficiency here is a meaningful, measurable concept (how many hours of labor, how many resources does it require to provide a certain amount of goods and services). Transaction costs may or may not be necessary but they are always costs. It is not conceptually difficult to analyze economic efficiency at the macro level. E. g. you can compare the health care sector or the transportation sector of different economies. If per capita health care cost is higher in economy A than in economy B but outcomes are similar, then A is more wasteful. In GDP accounting, A would seem to be more productive.

someguy,

True. Per capita government revenue is remarkably equal between Europe and the US at about $12000 per person. Also, it seems that almost the entire excess per capita GDP in the US goes directly to the top 1%. In other words, per capita GDP for the lower 99% is the same as well. This is a significantly different point than John makes, but interesting.

Whatever your favorite metaphor may be, GDP measures aggregate cost and pretends to be an outcome. Since my focus above was on waste and efficiency and efficiency is usually defined as outcome over cost, it is clear that treating the cost as the outcome makes it impossible to even conceptualize waste. It is true though that ceteris paribus (assuming constant efficiency), you can use cost as a proxy for the outcome. But doing so makes it impossible to recognize changes in efficiency.

In GDP accounting, there is no such a thing as cost – necessary or unnecessary. There is nothing that is even conceptually perceived as a cost.

I’m pretty sure that people who use GDP accounting admit that their measurement includes costs and waste, they just don’t know how to effectively fix that.

IOW, it’s a known limitation of the measurement, not some kind of ideological commitment to the idea that more waste is good.

That may be a fundamental disagreement between us, chris.

Btw I hope you read the Jonathan Rowe article. It emphasizes that the original inventor of GDP accounting was well aware of the inherent shortcomings but his own scruples were pretty much ignored by everybody else. GDP worship is not just an accident of measurement uncertainty. It is a fundamental expression of conventional “more is better” economic thinking. If economists were really conscious of the limitations of GDP accounting, why would they attach so much importance to its minor fluctuations? Krugman has a nice pair of diagrams at http://krugman.blogs.nytimes.com/2010/09/02/kurzarbeit/. To anybody with an open mind, what they show is that GDP doesn’t predict employment (and thus, the ability of the economy to provide for society), not even remotely. Krugman, whom I used to respect highly, refuses to see what is plain before his eyes. That is indicative of his profession. He claims (in another column) that we need 2.5% GDP growth (a doubling of “the economy” every 28 years) just to prevent unemployment from rising further. To me that sounds an awful lot like “some kind of ideological commitment to the idea that more waste is good”.

@115: I’m not quite sure I understand what you’re getting at — employment that doesn’t produce anything *is* waste, isn’t it?

Of course GDP doesn’t predict employment in an international comparison as well as employment-related policy does — the more surprising thing IMO is that employment doesn’t predict GDP either. Germany is keeping more people employed, but it’s not increasing the value of goods and services they produce. IOW, Germans are deliberately engaging in wasteful/unproductive employment in order to reduce the social harms of high unemployment.

He claims (in another column) that we need 2.5% GDP growth (a doubling of “the economy” every 28 years) just to prevent unemployment from rising further.

ISTM that this statement should be interpreted with an implicit “assuming we don’t alter our economic and labor policies to make them more like Europe”. The probability of that event is very low and Krugman knows it, and most of his readers do too, so I think he’s entitled to discount the possibility without so much as mentioning it.

“The ability of the economy to provide for society” is not well represented by either GDP or employment, IMO. Employment that produces little doesn’t provide for society, but GDP is badly inadequate without at least consideration of distributive effects, and in countries with little social safety net (such as the US), unemployment is an indicator of a major distributional problem.

Ultimately, I think providing for society has to be measured directly, by actually looking at the quality of living quarters, access to adequate food and water supplies, health care, etc. across the whole income distribution. The US does rather badly at this, primarily because of distributional problems (that is, essentially, we could provide for everyone, but choose not to in order to leave more luxuries for a few).

chris:

“I’m not quite sure I understand what you’re getting at—employment that doesn’t produce anything is waste, isn’t it?”

Part of my point is that Krugman et al say GDP needs to grow in order for employment to even stay flat . Logically speaking, and assuming that GDP does even measure something useful, it should be just fine if GDP stays flat if society already has a good living standard. Look at GDP levels for the US. We have 4-5% higher GDP now than we had in 2005 (which translates into GDP per capita being about flat) yet tens of millions of people are worse of, many of them dramatically worse off, than they were in 2005. If GDP really were measuring, even crudely, our material well-being, how come that a flat GDP translates into decreased well-being?

someguy:

“Also however crude it is GDP really works as an indicator of well being. Show me a nation with good GDP growth over time and you will be showing me a nation that is better off.”
That is precisely where we disagree. When you compare societies of relatively similar affluence, e.g. US and Denmark, I strongly disagree that the higher nominal GDP reported for the US tells us anything about which country has the higher living standard. Further, google GPI (Genuine Progress Indicator) and consider that US GPI has peaked around the 1970s despite GDP continuing to increase. You may of course find fault with GPI but there are many good reasons to doubt that US material well-being has increased in line with GDP. By some indicators, today’s young workers are worse off than their parents (part of that due to rising inequality which of course is the original topic of this thread).

If GDP really were measuring, even crudely, our material well-being, how come that a flat GDP translates into decreased well-being?

Because population is increasing. Employment is expressed as a percent, but GDP is a gross measure. Thus it has to rise at least as much as population growth, if other factors remain equal, in order for the economy to be the same except for having more people in it.

If other factors don’t remain equal and the ultra-rich continue to increase their share of U.S. wealth and income, the overall pie will have to grow even faster than that to keep individual slices from shrinking.

Krugman supports another Great Compression — IIRC he discusses that in his book _The Conscience of a Liberal_ — but, since his eyes are open, he thinks it’s unlikely in the near-term US political climate. So, if that doesn’t happen, how fast does the tide have to rise to lift even the boats that are having holes drilled into them? Pretty fast, is his answer, and I wish I could disagree.

piglet: “If GDP really were measuring, even crudely, our material well-being, how come that a flat GDP translates into decreased well-being?”

chris: “Because population is increasing.”

This is what I wrote: “Look at GDP levels for the US. We have 4-5% higher GDP now than we had in 2005 (which translates into GDP per capita being about flat) yet tens of millions of people are worse of, many of them dramatically worse off, than they were in 2005.”

It would help if you paid more attention at what I am actually saying when you disagree with me.

Piglet, the (good) reason economists pay attention to GDP is the one given by Krugman. Holding other things equal, and in the short run, fluctuations in GDP map pretty closely into fluctuations in employment.

Oh yeah? And the evidence for that is… what??? Economists believe so? If you are not willing to test your theories with empirical data then you are an economist. I pointed to the empirical data, which flatly contradict what Quiggin just claimed, and regretted that Krugman refused to see what was plain before his eyes. Quiggin’s reaction: second Krugman and refuse to acknowledge reality. This is a sad spectacle.

“If he actually drew the parenthetical inference that the economy must therefore double every 28 years, he is way off the mark – was that him, or your interpretation.”

Are you kidding me? You know how to calculate a doubling time? Rule of 70: 70 divided by the percentage growth rate.

Quiz: with a doubling time of 28 years, how long is the quadrupling time?

Walt and others, you guys are members of the “because I say so” debating club. I have pointed to actual empirical data. Are you claiming that these diagrams, that Krugman posted on his blog, are consistent with the claim that “changes in the growth rate of GDP predict changes in unemployment”? Yes or No?

Piglet,

With respect, I think you’ve picked the wrong fight here.

Here’s a simple explanation of the framework that Keynesians like Krugman and Quiggin (and me, when the wind is north-northwest) are using.

There are two GDPs: First, potential GDP or Aggregate Supply, determined by the existing capital stock, labor force, technology, etc. Second, actual GDP or Aggregate Demand, determined by demand. The great Keynesian insight was that there is no reason for these two numbers to coincide. When Aggregate Supply runs ahead of Aggregate Demand, we get unemployment, idle capacity, and deflation; when AD runs ahead of AS, we get bottlenecks, redistribution to the factors in short supply [1], and inflation.

Periods of high unemployment like the present are characterized by inadequate demand. But just because AD is short of AS, that doesn’t mean AS stops rising. [2] So if AD, i.e. actual, measured GDP, remains constant, the gap between AD and AS will grow over time. This is why Krugman says that GDP needs to grow simply in order to hold unemployment constant.

But note, the growth that matters here is AD, or actual GDP, relative to AS, or potential GDP. This is the growth that matters in the short term, since short-run fluctuations in demand are much larger than short-run fluctuations in supply. [3] But while short-term movements in AD swamp short-term movements in AS, in the long run most Keynesians believe that AD gravitates around AS, so movements in potential GDP dominate long-term growth. [4]

So the question, do changes in GDP predict changes in unemployment, is misspecified. Supply-driven changes in potential GDP do not have the same implications for unemployment as demand-driven changes in actual GDP. What matters for unemployment is the output gap, not output per se. So there’s nothing inconsistent in saying that in the short run there is a tight relationship between GDP growth and unemployment, but in the long run there is no relationship at all, as long as you believe, as almost all Keynesian macroeconomists [5] do, that short-run growth is driven by the demand side but long run growth is driven by the supply side.

Finally, you are right, of course, that GDP is not a good measure of wellbeing. But why is that a criticism? This is capitalism we’re talking about, dude: Production for profit, not for use.

[1] Typically labor or, more recently, oil and other commodities.
[2] It may slow some, but that’s a second-order issue.
[3] The idea that short-run dynamics are due to fluctuations in AS is known as the “real business cycle theory”; it’s one of the sillier ideas in macroeconomics..
[4] Keynes himself did not believe this, however. He thought that in a laissez-faire capitalist economy, AD would probably fall behind AS without limit.
[5] And probably a majority of Marxist macroeconomists, for that matter.

Second, growing inequality in the US (which Krugman of course is known to have denounced) funnels economic gains to a minority of the population so that the majority is in fact subject to a Red Queen Principle: Ongoing growth is “needed” to allow the rich to get richer without taking too much away from the poor. But this is not an argument in favor of GDP growth – it is (politically) an argument against inequality, and it is (scientifically) an argument against relying on GDP in the first place.

(What about productivity growth? That’s easy – it should simply translate into shorter working hours for most workers. Which, incidentally is precisely what happened in Germany, unfairly contradicting American economic wisdom.)

But your dismissive parenthetical about what *should* happen is plainly impossible under the US’s existing political institutions, and Krugman knows that. That’s why he’s setting the pace for the Red Queen race — because it’s the only *likely to be attainable* alternative. Without that pace of GDP growth, a substantial number of people will probably find their employment undermined by productivity growth, and therefore under US political structures, their standard of living will suffer likewise.

In order to exist with stable per capita GDP, diminishing hours per worker as productivity rises, and static inequality, the US would have to undergo radical sociopolitical reform. I don’t think it’s unreasonable of Krugman to ignore such a remote possibility and simply set forth the economic target that he thinks needs to be met for unemployment to hold steady in the absence of such a restructuring. (In order for “same number of workers, shorter hours each” to not result in a fall in standard of living for the workers, their real wages per hour worked would have to rise reciprocally or nearly so — a tall order when the demand for their labor is actually falling. I wonder whether the average German is in fact seeing a pay cut from involuntary hour-shortening.)

In an earlier comment, I overlooked the fact that you were taking population growth into account and by “flat GDP” you actually meant “flat per capita GDP”. Accordingly, the part of my response based on this misperception is inapplicable. Nevertheless, because of productivity growth (=less need for labor per capita for constant per capita output) and distributional factors (especially relevant in light of the previous point when a substantial number of people have nothing to sell but their labor), the overall point doesn’t go away — most people ARE in a Red Queen race where they need the economy to move pretty fast just for them to stand still.

your claim is not consistent with the empirical evidence from US and Germany on Krugman’s blog

Unrepresentative sample. Krugman picked those examples *precisely because* they show different employment outcomes from similar GDP trajectories — a fact which resulted from different policies and institutions, which is precisely Krugman’s point. Within one set of policies and institutions, an economy like the US does clearly exhibit employment-GDP correlation (with employment slightly lagging in time), and plenty of empirical evidence backs that up. (And if you measure employment in hours rather than number of workers, I suspect Germany does too, Kurzarbeit notwithstanding.)

Keynes himself did not believe [Say’s Law], however. He thought that in a laissez-faire capitalist economy, AD would probably fall behind AS without limit.

This is looking awfully vindicated to me, just at the moment.

Keynes himself did not believe [Say’s Law], however. He thought that in a laissez-faire capitalist economy, AD would probably fall behind AS without limit.

This is looking awfully vindicated to me, just at the moment.

You make a good point. While the dominant liberal-Keyensian view seems to be that the Great Recession is a temporary disruption and there’s no reason we can’t get back to the status quo ante, another point of view is that the crisis puts the prior growth in a different light. It’s not clear that contemporary capitalism can produce adequate demand growth without asset bubbles, at least without some major institutional transformation.

But — the phrase in brackets should be something like “Say’s law held even in the very long run.”

Okay, I suck. I meant to mention Okun’s law by name in my original comment, but I didn’t.

(Hey CT admin — have you thought about getting rid of the strikethrough code? I’m willing to be that 95% of times it’s invoked, it’s unintentionally.)

piglet: “How do you distinguish between “short run” GDP and “long run” GDP? There is only GDP. The GDP time series either predicts or does not predict the employment time series.”

LP: “I’m afraid you’re mistaken.”

Look this is what happens when I try to take economics seriously. I’m afraid that was a mistake.

There is a diagram of US employment ratio (which I much prefer over unemployment rate) at http://economistonline.muogao.com/2010/08/why-nber-hasnt-declared-recession-is-over.html. What it shows is that the 2000s have been a long disaster for employment, not just during recessions but almost non-stop, and this observation is specific to the US (not just Germany but most of Europe has done better). If you overlay that diagram with GDP level, you would see some weak correlation but GDP doesn’t nearly tell you how bad it is. The take-home message here is again that GDP is the wrong metric for evaluating economic performance. Focusing on GDP is just wrong, politically and scientifically.

PPP Adjusted per capita GNI minus the top 1% gives similar results.

There is no objective measure of overall material well being that will show that the median European is substanially better off materially than then the median US citizen because they aren’t.

Large European nations do very well for their citizens as does the US.

There is no objective measure of overall material well being that will show that the median European is substanially better off materially than then the median US citizen because they aren’t.

Don’t you have this backwards? The median European has about the same amount of money (in purchasing power terms) as the median American, but better public services that aren’t warmongering (often including health care that costs little to nothing out of pocket, and cheaper-out-of-pocket education too). How could they possibly avoid being better off?

Oh I’m happy to lose. That’s what I was hoping for.

Ok.

Depending on how we discount leisure the median German or French person might be better off.

That is a very respectable argument.

A home cooked meal is a joy not a labor. etc.

But let’s be clear despite wishfull assesrtions on CT threads the difference would be leisure.

John Quiggin,

Take it up with your fellow Social Democrats commenting on this thread.

They are very clear in their assertions that without even considering leisure time the median European, not European from a relatively well off European nation but median European, is better off than median the American.

[The emphasis is on everything but leisure.]

That is a pretty unpersuasive argument.

I think the median US citizen is probably better off even considering leisure. But without any great conviction.

Our differences appear to be a lot narrower.

This exercise is flawed in so many ways it is probably a waste of time repeating them since they have been discussed extensively already. A metric that puts France on a par with Arkansas, and Germany on a par with Alabama, for material standard of living cannot be taken seriously by anybody who has been to these places. When you use a metric that doesn’t measure what you want to measure, nobody should be surprised the outcomes are unreliable. If you are serious, you should either stop relying on that metric or at least make an effort to correct for the known distortions. For example, deduct health care spending because nobody thinks that Americans are getting any value for the additional money they spend. Deduct transaction costs. Compare outcomes, not costs.

Beyond that, I don’t think anybody knows what an “average American” or an “average European” look like. I don’t mean to disparage statistical comparisons per se but the question “is the average American better or worse off than the average European” is meaningless since none of these terms are well-defined. And even if we agreed on some basic definitions, any serious attempt at answering that question would produce margins of error far greater than any observed differences. Both are by and large affluent, materially saturated societies. Qualitative analysis may be more fruitful than trying to produce a ranking. In the case of the US, what is striking is the downward tendency that we have been going through for a while. By that I don’t of course mean decline in GDP, which is relatively insignificant, but the decline in economic security, in employment, in leisure time (for those who are still employed), the deterioration of public infrastructure, the increase in anxiety, in economic fear, that a large part of the population now feels. We can’t get a hold of reality as long as we use the wrong tools to observe it.