One percenters

by John Quiggin on September 3, 2010

In my post on EU-US convergence, I found that the US was similar to the leading eurozone countries in both productivity (output per hour worked) and employment-population ratio, so that the difference in income per person is mostly explained (in some cases more than explained) by differences in hours worked per employment person. I didn’t take the distribution of income into account, since the data sources I was using there did not provide anything useful. But commenter Detlef found a blog post by Maximilian Hagemes at the World Bank site which links to a useful paper by Piketty and Alvaredo on cross-country comparisons of income concentration. For most eurozone countries, they show that the top 1 per cent of households gets about 8 per cent of total income (the presentation is graphical, but in any case, there is no point in going for spurious precision with numbers like this). For the US, the most recent data gives an 18 per cent share. So, the share of national income going to the remaining 99 per cent is about 10 per cent smaller in the US than in the eurozone.

There are a couple of ways of looking at this.


The simplest is to adjust the comparisons given in my previous post by excluding the income of the top 1 per cent. There we saw that income per hour worked in the US is about 15 per cent higher than for the EU as a whole. But, given the much larger share going to the top 1 per cent, most of this difference disappears for the remaining 99 per cent, taken as a group. Within that group, Americans in the the top decile or top quintile (but not the top 1 per cent) do much better in relative terms than Europeans, while those in the remaining 80 or 90 per cent do relatively worse, as Piketty and Alvaredo show. So, in terms of income per hour worked, most Americans are probably a bit worse off than their counterparts in the EU as a whole.

But of course, the EU is a very disparate place, as is the US. France, Germany, Belgium and the Netherlands are all above 90 per cent of the US level in terms of total income per hour worked, and therefore ahead of the US as a whole once the top 1 per cent is excluded. We can then say that (excluding the 1 per centers) income per hour worked in the US is significantly below that in the leading eurozone countries. The gap is made up by longer hours of work and (to a smaller extent) by higher female participation in market employment[1]

There’s another way of thinking about this that I find a bit more interesting. In some sense, the top one-percenters are competing with the state for the job of running the economy. If they aren’t burdened down with high taxes and income redistribution, so the free-market case goes, they will do a much better job in promoting innovation, better resource allocation and so on, to the benefit of all. And through philanthropy, the top 1 per cent can help to provide public goods, health services and so on that would, in a social-democratic system be the responsibility of the state.

So, the income share accruing to the top 1 per cent may be seen as an alternative to paying more of national income in tax revenue for governments. It makes sense then, to combine the two, to see how much of total market income is being turned over to those who run the economy, fund public services and so on. Conversely, post-tax market income, excluding the proportion going to the top 1 per cent, is what is left over for private expenditure.

As with the earlier post, the answer is that, on this combined measure, the EU and US are fairly similar. 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. Simply adding in the proportion going to the very rich (a very crude way of doing the adjustment, but this is a blog post after all) brings the US share up to 46 per cent, while the other three come out at 48, 49 and 54 per cent respectively

Within the inevitable margin of error, we can reaffirm the conclusion from the earlier post that there is no significant difference between the US and the eurozone leaders on output per hour worked or on employment population ratios. The big differences between the two are
(a) Employed Americans work longer hours (offset by the fact that Europeans do more household work)
(b) In both the EU and US, ordinary income earners receive about half of total market income as private disposable income. In the US, however, a much larger proportion of the other half goes to those in the top 1 per cent, while in the EU it is mostly tax revenue. It seems clear to me that that the Europeans get a better return for their money

Update I was too subtle for my own good in the original version, putting up the idea that the share going to the rich could be viewed as a kind of tax, and leaving it to readers to draw the conclusion that (99 per cent of) Europeans get better returns from the money they pay to governments than do their American counterparts from a system where a large share of total income goes to the top 1 per cent. In the update, I’ve spelt this out.

The data on the top 1 per cent share I used was out of date. The figure for 2007 was 23.5 per cent. At this level, the share of US income that flows as disposable income to the bottom 99 per cent is probably below that of most European countries (the exact outcome depends on how much tax is paid by the top 1 per cent). The recession probably took a bit more from the very rich, but they are already bouncing back, at least on Wall Street.

fn1. Conversely, other parts of the EU are behind. And while it’s difficult to get really accurate state-level or regional figures for the US, it’s obvious that you can go the other way, and point to US states that are better off or worse off than the EU as a whole or the leading eurozone countries.

{ 159 comments }

1

Guido Nius 09.03.10 at 8:18 am

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.

2

Henri Vieuxtemps 09.03.10 at 8:45 am

1 % seems kind of arbitrary; why not top 5%, or top 10%, or 20%?

Also, the (quite ridiculous, IMO) idea that the income share appropriated by the upper class is like a tax that benefits everybody can be easily tested on countries with high Gini coefficient, like Brazil.

3

DFC 09.03.10 at 9:18 am

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…

4

VV 09.03.10 at 9:31 am

I agree with Henri. The idea that the income share appropriated by the top 1% is like a tax that benefits everybody doesn’t have any basis in reality* and also provides a very convenient “out” for the current US corporatist system and its captors, and its proponents in Europe.

“And through philanthropy, the top 1 per cent can help to provide public goods, health services and so on that would, in a social-democratic system be the responsibility of the state.
So, the income share accruing to the top 1 per cent may be seen as an alternative to paying more of national income in tax revenue for governments. It makes sense then, to combine the two, to see how much of total market income is being turned over to those who run the economy, fund public services and so on.”

If that’s the plan, then it’s only fair to ask “what do US taxpayers get in return of the money they turn over to the top 1%”? If the answer is “close to zilch”, the analogy is completely flawed. Right?

5

John Quiggin 09.03.10 at 9:33 am

‘it’s only fair to ask “what do US taxpayers get in return of the money they turn over to the top 1%”’

That was the point of the post. I didn’t think I had to spell it out for the CT audience, but obviously I was wrong.

6

VV 09.03.10 at 10:22 am

Well, the conclusion of the post fooled me:
“Within the inevitable margin of error, we can reaffirm the conclusion from the earlier post that there is no significant difference between the US and the eurozone leaders on output per hour worked or on employment population ratios. “

Ok then. Any differences?
” Employed Americans work longer hours (offset by the fact that Europeans do more household work)”

Ok then, not a huge difference given the parentheses. Anything else?

“In both the EU and US, ordinary income earners recieve about half of total market income as private disposable income. “

Ok then, it’s all the same!

If your intent was to draw attention to the actual implications of handing over the extra (tax) revenue to the top 1%, it was pretty well disguised, me thinks…

7

Slex 09.03.10 at 11:22 am

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.

8

zamfir 09.03.10 at 12:08 pm

I am pretty sure Americans have commuted below EU average, 25 minutes or so, comparable to the countries in Europe with the shortest commutes. EU average is more like 35.

One thing I find strange here is the assumption that rich American are rich at.the expens of other Americans. Given that really rich Americans tend to be owners of international companies, shouldn’t we.assume that they are also gettin money from others, in particular Europeans?

I have always assumed that some part of t high us income was simply that US elites are in charge of the world, while elites in other countries are more likely.to be just in charge of their country.

9

deliasmith 09.03.10 at 12:19 pm

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

Fixed, thanks vewwy much – JQ

10

David 09.03.10 at 12:44 pm

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

11

Ed 09.03.10 at 1:19 pm

“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.

12

chris 09.03.10 at 1:25 pm

idea that the income share appropriated by the upper class is like a tax that benefits everybody

Not all taxes benefit everybody. John only said that it was like a tax (which it is in the sense that the ordinary working person can’t spend it because it’s taken by someone else).

Of course, the government’s choices in how to spend tax money are subject to democratic accountability in countries that are democratic, and the rich’s choices in how to spend their high incomes are not. But that’s sort of the point, isn’t it?

13

stostosto 09.03.10 at 2:00 pm

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.

14

Henri Vieuxtemps 09.03.10 at 2:03 pm

I think in every country, democratic or not, the assumption, the goal (if not the practice) is that all the taxes will be spent for the benefit of the country as a whole. Representative democracy provides an (arguably) better mechanism for accountability, but that’s details. In contrast, the “trickle-down” theory is nothing but rhetoric.

15

Norwegian Guy 09.03.10 at 2:19 pm

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

Is there any statistics for this?

16

chris 09.03.10 at 2:45 pm

I think in every country, democratic or not, the assumption, the goal (if not the practice) is that all the taxes will be spent for the benefit of the country as a whole.

What, even monarchies and dictatorships? Are you serious? In many countries there is no significant attempt to spend taxes for the benefit of the whole, and at most, lip service is paid to the idea (including dictatorships pretending to be communist — scratch a “dictatorship of the proletariat” and find a dictatorship of the dictator). In regimes where the leader is likely to say things like “I am the state” there isn’t even the lip service, although they do build some quite impressive palaces.

17

Gene O'Grady 09.03.10 at 3:26 pm

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?

18

someguy 09.03.10 at 3:57 pm

“So, in terms of income per hour worked, most Americans are probably a bit worse off than their counterparts in the EU as a whole.

But of course, the EU is a very disparate place, as is the US. France, Germany, Belgium and the Netherlands are all above 90 per cent of the US level in terms of total income per hour worked, and therefore ahead of the US as a whole once the top 1 per cent is excluded. We can then say that (excluding the 1 per centers) income per hour worked in the US is significantly below that in the leading eurozone countries.”

Norway and Luxembourg were always ahead of the US.

Using your numbers Germany would be at 100.5%.

19

Norwegian Guy 09.03.10 at 4:15 pm

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.

20

David 09.03.10 at 4:41 pm

Why do I get caught in moderation all the time?

21

David 09.03.10 at 4:48 pm

“. 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.

22

More Dogs, Less Crime 09.03.10 at 5:22 pm

One could also add that Americans get a really lousy return on their tax-dollars due to things like our extravagantly high defence spending.

“1 percent of everybody only having the means to influence other people’s votes”
I’d be interested in seeing some research on how the top 1 percent influences the votes of the other 99. We could also consider those like people under 18, convicted felons, non-citizen residents or Brits writing letters before American elections as people who must rely on the votes of others rather than their own.

23

Sebastian 09.03.10 at 6:37 pm

“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.

24

Lemuel Pitkin 09.03.10 at 7:02 pm

I’m not sure why one would go to Wikipedia for this.

The OECD publishes a comparative table of tax revenues. Here are 2008 numbers, for all levels of government combined:

Austria: 42.9% of GDP
Belgium: 44.3%
France: 43.1%
Germany: 36.4%
Greece: 31.3%
Italy: 43.2%
Norway: 42.1%
Spain: 33.0%
Sweden: 47.1%
UK: 35.7%
USA: 26.9%

For the US, at elast, this figure has not changed in the past two years. For the second quarter of 2010, the BEA gives $3.9 trillion in total tax revenue (about 60% federal) out of a GDP of $14.6 trillion, or 27 percent.

25

Lemuel Pitkin 09.03.10 at 7:14 pm

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.

26

F 09.03.10 at 7:20 pm

The 28% number is for all governments. The long term average for the federal government in the US is only 18%, and is currently around 15%. This amount even includes payroll taxes.

27

F 09.03.10 at 7:37 pm

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.

28

Lemuel Pitkin 09.03.10 at 7:42 pm

most of the discrepancy is double counting of the $500 billion in federal grants-in-aid to state and local governments.

Minor point, but I think the double-counting of state aid to local governments may be even bigger.

29

Lemuel Pitkin 09.03.10 at 8:00 pm

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.

30

Keith 09.03.10 at 9:28 pm

One thing I find strange here is the assumption that rich American are rich at.the expens of other Americans. Given that really rich Americans tend to be owners of international companies, shouldn’t we.assume that they are also gettin money from others, in particular Europeans?

They are but the difference is offset by these European countries and their nefarious socialist progroms government subsidies of the social safety net. The 1%ers take as much from US 99%ers as they do from Europeans but we don’t have the social welfare programs that mitigate these costs. A European 99%er can go to hospital without having to pay out of pocket, or only marginally doing so. Here in the US, we pay out of pocket, even if we have health insurgence, because of copay. European income goes further, paying for other things besides gas and medicine.

31

Lemuel Pitkin 09.03.10 at 9:39 pm

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.

32

More Dogs, Less Crime 09.03.10 at 9:50 pm

Huh, I had a comment in moderation linking to some papers on European housework which no longer appears even for me. Is it the case that commends held for moderation only appear to their commenter for a limited amount of time?

33

Sebastian 09.03.10 at 10:09 pm

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

34

engels 09.03.10 at 11:00 pm

Very interesting post.

35

John Quiggin 09.03.10 at 11:36 pm

More dogs, this is just one of the mysteries of WordPress. Have another go.

36

Jack Strocchi 09.04.10 at 2:05 am

Pr Q said:

There’s another way of thinking about this that I find a bit more interesting. In some sense, the top one-percenters are competing with the state for the job of running the economy.

[snip]

(b) In both the EU and US, ordinary income earners receive about half of total market income as private disposable income. In the US, however, a much larger proportion of the other half goes to those in the top 1 per cent, while in the EU it is mostly tax revenue. It seems clear to me that that the Europeans get a better return for their money

Or, to flip the analogy on its head, the state should be viewed as a kind of benevolent super-plutocrat. Acting as a kind of parent looking out for the long-term interest of its charges. Which was, I think, the original Platonic conception.

The ideological difference between private capitalist plutocracy and public statist bureaucracy is that the statist institutions are directly accountable through democracy. Whereas capitalist individuals are only indirectly accountable through markets. Which will tend to make the state more responsive to typical public needs.

The interesting political question is why US citizens seem to accept the depredations of the capitalists more willingly than the depredations of statists. Obviously the US’s history as a nation based on limited government has something to do with this. Plus the influence of big money on politics. But still, it astounds me the way the US public seemed to accept Wall Streets blatant plutocratic embezzlements with a helpless shrug of the shoulders.

37

John Quiggin 09.04.10 at 6:15 am

LP @29 I don’t think a division between what is nominally labor and nominally capital income is particularly useful these days. CEOs and investment bankers pull in huge returns from their positions of power over capital, but these would normally be classed as labor income. Conversely, much of the money they are playing with is from 401k accounts and the like. 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.

38

Lemuel Pitkin 09.04.10 at 6:36 am

CEOs and investment bankers pull in huge returns from their positions of power over capital, but these would normally be classed as labor income.

There’s some of that, for sure, but perhaps not as much as you would think. I happened to be looking at some numbers on sources of income of the very rich (available from the IRS), and posted some results on my humble blog. You might be surprised how preponderant the share of capital income is at the top.

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

On this, we will have to disagree.

39

Hidari 09.04.10 at 9:36 am

‘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?)

40

alex 09.04.10 at 12:16 pm

Bildungsbuergertum would be the appropriate contemporary term. Nothing ‘petit’ about it – that’s craftsmen and shopkeepers.

41

dsquared 09.04.10 at 12:26 pm

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.

42

engels 09.04.10 at 1:17 pm

One definition to start with (G.A. Cohen’s from Karl Marx’s Theory of History):

a subordinate producer who owns her own labour power but not her means of production.

(Subordinate here means that she (i) produces for a superior who does not produce for her (ii) is commonly subject to the authority of her superior [or her delegate] within the production process (iii) is commonly poorer than her superior.)

43

engels 09.04.10 at 1:42 pm

(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’.)

44

bianca steele 09.04.10 at 1:57 pm

engels:
What does “own[] . . . [the] means of production” mean?

45

Irrelephant 09.04.10 at 2:39 pm

Would anyone care to comment upon this?

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

46

Steve LaBonne 09.04.10 at 3:41 pm

The interesting political question is why US citizens seem to accept the depredations of the capitalists more willingly than the depredations of statists. Obviously the US’s history as a nation based on limited government has something to do with this. Plus the influence of big money on politics. But still, it astounds me the way the US public seemed to accept Wall Streets blatant plutocratic embezzlements with a helpless shrug of the shoulders.

Here’s my totally amateur pulled-out-of-my-rear theory. Europeans- think especially of the French- have a long history of statism behind them, with the state at least pretending much of the time to be pursuing the interests of society as a whole, and once in a blue moon even genuinely acting that way. The US has never been anything other than a plutocracy- plutocracy is even an essential part of our national identity. The franchise was restricted to property owners until, IIRC, 1850; the founders were wealthy landowners (and lest we forget, slaveowners) whose dominance passed pretty smoothly over time to a plutocracy of more capitalist stripe as the country developed. Plutocracy is all we’ve ever known. Wealth, however ill-gotten, carries an automatic presumption of authority and even wisdom for us.

47

Henri Vieuxtemps 09.04.10 at 4:12 pm

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

48

chris y 09.04.10 at 4:32 pm

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.

I seem to remember that about teachers. Marx never really got his head round, as opposed to waving his hand in the general direction of, reproduction as opposed to production.

49

hix 09.04.10 at 5:15 pm

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.

50

Lemuel Pitkin 09.04.10 at 5:40 pm

Heroic asumption that IRS fillings represent the actual income. Capital income is much easier to hide.

Of course. But that strengthens my point rather than weakens it, since it means the numbers I presented are upper limits to the real share of wage and salary income of the very rich.

51

Lemuel Pitkin 09.04.10 at 5:42 pm

(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.)

52

Slex 09.04.10 at 5:53 pm

@ zamfir #8

A lot of sources on the internet give data that Americans commute less minutes on average than Europeans. But if you check the US Census Bureau and the European Working Conditions survey, you will see that questions are phrased differently. For the US the question is “how much do you travel to work”, for Europeans it is “how much do you travel to work and back”. And if the data is reliable, commuting in Europe seems to take up less time on average.

Of course, it is a different question whether the difference is big enough to actually make a difference in productivity statistics, if taken into account.

http://www.census.gov/acs/www/Products/Ranking/2003/R04T160.htm
http://www.eurofound.europa.eu/ewco/surveys/ewcs2005/4ewcs_02_05.htm

53

bianca steele 09.04.10 at 6:35 pm

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.

54

yabonn_fr 09.04.10 at 7:01 pm

20 : Why do I get caught in moderation all the time?

I happens more and more to me too – most of the time sneaking on me under the guise of reasonableness. I blame old age coming.

On the other hand, one hour watching tv (and, hence, yelling at it) is usually a sufficient cure.

55

Lemuel Pitkin 09.04.10 at 8:09 pm

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.

56

John Quiggin 09.04.10 at 10:21 pm

What’s relevant, I think is that the income share of the top 1 per cent has grown dramatically, while the picture with respect to labour and capital income shares is much less clear. The share of National Income going to wages and salaries hit a record low in 2006, but the share of total employee compensation (which includes health benefits and, I think, bonuses), has been more or less stationary. The corporate profit share is at a record high, but only marginally above the level in the 1960s.

So, it seems to me that a focus on the unequal distribution of income from all sources, including wealth, tells us more than an attempt to divide things up into productive labor, unproductive labor and surplus value.

57

John Quiggin 09.04.10 at 10:28 pm

As I pointed out in a previous round of this game,
http://crookedtimber.org/2007/06/19/the-euro-and-the-dollar/#comment-201195

there’s more to commuting than time costs. Cars are costly capital items with significant operating costs. That has to be set against public transport, which is largely paid for out of taxes, rather than private disposable income.

And, compared to walking or public transport, driving is a high risk activity. The US has a significantly higher motor vehicle death rate than most other developed countries, unsurprisingly in view of longer distances travelled per person.

58

Jack Strocchi 09.05.10 at 6:06 am

Pr Q #57 said:

So, it seems to me that a focus on the unequal distribution of income from all sources, including wealth, tells us more than an attempt to divide things up into productive labor, unproductive labor and surplus value.

I am not so sure that this is the best way to go, if one wants to get a good overall perspective on US political economy. Although net worth does not tell the whole story – a guy with one billion dollars worth of assets and a billion dollars worth of liabilities has a net worth of zero. But he is a different kettle of fish to a guy with zero dollars worth of assets & liabilities.

In the US, wealth is distributed much more unequally than income. This is to be expected as the top percentile is likely to derive most of its income stream from the ownership/control of assets in various forms. Plus, wealth holdings generate non-income forms of utility. (Or, as Mel Brooks said, “Its nice to be King.”)

Properly comparable data on the distribution of wealth are not easy to come by. The FRB’s Survey of Consumer Finances is the best source (you can bet Greenspan pored over it late at night). The most recent snapshot of US wealth distribution comes from Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007. Table 4 (p 37) gives the “Amount and share of total net worth and held by net worth percentile groups”. As of 2007, the top one percent of households held a whopping 33.8% of US assets. This came to 22 trillion dollars or (assuming household size of ~ 3 persons) about $20 million per household. Choose your parents well!

This wealth generates a great deal of non-accountable income in the form of pleasure, prestige and power – for instance owner-occupied housing, collectibles, perks of office, political influence (ones own hobby war!), table always reserved at restaurants, ushered into nightclubs, opening night invitations etc. Its times like those when its nice to have a rich friend.

One is tempted to include expensive mistresses on that list. But these items are really consumer durables with fairly rapid rates of depreciation. And, as we have seen in the case of Tiger Woods et al, they can turn into crippling liabilities if not properly managed.

59

Chris Bertram 09.05.10 at 7:17 am

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.

60

John Quiggin 09.05.10 at 8:09 am

The distinction between productive and unproductive labour seems to me to be entirely unproductive – a mistake made by Adam Smith and carried on by all the classical economists up to and including Marx.

61

Alex 09.05.10 at 10:46 am

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).

62

ptl 09.05.10 at 11:38 am

59 yes, it’s an outlier. And of course Marx has more than one model of class.

60. Adam Smith’s formulation is, potentially, responsible for a multitude of sins. But the proletariat can also be defined by its lack of property in the means of production. by reliance on a wage, or salary, sometimes.

63

dsquared 09.05.10 at 3:19 pm

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.

64

Shelley 09.06.10 at 3:42 am

The young people graduating into this terrible economy will, statistically, never recover from the shaky start. That’s financially: never mind the sense of disaffection and logical refusal to invest emotionally in a society that makes it clear it has no place for them. Except handing out fries.

65

alex 09.06.10 at 7:23 am

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

66

Earnest O'Nest 09.06.10 at 7:32 am

63 – so much so in fact that the Deng Xiao Ping liked to refer to himself as a real Smithian.

60- I never realized up to now that my grandma was a classical economist.

67

John Quiggin 09.06.10 at 8:31 am

#66a Smith’s distinction gets rediscovered constantly – only the categories differ.

68

belle le triste 09.06.10 at 9:03 am

As a hard-working buffoon, I am upset that my labour is considered productively valueless.

69

Chris Bertram 09.06.10 at 9:38 am

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.

70

Chris Bertram 09.06.10 at 9:39 am

That is all supposed be a quote after “Labour with the same content … ” obviously.

71

Earnest O'Nest 09.06.10 at 9:52 am

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.

72

John Quiggin 09.06.10 at 10:03 am

It’s common in Australia, as a union-busting and tax-dodging device, for companies to force their workers to become ‘independent’ contractors, supplying their own capital, but working under direction, much as before. Some of them do, in the end, become semi-independent small businesses with more than one client/employer. As I read him, Marx would conclude that these workers are unproductive. More importantly, Marx would (if I understand correctly) conclude that this reshuffle produces a fundamentally different class relationship. I don’t find this convincing.

73

alex 09.06.10 at 10:15 am

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]?

74

ajay 09.06.10 at 11:03 am

72 doesn’t quite seem to mesh with the Marx quoted in 69, which seems to make a lot of sense. Surely the singer is a productive worker whether she spends all her time singing for one employer or sings for a different employer every day.

As I read 69, he’s trying to make a distinction between three, not two, classes of people:
Alice carves small wooden birds because she likes carving small wooden birds. She is an unproductive worker.
Bob carves small wooden birds and then sells them out of the back of his car. He isn’t an unproductive worker, he’s a dealer in a commodity.
Chuck works full-time for a company which sells small carved wooden birds. He is a productive worker, but he’s different from Bob, because Bob gets to hold on to the capital that his labour produces, and Chuck doesn’t.

75

ejh 09.06.10 at 11:13 am

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

76

engels 09.06.10 at 12:06 pm

Our concern to distinguish between productive forces and other requisites of and stimuli to production parallels Marx’s interest in sealing off the idea of productive activity from activity which enables or assists production but is not itself productive. He criticized Nassau Senior, who considered soldiers productive when they supplied security essential to uninterrupted agrarian labour. For Senior, the soldier participates in producing corn by protecting the farmer. But though it is true, in the case envisaged, that without the soldier no corn would be produced,

the soldier can drop out although the material conditions of production, the conditions of agriculture as such, remain unchanged.

(Cohen, KMTH, p.33)

77

Zamfir 09.06.10 at 1:08 pm

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.

78

Chris Bertram 09.06.10 at 1:19 pm

#76 @engels – that’s an intelligible distinction, between the work that is necessary as a part of the material content of production and that which is only necessary in virtue of its social form. So, to extend the examples, the guards who stop the slaves from running away would not be necessary under capitalism and so only contribute to production because slavery is its dominant form. That raises the possibility, of course, that at least some of the work done by lawyers, accountants etc is required by the complexity of the process at and after the productive forces reach a certain level. So you’d need bean counters whatever the social form of an advanced economy, so they become productive after all.

79

piglet 09.06.10 at 4:45 pm

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?

80

piglet 09.06.10 at 5:19 pm

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.

I do think there is value in distinguishing between productive and wasteful economic activity. Neoliberal economists don’t like this because they pretend to abstain from any value judgment (what is valuable is decided by “the market”). But clearly some economic activities, that are counted towards GDP, are destructive (causing an oil spill, for example). Some are concerned with damage repair (cleaning up an oil spill). Some are merely transaction costs caused by other sectors of the economy (law suits for compensation after an oil spill). 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 suspect that the high productivity figures for the US have a lot to do with the statistical prominence of these sectors. Statistically, the legal profession is extremely “productive”, as is the financial sector, as are doctors, because these professionals command extremely high fees (especially in the US, which makes them “more productive” than their European counterparts even when they do exactly the same work). During the housing bubble, real estate agents must have given productivity statistics a measurable boost (I hope somebody runs these numbers some day). 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. It is nonsensical but statistically, selling an existing house is a much more productive activity than building a new one. Clearly, counting all economic activities equal is absurd and misleading.

81

john c. halasz 09.06.10 at 11:22 pm

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.

82

Steve LaBonne 09.07.10 at 1:18 am

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.

I disagree. What they actually benefit from is obfuscation of the reality that I described. Fighting it effectively can’t even begin until more Americans awaken to that reality.

83

Robert 09.07.10 at 7:23 am

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.

84

chris 09.07.10 at 3:05 pm

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.

Isn’t transferring a house from an owner who has little use for it to an owner who has more use for it adding something to the economy? Just because the house hasn’t physically moved doesn’t mean that the transfer of ownership is not productive.

IMO, this is as much an error as claiming that hauling a ton of coal from Newcastle to somewhere else is “unproductive” because it doesn’t become a ton and a half. Just as a ton of coal in Newcastle has different value than a ton of coal elsewhere, a house belonging to a foreclosing bank or the estate of a decedent has different value than a house belonging to someone who intends to live in it.

It is nonsensical but statistically, selling an existing house is a much more productive activity than building a new one.

I take it you mean per worker-hour, but then there’s nothing nonsensical about it at all. It’s “more productive” because its market value is high relative to the number of worker-hours of effort involved; that is the case because the costs of entry are fairly high, which restrains competition from driving down the market value of that particular type of work.

85

piglet 09.07.10 at 3:29 pm

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.”

86

someguy 09.07.10 at 4:02 pm

Sebastain,

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

I think this is the link you want.

http://stats.oecd.org/Index.aspx?DatasetCode=CSP2010

Expenditures are 38.8% for 2008. In general total US govt expenditures run at about 35% of GDP.

Norway was at 40% for 2008. Australia 34.

The OECD total usually runs at about 40%. The more relavent EU nations run at about 45%.

The US is at the low end of the scale but it is not some wild outlier.

87

piglet 09.07.10 at 4:11 pm

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

88

piglet 09.07.10 at 4:11 pm

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

89

Lemuel Pitkin 09.07.10 at 4:16 pm

>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.

90

someguy 09.07.10 at 4:36 pm

Sebastain,

http://stats.oecd.org/Index.aspx?DatasetCode=CSP2010

Tax revenues were 32.3% vs 37.9% for OECD average.

In general the US average is about 34% vs 39%.

Again the US is not some wild outlier. Again the US average is about 5% less than the OEDC average.

91

chris 09.07.10 at 4:51 pm

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.

92

Lemuel Pitkin 09.07.10 at 5:11 pm

Tax revenues were 32.3% vs 37.9% for OECD average.

Still wrong.

You are confusing all revenues with tax revenues. Scroll down in that same table, and you will see total tax revenue for the US is 26.9%, vs. an OECD average of 35.8%. Or see here.

I am not sure what the table you linked to is including under current revenues other than taxes, but it’s not social insurance contributions — those are explicitly included as taxes.

93

piglet 09.07.10 at 5:27 pm

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.

94

piglet 09.07.10 at 6:26 pm

I’ll try with one more example. Consider an enterprise making a product, maybe bananas. The enterprise will have an administrative unit that is not directly involved in making products but nevertheless that unit is not just dead weight. It performs necessary functions and without it, production would probably come to halt. How do you describe the productivity of that enterprise? You’d probably quantify the product output over time and production cost. The administrative cost is part of the cost, not of the output. You wouldn’t say that increasing the bureaucratic overhead increases productivity. The overhead may be necessary and it may improve productivity overall but nevertheless it is a cost and would always be counted as such, and ceteris paribus, the lower your overhead the more efficient you are.

In microeconomics, everybody understands this distinction but 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. We pretend that every divorce proceeding, every hedge fund fee, every sales commission, every shipping expense, every tax form adds value to the economy. And that is nonsense.

95

chris 09.07.10 at 6:32 pm

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”).

96

someguy 09.07.10 at 6:37 pm

Lemuel Pitkin,

For 2006 the weighted average of tax revenues as a percentage of GDP is 33.9% for OECD vs 28.2% for the US. For a difference of 5.7%.

For revenues the difference is generally 5%.

For tax revenues the difference is generally 5%.

For expenditures the difference is generally 5%.

97

chris 09.07.10 at 6:48 pm

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.

98

F 09.07.10 at 7:20 pm

someguy,

The average for Europe is 38-39% for a difference of 10%. Pretty significant. A weighted average will be misleading because the US makes up nearly one third of the total.

99

Henri Vieuxtemps 09.07.10 at 7:37 pm

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.

100

someguy 09.07.10 at 7:42 pm

F,

For 2006 the weighted average of tax revenues as a percentage of, for GDP is 33.9% for OECD [not including the US] vs 28.2% for the US. For a difference of 5.7%.

Yes, relavent European nations will run at about 10% difference.

But Switzerland was 29 and Germany 35. Even when grouped with Europe the US is just on the low end of the curve.

101

Steve LaBonne 09.07.10 at 7:48 pm

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.

102

Lemuel Pitkin 09.07.10 at 8:01 pm

someguy,

I am glad you’re finally citing the correct number for US tax revenue as a share of GDP, the same one I gave originally.

As for your larger argument — well, I can’t tell what it is. Yes, US tax revenue as a share of GDP is about the same as Switzerland or Ireland, significantly higher than OECD members Turkey and Mexico, and “only” ten points lower than most European countries. So what?

103

F 09.07.10 at 8:01 pm

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.

104

someguy 09.07.10 at 8:16 pm

Lemuel Pitkin,

“I am glad you’re finally citing the correct number for US tax revenue as a share of GDP, the same one I gave originally.”

2009 is a bad base year as tax revenues are down 1.5% points. Also the weighted average is 33.9% almost 2 full percentage points less.

I was mostly just checking to make sure my remembered impressions of the data matched what the data still was. They do.

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someguy 09.07.10 at 8:21 pm

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.

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F 09.07.10 at 8:29 pm

Wait, why are we suddenly changing the metric? And why is expenditures per capita “what is really important for now”? Why is it important? And why just for now?

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piglet 09.07.10 at 8:35 pm

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.

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someguy 09.07.10 at 8:43 pm

F,

Comparing the US vs Europe. Social Deomcracy vs Hobbesian Plutocratic Capitalism.

But public expenditures per capita for Social Democracy are < public expenditures for Hobbesian Plutocratic Capitalism. (Yes PPP adjustment is needed.)

Knock off the top 1%, and now that US employment numbers match Europe's, how productive is the US vs Europe? The answer is that Germany and the US are pretty much the same.

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F 09.07.10 at 9:26 pm

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.

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John Quiggin 09.07.10 at 9:46 pm

Piglet, a better metaphor would be that using GDP to measure welfare is liking using pan evaporation rates (or how much you are sweating) to measure temperature. It’s conceptually wrong because evaporation rates (and sweating) depend on humidity as well as temperature. But, other things equal, higher temperature means higher evaporation and more sweat. So, if all you have is an evaporation measure, that’s what you use.

Similarly, since GDP is easiest to measure, it gets used a lot.

Even within the standard national accounts, there are better measures like Net National Income. Whenever I can, I use and refer to these, rather than GDP.

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piglet 09.07.10 at 10:05 pm

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.

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hix 09.07.10 at 10:53 pm

Tax financed healthcare for all: Great and +10% of gdp public sector spending
No tax financed subsidies for theaters and coal power plants anymore- 0,5% of gdp public sector spending in certain countries, also great.
American siced army for western Europe +5% of gdp public sector spending and a horrible idear.

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chris 09.08.10 at 1:36 pm

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.

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Steve LaBonne 09.08.10 at 1:46 pm

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

But it’s human nature to downgrade the importance of whatever you have trouble measuring.
To take a trivial example, defense was undervalued for years by baseball statheads because of the difficulty of coming up with good statistical measures of it.

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piglet 09.08.10 at 3:10 pm

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”.

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someguy 09.08.10 at 3:56 pm

piglet,

I think that you make a lot of good points but that

Broken windows should be netted out when we add up GDP but with all sorts of caveats about hours worked staying the same and full emplyment breaking more windows next year does not show up as GDP growth.

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.

Ultimately I think the issue isn’t that it doesn’t work but that it does. It makes more sense to just apply whatever very large discount to global warming or whatever else.

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chris 09.08.10 at 4:01 pm

@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).

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Steve LaBonne 09.08.10 at 4:12 pm

It makes more sense to just apply whatever very large discount to global warming or whatever else.

Often- wars are another case- such an adjustment might actually change the sign and not just the magnitude. That suggests a major problem with the thing being adjusted.

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piglet 09.08.10 at 5:03 pm

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).

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piglet 09.08.10 at 5:04 pm

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).

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chris 09.08.10 at 6:31 pm

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.

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chris 09.08.10 at 6:36 pm

Also, if the same goods per capita are produced with less labor and more robots (or whatever), unemployment will be likely to increase, unless some other change intervenes (like earlier retirement, or fewer hours worked), and the money that would have gone to wages will go instead to the owners of the robots. The crisis of productivity outstripping demand and its implications for distributional issues in an economy with diminished need for labor are not addressed by GDP, but it’s far from clear that an expectation of maintaining historical levels of paid employment (let alone above-historical levels resulting from more women seeking employment outside the home) is achievable, let alone likely or inevitable, so unemployment (as it is conventionally understood) may not be the most useful way of measuring the performance of a post-labor economy, either.

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piglet 09.08.10 at 8:08 pm

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.

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John Quiggin 09.08.10 at 8:25 pm

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. So, if you are trying to stabilise the macroeconomy in a given country, and GDP is falling, or growing more slowly than the rate implied by medium-term productivity and population growth, you should be worried.

So Krugman is right to say that, in the US at present, you need 2.5 per cent GDP growth to keep unemployment steady. 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.

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piglet 09.08.10 at 11:26 pm

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?

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someguy 09.09.10 at 1:53 am

piglet,

Ok. Let’s pick the indicators. You tell me what you want to use and we can go from there.

Sounds like fun.

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John Quiggin 09.09.10 at 1:59 am

Umm, piglet, you do know what “short run” means, right? As a hint, most economists don’t regard 28 years as a good range for short-run models.

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Walt 09.09.10 at 5:21 am

Unfortunately for your argument, piglet, you are completely wrong on the empirical evidence. People who look at the data have discovered that changes in the growth rate of GDP predict changes in unemployment. This is social science, not physics, so the fit isn’t perfect, but it’s there.

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piglet 09.09.10 at 5:05 pm

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?

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piglet 09.09.10 at 5:54 pm

John: “Umm, piglet, you do know what “short run” means, right? As a hint, most economists don’t regard 28 years as a good range for short-run models.”

This discussion is somewhat difficult because you don’t state your position in clear enough terms. “Holding other things equal, and in the short run, fluctuations in GDP map pretty closely into fluctuations in employment.” Can you turn this into a testable hypothesis? I don’t think so. Still, even with weasel words like “in the short run” attached, your claim is not consistent with the empirical evidence from US and Germany on Krugman’s blog. Those diagrams are short run enough for you I presume? They show US employment falling more than GDP and continuing to fall when GDP starts growing again. German employment slightly increases despite GDP decreasing and behaves dramatically different from US employment even though the GDP curves are quite close. This is not, in my universe, factor X “mapping closely” into factor Y. All there is is a weak relationship with many caveats.

Now again to my disagreement with Krugman. He wrote in “This Is Not a Recovery”:

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down.

Now it is true that Krugman doesn’t say “we need at least 2.5% growth for the next 280 years” (which, as a reminder, would imply an increase of 100,000%). But frankly there is no indication here that Krugman is only referring to the “short run”. He doesn’t say, and it wouldn’t make sense for him to say, that we need strong growth for only the next 1-2 years (and then what?). Like 99% of economists, Krugman (and it seems to me Quiggin but correct me if I am wrong) has accepted the growth fetishism that dictates that an absence of GDP growth is unacceptable. In a variation of the Red Queen Principle (“you have to run fast in order to stay at the same place”), Krugman is convinced that without growth, we will become worse off. The level of material well-being already reached is never enough. It is inconceivable that an already materially saturated society like ours might not need any more stuff. The contradiction that I am pointing to is this: if GDP is a close enough measure of material well-being, why does it have to grow for our well-being to stay the same? Why is it unthinkable to be content with a stagnating GDP?

There are two caveats to the above, both of which I have acknowledged before. First, US population grows at 0.9% so in order for per capita GDP to stay constant, 0.9% growth is needed. The mystery here is that economists far more frequently refer to GDP than to GDP per capita (why did Krugman use GDP to compare US and Germany, knowing that the demographics are different?). It should become a habit to report economic data corrected for population.

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.)

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Lemuel Pitkin 09.09.10 at 6:00 pm

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.

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Lemuel Pitkin 09.09.10 at 6:04 pm

(You also say, well, if productivity is growing faster than demand, why not shorten working hours, shift toward more intrinsically rewarding but less productive ways of organizing production, etc. And in a rational society we would. But as long as production is organized by profit-making firms, there’s no mechanism to bring that about, and we get unemployment instead. It’s not a criticism of economics that it describes the actual operation of capitalism, and not the operation of some alternative system.)

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chris 09.09.10 at 6:15 pm

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.)

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Salient 09.09.10 at 6:21 pm

A quick thanks to piglet and LP for those last few comments, which cleared up a bit of my confusion reading through earlier comments.

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.

Except that political arguments against inequality are dead in the water right now (in the US). Assume that inequality is well-modeled by discounting the GDP growth by some factor, like one-third, which could be computed by determining what portion of recent GDP change has gone entirely to the super-wealthy who don’t particularly need it. Then the 0.9% population growth rate closely corresponds to the 2.7% growth in GDP needed in the short-term, where short term could be defined roughly as “until we can get this inequality of distribution under better control.”

There’s also the issue that you’re comparing GDP to employment rate E, or perhaps averages of those, whereas (I think) economists are looking to compare dGDP/dt to dE/dt. (But I’m still a bit confused about the predictive correlation being asserted or conjectured: will the sign of dGDP/dt(x) predict the sign of dE/dt(x + h) for small h?)

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chris 09.09.10 at 6:22 pm

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.

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Walt 09.09.10 at 6:25 pm

Seriously, piglet? I told you the name of the empirical law. It’s too much work for you to look it up? It’s not like you have to go to the library or something. Well, LMGTFY.

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Lemuel Pitkin 09.09.10 at 6:34 pm

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.”

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piglet 09.09.10 at 6:42 pm

LP: “So the question, do changes in GDP predict changes in unemployment, is misspecified.” But this is what several posters here have claimed.

“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 … that short-run growth is driven by the demand side but long run growth is driven by the supply side.”

This doesn’t make sense. 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. It would be helpful if you could explain your position with respect to the empirical data I have pointed to. Which part of the diagrams is “short run” and which is “long run”?

“It’s not a criticism of economics that it describes the actual operation of capitalism, and not the operation of some alternative system.”
Well the data show that there are differences. Germany is not an “alternative system”, it is still capitalism, but it shows that there are ways to stabilize employment without strong growth. Furthermore, I do expect from economists – if they are scientists – to not just describe the way the system happens to work (a task at which unfortunately they fail much of the time anyway) but to also explore how it fails and how it could work better.

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Walt 09.09.10 at 6:47 pm

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

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Lemuel Pitkin 09.09.10 at 7:03 pm

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.

I’m afraid you’re mistaken.

Germany is not an “alternative system”, it is still capitalism, but it shows that there are ways to stabilize employment without strong growth. Germany is not an “alternative system”, it is still capitalism, but it shows that there are ways to stabilize employment without strong growth.

Sure it is. The German performance in the Great Recession is very unusual, and is the result of a very specific set of labor -market institutions that are quite different from what we have in the US and the great majority of other capitalist countries. Those institutions are the result of very long historical development, from an exceptionally strong socialist-led labor movement in the pre-WWI era, through the discrediting and disorganization of the capitalist class in Naziism and WWII, through the establishment of co-determination, works councils, etc. in the postwar period. Lacking that history, the US can’t simply do what the Germans did.

Here’s the thing. Economics is predominantly bullshit, but the part that is not bullshit, is not trivial. If you want to learn about this stuff, I’m happy to suggest things for you to read (and to read things that you suggest.) But if you want to resolve it all from first principles in a comments thread, well, I’m afraid this is not going to be a productive conversation.

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Lemuel Pitkin 09.09.10 at 7:05 pm

(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.)

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piglet 09.09.10 at 7:23 pm

“It’s not clear that contemporary capitalism can produce adequate demand growth without asset bubbles, at least without some major institutional transformation.”

That’s another interesting point. I haven’t mentioned that before but I do think that the kind of economic growth everybody here says is “necessary” isn’t going to happen anymore in most of the developed world. US GDP has grown on average 3.5% during the 20th century (i.e. since 1930 since that’s when the data series starts) but for the past decade it has been down to about 1.6% annualized. GDP growth for the decade is way below any other decade since 1930. Demographics does not explain that: – population growth has been 1.2% and 0.9% respectively. This looks like a radical shift in the long term economic trend. Some posters here write me off as utopian for suggesting to tackle inequality and shorten work hours instead of trying to grow ourselves out of the employment misery but I think you are the utopianists. The remedy you are suggesting – doubling economic output every 20 to 30 years – is economically unrealistic, ecologically disastrous and in the long run physically impossible as you very well know, and despite your protestations you do not seriously have any long term perspective other than the same old growth economy.

That is not available any more. It is not even desirable. It won’t happen. I am under no illusion that fixing the US economy, tackling inequality, eliminating inefficiency, are difficult tasks but you’ll soon find that there is no alternative. Business as usual is simply not an option any more. And that is perhaps the essence of my beef with Krugman (and, more to the point, Obama) – their striving is to look for ways to restore business as usual.

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piglet 09.09.10 at 7:27 pm

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.

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Tim Wilkinson 09.09.10 at 7:53 pm

I don’t know much about this stuff, so perhaps this is a silly or senseless question or one to which I won’t understand the answer, but I am puzzled by LP’s identification of AD (and not AS) with actual GDP.

Why is supply considered to be potentially unactualised in production while demand is always actualised in consumption?

Or more pressingly given such a stipulation (if it is a stipulation), how is it thought possible for AD to exceed AS, since (as I – perhaps wrongly – infer) AD is held to be identical with actual consumption of things actually produced?

No doubt I am missing something, but if so then whatever it is, I am, er, missing it.

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piglet 09.09.10 at 7:58 pm

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.

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Lemuel Pitkin 09.09.10 at 8:02 pm

Tim Wilkinson,

One way of thinking about this, that may be clearer, is to think of AD as nominal GDP. When output is below potential, increases in nominal GDP translate into increases in real GDP. When output is at potential, increases in AD translate into increases in the price level.

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someguy 09.09.10 at 9:34 pm

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.

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Tim Wilkinson 09.09.10 at 9:53 pm

LP thanks, yes. I forgot about money(!) and was thinking of ‘actual GDP’ as real GDP, and AD as (potential) consumption of stuff (measured in the same way as AS, and constrained by I know not what – natural frugality? limited acquisitiveness?), rather than as (actual) spending.

Still not quite sure where saving (hoarding or investing) comes in as the alternative to spending (i.e. the way in which money as ‘consumption capacity’ may go unused). I just haven’t got my head round this ‘capitalist organisation of production’ lark. As you say though, I should read a book if I’m really interested, rather than trying to elicit explanations of elementary theory through some kind of sub-Socratic dialogue.

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John Quiggin 09.09.10 at 11:58 pm

Piglet @145. If you’ll recall, the decline in the US E/P ratio relative to that in Europe was the central point of the post before this one. You don’t need to tell me about this. And Krugman has written about this stuff a lot. So, rather than jumping to the conclusion that he and I are slaves to some mechanical notion of GDP as the goal of all economic activity, maybe you should consider the possibility that we know what we are talking about, and that, when we refer to GDP we are using it for the limited purposes for which it is a legitimate measure.

Honestly, I think you are chasing shadows here.

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piglet 09.10.10 at 3:38 pm

I’ll just refer to 130, no need to repeat myself.

“Chasing shadows”? GDP fetishism is not somebody’s imagination. It is what governs a large chunk of economic thinking both of right-wing and Keynesian economists. It is not enough for you to perform some hand-waving when confronted. In my experience, almost any economist will say something like: “Oh but everybody knows about the limitations of GDP. We only use it for limited purposes yada yada”, and then will go on to ignore what he/she just said and continue using GDP as the central category of economic analysis. With destructive consequences.

Btw what is your take on the Jonathan Rowe article? I bet you’ll say that he is right in principle but it doesn’t have any implications for the way you do economics.

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chris 09.10.10 at 5:23 pm

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?

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John Quiggin 09.10.10 at 7:41 pm

@Piglet I bet you’ll say that he is right in principle but it doesn’t have any implications for the way you do economics.

You lose. Among otther things, Piglet, I’m the author of a couple of articles showing what happens when you adjust GDP-like measures to use life expectancy (an output measure) rather than health expenditure (an input), as well as quite a few more articles (and many blog posts) on the limitations of GDP ). And to repeat yet again, the central point of the posts we are discussing was the need to look carefully at hours of market and non-market work in evaluating welfare. I’ve covered nearly all the points in Rowe’s article, including his very good history of the GDP concept and its legitimate uses.

I’ll leave it that – if you want to keep on shadow-boxing, feel free, but don’t expect any further engagement from me.

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piglet 09.11.10 at 12:55 am

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

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someguy 09.11.10 at 1:57 am

Chris,

http://www.nationsonline.org/oneworld/GNI_PPP_of_countries.htm

Because they don’t have the same amount of money in PPP terms. For 2005 after subtracting out the top one percent Germany has a PPP per capita GNI of 27095 vs 34077 for the US. A difference of 20%.

Germany is relatively well off.

The EU at 8% for the top 1% percent would be 24748 vs 34077 for a difference of 27%.

Maybe a weighted average would result in less difference.

Anyone who makes 25% more than me doesn’t make the same as me.

Do you have an objective overall measurement?

[They pay plenty out of pocket in taxes.]

The US could improve in lots of ways and directions. Europe seems like a great place.

The median Euoropean is not materially better off. But they do probably make up a lot of the difference with cheaper public services and more leisure time.

The US does not appear to get a lot more for it’s over priced public services.

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someguy 09.11.10 at 2:21 am

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.

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John Quiggin 09.11.10 at 2:48 am

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

Since this was exactly the point of the OP, I suppose it’s not surprising that we are back to it after 155 comments.

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someguy 09.11.10 at 3:12 am

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.

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John Quiggin 09.11.10 at 3:39 am

I think we are very close. Based on the data cited above, median US residents are significantly better off than their counterparts in Southern and Eastern Europe, comparable to Denmark and Sweden, and only a little behind France, Germany and the Netherlands. Taking Europe as a whole, the US is still ahead in per capita terms, even after taking account of leisure and the cut taken by the top 1 per cent.

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piglet 09.11.10 at 7:35 pm

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.

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