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Economic treadmill [Oct. 1st, 2012|02:26 pm]
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So in the spirit of yesterday's post on useless economic growth, I have a question for any economists in the room.

The 1990s seemed to be a great time when most people were happy and there was more than enough wealth to go around. 2012, and probably even more so a few years ago, were a terrible time of recession when we were all reduced to eating the leather out of our own shoes, or at leas that's what we'll tell our grandchildren.

But if you look at GDP per capita...



The country has about 1.3x the per capita GDP now as it did in the 90s.

So if we're about 1.3x as rich, why do we feel so much poorer?

Is it a change in the amount of money we need to purchase our fascinating futuristic lifestyles? I don't think so. If anything, technology costs less now than it did in the '90s; I seem to remember a good desktop computer costing thousands then, and forget about a cheap cell phone. If I'm reading my history book right, apparently people back then would even pay for movies and music?

Is it a change in the way the money is distributed? If so, then could the government make us just as happy as we were in the 90s by launching a massive redistribution program to restore money to its 1990s distribution, plus still have a quarter of the money left over? If so, why isn't this something I can vote for in November?

Is the relevant feature not GDP, but GDP growth? If so, why should that be? I don't get my money-related happiness from knowing that I might have 5% more money next year, I get it from having lots of money now.

Is the relevant feature something to do with availability of credit? If so, why? We have 133% as much wealth now. Isn't that the equivalent of 1990s banks being willing to loan everyone an amount equal to a third of their income every single year? Without really caring about being repaid?

This becomes even more worrisome when you realize that everyone seemed to really like the 1950s and talk about it as a time of great plenty and limitless possibility, but we have three times as much money now as we did then.

Am I missing some sort of obvious economic point here, or is economic growth really that useless from an improving-society point of view?

EDIT: Worth noting that 1.3x is well above the boost we would get from having everyone take modafinil.
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Comments:
[User Picture]From: gwendally
2012-10-01 09:29 pm (UTC)

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You're not accounting for population growth, GDP per capita. We have a larger population now.

You also aren't accounting for the shifting ways we spend our GDP.

I don't have data at my fingertips, but I do know that medical spending per person is closing in on 20% of GDP as we have the combined onslaught of an aging population combined with medical services that actually cure you. (In 1940 you didn't spend much on medicine because a.) you died of that first heart attack and b.) it didn't work very well.)

I have clients calling me nearly every day complaining about spending $22K/year for a family medical insurance plan. They have the money, they would prefer to spend it on more discretionary things.

And that leads to $100/barrel oil...

Edited at 2012-10-01 09:30 pm (UTC)
[User Picture]From: squid314
2012-10-01 09:37 pm (UTC)

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Good point; I corrected the entry to be about GDP per capita. It's still very similar since population has increased much more slowly than GDP.

Life expectancy not counting infant mortality has increased about four years since the 50s, and maybe one year since the 90s (it's actually going down in some populations).

I acknowledge that is in fact part of the explanation, but I certainly don't think it detracts from the "How did we screw up so badly?" factor?
[User Picture]From: gwendally
2012-10-01 10:30 pm (UTC)

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My memory of how GDP is constituted shows that financial services make a ton of money, and the income from that is very concentrated in the top .01% (1% of 1%) so that's another way to say income inequality is worse, but I don't think that's the whole story. I think Elizabeth Warren did a good job of teasing it out when she tried to explain shifting patterns of household consumption in one of her (more academic) books.

We changed what we spend money on. We used to spend a lot more on food and clothing. Now we spend it on daycare/education and medical care and transportation and communication. I think it feels less discretionary, harder to skimp on. (You can wear hand-me-down dresses, but not use hand-me-down braces.)
[User Picture]From: nancylebov
2012-10-01 10:03 pm (UTC)

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Medicine does work some of the time, but at least in the US there seems to be a lot of thrashing around-- an expensive process of diagnosis and treatment before (as sometimes happens) something that works gets found.
[User Picture]From: gwendally
2012-10-01 10:24 pm (UTC)

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This sounds like a "House" episode!

I've studied this somewhat extensively - was on a panel implementing health care reform in Massachusetts under Romney - and *MOST* of the exploding spending on health care is simply increased utilitization.

Whether the utilization is appropriate is another question, but theoretically someone somewhere thought it was, as opposed to just being an odd hobby for someone to have. Some might be due to defensive medicine in the face of malpractice threats, for example. Certainly some could be simply miscommunication.

But for the most part, according to the studies I've seen, the consumers are consuming more. More knee replacements. More kidney replacements. More everything. When I look at our own anecdotal spending I can assure you that I value marginal increases in my own health FAR MORE than I value Other People's Money, i.e., I'm perfectly happy to have marginal increases of my health for very expensive procedures because I can get it done entirely for free (from my perspective.)
[User Picture]From: nancylebov
2012-10-01 10:51 pm (UTC)

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You're luckier than a fair number of people I know. Medicine that doesn't work isn't free even if it's paid for by other people's money. There's time, pain, and side effects to consider.
[User Picture]From: drethelin
2012-10-01 09:42 pm (UTC)

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To what extent is the media's portrayal of how much things suck accurate? the "recession" barely touched me, for example, whereas iphones have definitely increased my standard of living.
[User Picture]From: nancylebov
2012-10-01 10:01 pm (UTC)

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I think the economic problems are very unevenly distributed-- things for at least some of the people on my flist are very much worse than they used to be (at the needing to raise money for basic life support level-- there didn't used to be that sort of fund-raising), but one of my friends (relatively reclusive and works at Google) didn't know anyone who was in financial trouble.
[User Picture]From: mindstalk
2012-10-01 10:25 pm (UTC)

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Unemployment is really high, food stamps are really high, people are going years without finding a job.

But if you have a job, it's a great time!
[User Picture]From: marycatelli
2012-10-02 01:01 pm (UTC)

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The Great Depression was a great time if you had a job. Low prices.

Life is like that. It's an ill wind indeed that blows nobody any good.

The question is how to tally up the goods and evils. Argument by anecdote has a notorious tendency to make things worse.
[User Picture]From: ikadell
2012-10-01 10:02 pm (UTC)

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How exactly are you counting inflation? How are you counting the - for lack of a better term - evenness of the distribution of wealth?
[User Picture]From: squid314
2012-10-02 02:22 am (UTC)

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I'm counting inflation by getting my numbers from a graph that measures real per capita income rather than nominal.

I'm deliberately not counting evenness because if economic growth is useless because it all goes to the top who don't need it, that kind of proves my point.
[User Picture]From: mindstalk
2012-10-01 10:26 pm (UTC)

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"Is it a change in the way the money is distributed?"

Duh. Haven't you seen all the stuff on stagnating median income?

"If so, why isn't this something I can vote for in November?"

That's not a question for economists.
[User Picture]From: mindstalk
2012-10-01 11:08 pm (UTC)

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Gas is more expensive than it was in 2000 (though not super high by historical standards, yet.)

College is crazily expensive and getting more so, *and* increasingly necessary for a good job.

Health care costs are shooting up (and worker compensation increases may be mostly absorbed by employer premiums.)

Housing's complex, but definitely more expensive in lots of places where people would like to live.

The 2000s recession recovery was slow and languid on the jobs front, just as currently the stock market is rising up (with record corporate profits) but unemployment is still really high.

So it's more expensive to drive or send your kids to college or live in nice places, jobs are uncertain and pay stagnant, particularly below the professional level, 20-somethings with degrees often can't get jobs at all and are living at home.

Meanwhile the top 1% is like 6x richer or something.

But yay, you have a cell phone and infinite porn.
[User Picture]From: maniakes
2012-10-01 10:44 pm (UTC)

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I'm personally much richer than I was in the 90s. That's mostly lifecycle effects (I was in my teens in the 90s and am 31 now), but I'm also significantly richer than either of my parents were in the 90s. YMMV.
From: (Anonymous)
2012-10-01 11:07 pm (UTC)

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It matters a great deal what components of GDP you're looking at. The computers and electronics that we're all so fond of are getting cheaper in price...which shows up as stagnant-or-falling sales. (There are attempts to correct for quality changes over time but it is, shall we say, not an exact science.)

Other things go up in price but don't appear to improve in quality. There's some talk upthread about healthcare inflation - suffice it to say that I'd greatly prefer 1960s medicine to 1910s medicine but there's considerably less difference between 1960s and 2010s. Education is going up in price but certainly does not appear to be innovating fast (Coursera excluded - and free online ed doesn't show up in GDP!) Government services get counted in GDP and are growing fast but does not appear to be, say, suddenly solving poverty or anything. Land in cities is getting more expensive but that doesn't seem to benefit the nation as a whole (landlords are happy, renters aren't.)

Tyler Cowen has been talking a lot about the Great Stagnation - an interesting concept even if you disagree, and his argument is that GDP growth since the '60s or so have basically been in areas healthcare, education, and government, in which simple the cost figures used in GDP are a bad proxy for quality. So we're not as rich as the numbers make us out to be.
From: (Anonymous)
2012-10-01 11:13 pm (UTC)

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It's also interesting to reflect that not all market transactions seem equally conducive to happiness. Suppose a jeans company manages to convince everyone in country A that they need to buy $100 jeans. Country A's GDP per capita will suddenly rise by $100 (and more if people work more to pay for them). Is country A really better off than country B which gets by on old Levi's? The answer is not obviously yes.

Or, consider Universe A in which Coke and Pepsi are as they are now, vs. Universe B in which they hire lots of ad agencies and wage a zero-sum war over the (assumed inelastic) soft drink market. GDP goes through the roof; are they better off?

Now clearly this reasoning can go overboard, with people saying crazy things like "Finance is nothing but a leech on the economy" or "Lawyers produce nothing of value" based on emotional reactions. Still, the weak version of "not all GDP is created equal" seems valid, and strikingly understudied.
[User Picture]From: philmophlegm
2012-10-01 11:42 pm (UTC)

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Good point oh anonymous sage.

Another example. This year is a really cold winter. People have to turn the heating up and consume more heating fuel. Last year was a really mild winter, so much so that people didn't need to turn their heating on at all. This year's GDP would be higher than last year's, but are people better off?
[User Picture]From: mindstalk
2012-10-02 02:55 am (UTC)

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This doesn't necessarily follow; people who didn't spent money on gas bills may spend it elsewhere. There was concern early in 2012 that the 'recovery' might have been just activity shifting earlier in the year due to warmth.
[User Picture]From: philmophlegm
2012-10-02 11:05 am (UTC)

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Also true. I should have added a 'ceteris paribus' (the economist's favourite get-out clause).
[User Picture]From: maniakes
2012-10-01 11:50 pm (UTC)

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There's also Bryan Caplan's side of the Great Stagnation argument to consider: the claim most of the big improvements to quality of life are undercounted in GDP statistics because they're made widely available at very low or zero price, so they're mainly consumer surplus.

This is Caplan's latest post in the debate, with links to one or two previous posts.
http://econlog.econlib.org/archives/2012/10/how_stagnant_ar.html
[User Picture]From: philmophlegm
2012-10-01 11:19 pm (UTC)

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Be careful about confusing wealth and income.


While I have a lot of sympathy for the idea that actually people aren't poorer than they were, there are some factors I can think of that might be relevant here. These are from a British perspective, because that's where I am, but they're probably applicable in other western economies.

1. People have to spend much more money during employment on their life after employment, that is savings and pensions. My grandfather started work when he was 15, retired when he was 65 and died when he was 68. He had 50 years to save up for three years of retirement. My father started work when he was 16, retired when he was 60 and is still alive and going strong at 67. I started full-time work when I was 22. If I retire at 65, I could maybe expect another 20 years of life, meaning that I have 43 years to save up for 20 years.

2. Property prices are much, much higher than they were when my parents were buying a house (or even when my wife and I were buying our first house fifteen years ago). In the UK, this is largely because house building has not kept pace with population growth (from immigration among other factors) and because fewer people live in large families. Even new graduates with good jobs cannot expect to own their own house until they are several years into their careers.

3. When I were a lad, they used to pay you to go to university. Now, you have to pay them.

4. People look at their parents. While they don't tend to notice that their parents didn't have expensive holidays every year, or have all sorts of consumer electronics, or go out drinking every Saturday, they do notice that their parents owned their own house when they were in their twenties, had paid off the mortgage by the time they were fifty and retired early. And none of that seems likely for people who ate say 30 now.
[User Picture]From: maniakes
2012-10-02 12:00 am (UTC)

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On further consideration, I don't think one should be so quick to dismiss the value of expected future income. I've "spent" a lot of money to increase my expected future income, through education and long-term savings and investment, proving that on the margins I am willing to sacrifice current consumption for future earnings.

I expect this is a major factor for people feeling poorer now than in the 90s despite per-capita income and wealth going up: expected rates of return on savings and investment are way down from the days of the Dot Com boom (between minuscule interest rates on bonds and bank accounts and the increased perceived risk and decreased expected average growth rate of stock and other equity investments), so the apparent price of future income has gone way up.
[User Picture]From: pktechgirl
2012-10-02 12:20 am (UTC)

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I think it's anticipation. You saw the same thing in the 50s- people had a lot less, comparatively, but the expectation was that things were getting better.
From: swimmy
2012-10-02 01:04 am (UTC)

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Lots of good comments in the thread so far (especially about rising health and education costs lacking corresponding improvements in health care and productivity), but here's an important point a student of cognitive bias should be able to appreciate: It may not be that growth is useless for improving society, it may just be that people are really, really, really bad at measuring societal improvement. See here. If you ask random people how much wealthier we are than typical Americans living in 1900, you are very likely to get answers along the lines of "twice as wealthy" and unlikely to get the correct answer of "nearly 10 times as wealthy." People overrate the past, and people are probably doing that for the 90s. Not that you're noticing a fake problem, but I'd bet it's overstated.

The effect is probably exaggerated as you go back further. For the 50s we're talking about the childhood of baby boomers. For the 1900s we're talking about fake perceptions generated from imagery in movies and textbooks.

Edited at 2012-10-02 01:04 am (UTC)
[User Picture]From: Roy Stogner
2012-10-02 01:06 am (UTC)

Potentially important factors

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Transfer payments are over $2 trillion per year (http://united-states.reaproject.org/analysis/transfer-payments-ca35/) now; I'd be fascinated to hear what a massive redistribution program would look like by comparison.

Some reasons increased GDP doesn't necessarily imply increased happiness:

If most people are motivated by envy rather than greed (http://falkenblog.blogspot.com/2010/03/why-envy-dominates-greed.html) then it doesn't matter what the absolute level of wealth is; the nth percentile is always going to be the nth percentile. This may even make some kind of evolutionary sense, if (proto)human development was culled less by death (where absolute status matters) and more by sexual selection (where relative status is all-important).

Now that significantly fewer families have married parents (http://www.nytimes.com/2012/07/15/us/two-classes-in-america-divided-by-i-do.html?pagewanted=all), that increase in wealth doesn't go as far as it used to. Cooperating with your spouse to maintain a household for your family is far easier than separately maintaining two houses after shuffling around child support and/or alimony. This also creates rising household inequality (http://politicalcalculations.blogspot.com/2011/10/real-story-behind-rising-us-income.html) and feeds into that envy problem.

Unemployment is high, but more importantly duration of unemployment is through the roof (http://economix.blogs.nytimes.com/2011/08/05/length-of-unemployment-continues-to-break-records/). There's a real fear now that if you start to fall behind it may easily become a permanent failure.

There's also all the things that GDP doesn't measure in the same way you or I would measure it:

If you have to take two jobs to make the same salary, your personal utility is probably in the toilet due to the lost free time, but your contribution to GDP is still the same.

If you use a higher salary to buy things that you would otherwise make, then your personal consumption may be unchanged (or may be reduced by taxes, or may be lower quality in common cases like the stay-at-home-mom->daycare transition), but your and your trading partners' contribution to GDP goes up.

If your skilled job is suddenly lost to or threatened by automation or outsourcing, GDP sees the current drop of "old_salary - new_salary", but from your point of view the change was "present_value(expected_integral_over_future(old_salary) - expected_integral_over_future(new_salary))", which may be an order of magnitude larger (or infinitely larger in the "threatened" case).
[User Picture]From: Roy Stogner
2012-10-02 01:07 am (UTC)

Re: Potentially important factors

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Those were all nice "a href=" tags that turned into proper hyperlinks when I hit preview, I swear...
From: (Anonymous)
2012-10-02 08:04 am (UTC)

Re: Potentially important factors

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This married-parents statistics is has the highest stew yield of all oysters. Are we talking single parents, two-adult families where some or all of the children are stepchildren, couples that just don't think a marriage license matters? The latter two don't have more costs.
[User Picture]From: marycatelli
2012-10-02 01:02 pm (UTC)

Re: Potentially important factors

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Well, yes, actually, they do. Cohabiting adults are much more likely to maintain separate supplies of stuff they both need.

Not so much as a couple living separated but still more.
[User Picture]From: naath
2012-10-02 10:29 am (UTC)

Re: Potentially important factors

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Massive redistribution> bigger. Just because the current numbers are big doesn't mean bigger numbers don't exist. Of course there are problems with enforcing such a redistribution.
[User Picture]From: Roy Stogner
2012-10-03 03:07 am (UTC)

Re: Potentially important factors

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Falkenstein has a link to another study (http://falkenblog.blogspot.com/2012/10/more-evidence-that-envy-trumps-greed.html) in which "envy dominates the results as the utility generally decreases when the peer group earns more and it increases when the peer group loses more than the subject."

Redistribution might be an answer, but perhaps somehow training people not to take joy in the suffering of others or suffering in their joy is also worth investigating.

[User Picture]From: xiphias
2012-10-02 01:50 am (UTC)

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Yes, it's distribution of wealth. We've got massively more income inequality than in 1990. The poor are about the same, the middle class is lower, and the rich are richer, and the super rich are SO AMAZINGLY STRATOSPHERICALLY RICHER that normal economic models start breaking around them.

The GDP per capita growth happens because of the 0.1%.
[User Picture]From: eyelessgame
2012-10-02 05:53 am (UTC)

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As others have said, increasing the mean without increasing the median is, in fact, useless from an improving-society point of view.
[User Picture]From: eyelessgame
2012-10-02 05:59 am (UTC)

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The other half of it is economic security versus insecurity. When the labor market is as slack as it is currently, the consequences of losing a job are catastrophic. Security is a commodity, and it is currently very expensive. A person in the 1950s lived not nearly as well as we do today, but he had the confident expectation that by continuing to do his job well, he would remain skilled and relevant, he could continue to provide for his family, his children would grow up in a society where they had an equal opportunity to everyone else, his job and society and his own prudence would combine to provide him with a pension, Social Security, and personal savings that would lead to a comfortable retirement.

All or most of that is frayed, and most of the reason for the fraying is the concentration of wealth into a small number of hands.
(Deleted comment)
[User Picture]From: eyelessgame
2012-10-03 01:33 am (UTC)

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Fair enough. Both the concentration of wealth and the dismantling of the social services that supported the middle class and shielded it from misfortune are the predictable result of the same deliberate choices and actions made by a set of political entities. They're connected but they have a common source.
[User Picture]From: Julia Wise
2012-10-03 02:50 am (UTC)

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I'm rereading the "Little House on the Prairie" series, which makes makes me feel happy and rich. I have hot water! And a tight roof! And a real mattress! My shoes are the right size! etc. I actually think reading about the past makes me appreciate modern life more.
[User Picture]From: oscredwin
2012-10-14 03:10 pm (UTC)

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An essay about the importance of Economic growth:

Here and there, I hear friends ask why economic growth is so important.

An economy is not a zero sum game. Economies grow (and when interfered with, shrink), and the growth in the economy is a measure of how much richer people are with time.

An economy growing at 3% a year, as the US has struggled to do for some decades now, grows about 20 times over a century. That is, after 100 years, there's 20 times more wealth -- and you can see that result concretely around you in the difference in the lives of people in 2012 vs. 1912.

However, an economy growing at 4% a year grows 55x in a century. At 5%, the growth rate is about 150x in a century. At 7%, the rate is about 1000x improvement.

I would like to note that before we got the "reforms" of the first half of the 20th century, we used to get economic growth rates in this country around 7%. The price of the reforms, whether you think they were good or bad, is probably a difference in your standard of living of about 50. (I think we probably could have done better still, by the way.)

I cannot imagine what a country fifty times richer than the US would be like, though it would clearly be quite a nice place to live. Even if we discount a factor of fifty as ridiculous (though I don't think it is ridiculous) and pick a more conservative factor of five or ten -- not five percent or ten percent difference mind you, five times or ten times difference -- the distinction is still stark. Imagine what your life would be like now if it had not been for all the "help" that you had gotten from the state for all these decades.

A factor of five or ten is quite a price to have paid. Imagine all the medical advances that could have been funded (and the deaths that could have been prevented), all the improvements in infrastructure, even just how nice it would be to be five times richer than you are now, let alone fifty times richer. Imagine how much better off retirees would be, how much nicer schools would be, how much nicer even bathrooms in restaurants would be.

By the way, the difference in standard of living between Mexico and the United States is the result of about a 1 percent difference in growth rate per year between the two countries compounded over the last century. The difference between open sewers and slums versus the life we live is just 1% growth per year. That difference is a very vivid distinction.

If you think 7% is crazy (which it clearly is not), imagine if the US had experienced even 4% growth instead of 3% -- the difference would be a nearly 3x larger GDP, and a lifestyle as different from what we have now as ours is from Mexico.

If, like me, you don't think 7% would have been impossible, sit back for a moment and cry over what fifty times the national wealth would have been like.
From: (Anonymous)
2012-11-04 12:00 pm (UTC)

GDP growth does not mean you're getting richer

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http://www.debate.org/opinions/is-gdp-growth-a-good-indicator-of-improving-quality-of-life

If I have to spend a lot more money to retain my standard of living, then wealth has gone DOWN, while GDP has gone UP.

There are other factors that one can look at to determine if people in a given society have become more wealthy.

- real wages
- trade deficit / surplus
- savings rate

Greetings from Germany
David