Compensation and Productivity



Many Americans have seen graphs like this:

Much of this is due to the use of different price level deflators for productivity and compensation. Over the past forty-one years, U.S. output has risen in price much more slowly than the cost of living for the typical American worker. When using the same price level deflator, the compensation-productivity divergence looks much more recent, having begun in late 2001, rather than in 1973:


Alternatively, if one wants to use a logarithm scale for the same graph (to show an exponential growth trend instead of a linear trend):


I strongly suspect a good portion of the divergence from the exponential growth trendline after 1973 is due to falling and stagnating worldwide per capita oil production.

The Heritage foundation suggests most of the recent wage-productivity divergence, after taking into account the difference between the deflators, is due to overstating input price increases and not accounting for depreciation in output measurements. I doubt the latter, as depreciation did not significantly increase in 2008. It is interesting that stated average real hourly productivity increased during the 2008-9 recession (a phenomenon almost unique to the United States). I suspect real hourly wages did not rise as fast as real hourly productivity in the U.S. in 2008-9 due to the effects of higher unemployment on wages. In the 1990, 2001, and 2008 recessions in the U.S. (but not before), low-productivity workers increased hourly productivity to avoid being fired, thus leading to rapidly rising real hourly productivity while wages stagnated due to the labor surplus. I do not know why this only arose in the U.S. after the 1980s.

Import Substitution


America’s large size and population explains why it could afford its extreme manufacturing protectionism during the 19th and early 20th centuries.
Mexico ceased import substitution with the passage of NAFTA. For various reasons, economy-wide labor productivity continued to stagnate.
Also, while Turkey was never a basket case, it was was never a tiger economy, either. It remains the only example of a country to successfully transition from successful import substitution to successful free-ish trade.

Laws of Economics



1. Demand does not create its own supply (cf. “stagflation”).

2. Supply does not create its own demand (cf. “involuntary unemployment”).

3. What is consumed must first be produced [citation not needed].

4. There is no corresponding necessity that what is produced must then be consumed (see Law 2).

5. For any rational economic activity to occur, supply and demand must be coordinated.

There are many ways to coordinate supply and demand. No way, so far, has been found to be perfect. Generally, it has been conceded that market systems of coordination of supply and demand are more efficient and less prone to shortages than ways based on central control of production. [Edit: A few hours after I wrote this, a 10-hour power outage took place- something that never happened in Communist Russia. Seems nature loves irony.] Most recessions in modern advanced economies are real wastes of real resources (see here).

Comparing the Real GDPs per Capita of the Former Soviet Republics


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The Baltics are excluded from consideration in this post. This is the current (2013) ranking of former Soviet republics in real GDP per capita (PPP) terms. The statement in brackets refers to change in country/republic rank from the year 1990.

1. Russia (from 1) [0]

2. Kazakhstan (from 2) [0]

3. Belarus (from 6) [Up 3]

4. Azerbaijan (from 4) [0]

5. Turkmenistan (from 5) [0]

6. Ukraine (from 3) [Down 3]

7. Armenia (from 9) [Up 2]

8. Georgia (from 7) [Down 1]

9. Uzbekistan (from 12) [Up 3]

10. Moldova (from 8) [Down 2]

11. Kyrgyzstan (from 11) [0]

12. Tajikistan (from 10) [Down 2]

These, consequently, are the best and worst performers in changing their real GDP per capita (PPP) rankings in the FSU since 1990:

1. Belarus and Uzbekistan [Up 3]

2. Armenia [Up 2]

3. No change: Russia, Kazakhstan, Azerbaijan, Turkmenistan, Kyrgyzstan

4. Georgia [Down 1]

5. Moldova and Tajikistan [Down 2]

6. Ukraine [Down 3]

Here is another ranking: country’s real GDP per capita in 2013 compared to that at relevant 1990s business cycle trough:

1. Azerbaijan: 5.00X

2. Armenia: 4.09X

3. Belarus: 3.24X

4. Turkmenistan: 3.21X

5. Georgia: 3.17X

6. Kazakhstan: 2.78X

7. Tajikistan: 2.34X

8. Uzbekistan: 2.26X

9. Russia: 2.11X

10. Moldova: 1.99X

11. Ukraine: 1.90X

12. Kyrgyzstan: 1.83X

Thus, the below is the annualized growth rate in real GDP per capita in each former Soviet country between the year it hit its respective 1990s business cycle trough and 2013:

Azerbaijan: 9.35%

Turkmenistan: 7.37%

Armenia: 7.3%

Belarus: 6.75%

Georgia: 6.26%

Kazakhstan: 5.85%

Tajikistan: 5.13%

Russia: 5.11%

Moldova: 5.05%

Uzbekistan: 4.92%

Ukraine: 4.38%

Kyrgyzstan: 3.42%

What’s the matter with Kyrgyzstan? Its terrible education system? Its lack of industries built up during the Soviet era? Its geographic isolation? It’s certainly interesting that Ethiopia and Armenia are rapidly growing, but Kyrgyzstan isn’t. Also, the Belarussian economic miracle (which, for different reasons in each year, stalled in 2012 and 2013) hasn’t at all been emphasized in the U.S. media.



Price Level v. Real GDP: The AS-AD Model Examined


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People in the economics blogosphere (e.g., Krugman, Sumner) all talk about a lack of aggregate demand since the 2007-9 recession. Yet, they never seem to try to test that claim using the same graphics they were taught in Econ 101, which can be easily generated in Excel using data from FRED.

X-axis is Real GDP; Y-axis is Price Level (the GDP deflator). Blue line is historical data points.

Now, for the big reveal:


The red Aggregate Demand curve is for Q2 2009 and is based on Scott Sumner’s assumption that AD=NGDP. The blue line is still historical data points. As you can see, using the Sumner NGDP/Aggregate Demand curve, most (62.7%) of the change in Real GDP during the 2007-9 recession was caused by supply-side phenomena.

Now, let’s look at the U.S. recession of 1990. The recession was caused by a credit contraction, not the oil price shock of the Gulf War-oil shocks don’t cause recessions these days; credit contractions do. And there was a credit contraction in America by April of 1990.


The red AD/NGDP curve is for Q1 of 1991. The blue line is historical data points. As anyone can see, there was hardly any AD/NGDP decline at all in 1990-91- certainly not enough to spark a significant decline in Real GDP. The decline in Real GDP was pretty much entirely supply-side. Indeed, AD/NGDP was slightly higher at the bottom of the recession than when the recession began.

So Scott Sumner is right: NGDP targeting regimes would create stagflation in all recessions because recessions in modern economies are mostly supply-side phenomena. This might seem counter-intuitive to most New Keynesians, who think of the Great Depression of the 1930s as the ur-example of recessions, but when you’re an Austrian, thanks to ABCT, you’d think most recessions would be inflationary and would be very surprised at the highly unusual Great Depression of the 1930s, which was clearly a demand-side phenomenon, as the American price level was higher in March 1921 than in June 1932 (both months had the same level of real output), thus indicating a movement of the Aggregate Supply curve to the right between these months.


This is What Happens When the Police Don’t Take Back the Streets


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Looters ran out of shops with boxes stacked in their arms up to their chins. Behind them lay overturned shelves, spilled goods and wrecked displays. All the while, police stayed back by their armored vehicles and observed but did not stop them.–271492781.html

Despicable. The police exist to protect the people and their property. What good is a state that does not carry out its functions? It is no better than anarchy! Was the donation of surplus military equipment to the Ferguson police all for naught? The police’s role is not to be subject to the disingenuous whining of the leftist media establishment, but to protect the citizenry under its jurisdiction! Unleash the cops! Take back the streets! Restore order to the residents of Ferguson, Missouri! Ignore the petulant complaints about “police militarization” from the prophets of Ba’al of our day.
A great libertarian intellectual, Murray Rothbard, once (correctly) wrote, at the height of the 1990s crime wave:

There is only one way to fulfill the vital police function, the only way that works: the public announcement–backed by willingness to enforce it–made by the late Mayor Richard Daley in the Chicago riots of the 1960s–ordering the police to shoot to kill any looters, rioters, arsonists, or muggers they might find. That very announcement was enough to induce the rioters to pocket their “rage” and go back to their peaceful pursuits.
Who knows the hearts of men? Who knows all the causes, the motivations, of action? But one thing is clear: regardless of the murky “causes,” would-be looters and muggers would get such a message loud and clear.

4. Take Back the Streets: Crush Criminals. And by this I mean, of course, not “white collar criminals” or “inside traders” but violent street criminals – robbers, muggers, rapists, murderers. Cops must be unleashed, and allowed to administer instant punishment, subject of course to liability when they are in error.

And so, Pat proclaimed, “we must take back our cities, and take back our culture, and take back our country.” Yes, yes, yes!

A Note on the Airstrikes


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As everyone knows now, Obama, usually a good friend of the Islamic State, has in the past few weeks began performing concrete action against it. Does this negate my position that Obama is a firm supporter of the Islamic State and all the instability in the Fertile Crescent and Libya today? No.

Obama only began countering the Islamic State when it approached dangerously close to the city of Arbela after its decisive victory to the Southwest of Gaugamela. Apparently, the integrity of the government of Iraqi Kurdistan is infinitely more important to the present American administration than the fate of the Kurds of North Syria, the fate of the Shiites of the region of Baghdad, the fate of the Syrian rebels in the region of Deir ez-Zor, or the fate of the Christians who once used to reside in Raqqa and Mosul. That’s a pretty big list. Iraqi Kurdistan is, it seems, a vital client state of the United States, effectively allowed by it to export oil to Turkey without the permission of the Iraqi government. Iraq, if with Maliki, is not. Let us see how the present Iraq, without Maliki, will be treated by the present American administration.

In other news, the media silence on Turkey’s complicity with the Islamic State’s expansion has finally ended. I am very surprised.

Edit: Even Turkey has begun to attempt to reduce Islamist militant activity within its own borders. Apparently, it wants to keep the instability it has created in Iraq and Syria in Iraq and Syria, not within its own territory. This goes for the Syrian rebels, too. Of course, South Carchemish and Tell Abyad are still in Islamic State hands, thus demonstrating Turkey has no full-fledged war on militant Islam.

Leftist Stupidity on Ecuador from a Year Back


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Lately, I’ve been learning a bit about economic development and its relationship to economic freedom. I’ve been especially interested in economic nationalism and leftist support for it. A few minutes ago, I found this bit of tripe from a blog more popular than this. It’s not the worst sort of tripe on this matter, of course- but it’s pretty bad. The bit of tripe compares apples (Ecuador) to cucumbers (the U.S. in the 1990s and 1980s), does not adjust for population growth, and uses an improper methodology (Russia does not have a lower GDP per capita than Turkey; always use Purchasing Power Parity in GDP comparisons). In reality, per capita GDP (PPP) growth in Ecuador since 2009 has been slower than in either of the two countries (both of which have commitment to free-market policies) bordering it. The statistics came out less than a day ago and, for some reason, do not include the 1980s.

Also, there seems to be a general pattern. Latin American countries adopt leftist policies. Rightist economists warn they will surely be disastrous in the long run. Latin American countries experience high inflation and debt crisis, thus leading to IMF intervention. Leftists blame IMF intervention for slow growth resulting from debt overhang and failure to absorb traditional economy into the globalized world.

Things That Will Never Be Said by the News Media or President Obama


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But then Mr. Erdogan has said many reasonable and conciliatory things since the Syrian crisis began, and he has done nothing to rein in the thugs who have seized control of parts of eastern Syria, or to block the fighters and sophisticated weapons supplied them from Turkey.

Suddenly, the risks inherent in Erdogan’s gamble are glaringly obvious. By supplying weapons to the rebel militias, with their strange mix of intelligence agents, local thugs and trigger-happy Turkish volunteers, Erdogan made himself a hostage to their brutish blundering.

The West, led by President Barack Obama, will demand that he cut off support to the rebels once and for all and seal the border.

Obama said Turkey has a “direct responsibility” to compel rebels to cooperate.

If Turkey continues to destabilize Syria, Obama said, it will further isolate itself from the international community.

It is long past time that Erdogan ended both the inflammatory information war in Turkey and the military proxy war in northern Syria that he has done so much to conceive, fund, organize, and fuel. There are hundreds of corpses strewn across a field today in eastern Syria. What is Recep Tayyip Erdogan’s next move?

Turkey’s Recep Tayyip Erdogan is at a fateful crossroads. He can go all-in on Syria, upping the ante by increasing military supplies to the retreating rebels in Syria’s north, providing open military backing to their cause, and as a last resort ordering an invasion by Turkish troops. Or, on the other hand, he can relinquish his would-be stranglehold over Syria and accept Syria as a unitary state, probably oriented toward Iran and the Axis of Resistance, while establishing normal relations with Syria on the lines of, well, Greece.

-Thus is the power of the Narrative. Some destabilization (e.g., in Syria and Iraq) is almost completely ignored (though not quite covered up; but note the measured tone) (but why?). Other destabilization (e.g., in Donetsk) is seen as a threat to international order (but why?). What fundamentals lie behind this? And who directs all this? The war crimes of the Syrian rebels and the ISIS (the former actively supported, the latter apparently only passively supported by Erdogan’s regime) are no less severe than those of the Novorossiya rebels.

The Congressional Hearing on the Rise of ISIS


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Only a couple hours after I left D.C.’s White House North Lawn to drive home, a Congressional hearing on the rise of the ISIS began less than three kilometers away from where I was. It is only fair to comment on it here.

1. James Franklin Jeffrey of the Washington Institute for Near East Policy recognizes the threat of ISIS (which I also do), supports the White House’s decision to attempt the overthrow of Maliki (which I oppose), opposes Kurdish independence (which I support), supports greater oil revenue distribution with the Iraqi Arab Sunnis (which I also support), and supports a serious activist anti-ISIS policy (which I support, but Obama doesn’t). He fails to see that it is Turkey that is the Middle East’s rouge state, not Iran, which, aside from its occasional support for Hezbollah’s attacks on Israel and U.S. citizens, is harmless to the U.S.. Money quotes:

Importantly, our allies in the common struggle for stability—Turkey, Israel, and the Sunni Arab states— see Iran as at least an equal threat to their survival as Al Qaeda, and we must respect that to gain their essential cooperation.

As we’ve experienced, from Al Qaeda before 9/11 to Iraq since 2011, problems in the region absent decisive, heads up engagement by the US will keep getting worse to the point when, very late, and at great cost, the US will be compelled to act at far greater cost and risk than if acting earlier.

2. The retired General Jack Keane of the neocon (and very informative) Institute for the Study of War gives an occasionally flawed, but generally correct, informative, and commendable testimony. His is the testimony at this hearing closest to my own views. It is the only one of the four testimonies to not throw Maliki under the bus. Unfortunately, this testimony contains blatant falsehoods: Syrian military-ISIS conflict is not uncommon (though it is true that the Assad regime has helped Syrian militant Islamist fundamentalists) and the FSA was definitely not “the only force in Syria that fought ISIL” (Kurds? Nusra? Syrian Army?). Keane also, sadly, fails to mention the crucial role of Turkey. Money quotes:

U.S. intelligence agencies have been quite aware of this threat, this is the failure of policy makers who ignored it.

AQI was defeated in Iraq by 2009, an admission they made repeatedly in message traffic, calling off the flow of the foreign fighters.

Key policy decisions in 2009 to disengage from Iraq politically and to no longer help shape Iraq’s political future was disastrous. Particularly in light of previous success in other post conflicts; Germany, Italy, Japan, South Korea, the Philippines, and Bosnia Herzegovina.

Russia desires to be a key player in the Middle East and influence other actions as they are doing successfully in Syria and Iran desires Iraq to be a client state similar to Syria. Maliki has brought them in as significant international supporters to assist with operations against ISIL which only enhances Maliki’s political position due to the lack of tangible support by the US.

3. Doug Bandow of the Friedman/Koch libertarian Cato Institute makes an unconvincing case for abstinence. He comes closest to my views while the U.S. occupation of Iraq, which I then saw as stupidity on a massive scale and today accept as necessary to clean up the mess the U.S. left behind after its reckless toppling of Saddam, was still going on. He correctly points out that the ISIS has plenty of problems, is more committed to expanding in the Fertile Crescent than striking the U.S., and cannot conquer most of Iraq’s population. However, the ISIS can easily triumph over its Baathist allies if they rebel, as it already has done in Syria. Bandow also points out that U.S. intervention is a band-aid over a much larger Iraqi credibility problem. However, if the Iraqi government is unable to become credible, there’s always the well-funded Kurdish Regional Government the U.S. can rely on to defeat the ISIS in northern Iraq. Bandow’s statement that “Today ISIL is too big to simply decapitate.” raises the prospect of a civil war in the Islamic State, which, while terrible to contemplate, is quite plausible. Unfortunately, Bandow wrongly throws Maliki under the bus. He fails to understand the consequences of his two statements: “In Syria the ISIL radicals face simultaneous military challenges from the government, moderate opposition forces, and even slightly less extreme jihadists, as well as the political task of establishing a functioning government in areas under its control.” and “Turkey is a Muslim nation with significant military capabilities which borders both Iraq and Syria.”. It is Erdogan, not Maliki, who is the Middle Eastern leader most responsible for the rise of ISIS. Fortunately, Bandow makes up for his mistake by pointing out the dubious prospects for a replacement for Maliki. He also correctly points out that the Middle East is in flux and that partition should not be off the table. Bandow is only partly correct in his objection to funding Syria’s rebels: the risk is that weapons may fall into the hands of Nusra, but supporting more secular humanist forces in Syria decreases Nusra’s advantage. Likewise, weapons falling into the hands of the enemy is an inevitable risk in any violent conflict. Bandow’s statement regarding Israel, Jordan, and Lebanon “However, Washington should be burning the diplomatic wires to encourage them to take action according to their interests and abilities. The U.S. has enough challenges in the Middle East and elsewhere around the world to jump into another conflict.” is 180 degrees from the truth. It would be foolish for these states to fight the ISIS, as all of them are smaller in territory than the ISIS and have no access to the Turkish border. The U.S., however, has enough pressure to force Turkey to allow the U.S. to conduct coercive operations against the ISIS from Turkish territory. If anything, Bandow is too supportive of Iran, though he does correctly state that “the Obama administration should quietly ensure that any U.S. military involvement does not clash with actions taken by Tehran”. Though Bandow does state that “ISIL has grown most obviously out of past U.S. policy mistakes”, he fails to state that it had shrunk during and after the late 2007 surge out of past U.S. policy successes. Money quotes:

To the extent that the organization establishes effective control over a territory, which remains problematic, it will have less incentive to strike the U.S., since doing so would, as with the Taliban in Afghanistan, risk its geopolitical gains. The group continues to pose a serious challenge, and one which could morph into something different and more menacing over time. But today Washington has an opportunity for a considered, restrained, and measured response.

Iraq’s most serious problem today is that the state lacks credibility and will, and the military lacks leadership and commitment. These America cannot provide.

Moreover, appearing to reflexively back Baghdad risks foreclosing potential solutions, including some form of federalism or even partition. The Iraqi Humpty Dumpty has fallen off of the wall. The Kurds are moving toward a vote over independence. The willingness of mainstream Sunnis to back ISIL demonstrates the depth of their alienation from Baghdad. The collapse of the Iraqi military suggests that the national government is unlikely to quickly reassert its authority. The U.S. and other interested parties, including Jordan, Israel, Turkey, and Iran should be talking informally and quietly about options to defuse the potential sectarian explosion. While Washington could help advance such an approach, no plan will succeed without support of regional states and local peoples. All options should be in play.

Washington’s reluctance to countenance Tehran’s involvement in Iraq is understandable but irrelevant. Hussein’s loss always was going to be Iran’s gain, the Bush administration’s intentions notwithstanding. There is nothing Washington can do to change that today. The more America is willing to tie itself to the Maliki government the less the latter might need to rely on Iran, but the impact likely would be marginal. The overwhelming religious, cultural, personal, economic, and geopolitical ties would remain. The U.S. always will be a distant and alien power.

America’s role should remain advisory, at most, but it would be best to ensure no inadvertent complications. The crisis in Iraq has placed a greater premium on improving relations with Iran—and especially resolving the nuclear issue, if possible.

4. Michael Eisenstadt of the Washington Institute for Near East Policy comes closest to Obama’s views, but refuses to mention the crucial role of Turkey (if ISIS is equivalent to Viet Minh, Turkey is equivalent to North Vietnam and the U.S. is equivalent to the U.S.S.R.). He points out that direct U.S. intervention in Iraq would simply lead to more ISIS recruitment, but I say that this is a good thing! The more ISIS jihadis killed this time, the fewer the Iraqi government has to kill later. His testimony is mostly perceptive and quite frank. He does understand that “The road to liberating Iraq passes through Syria.”. He supports Obama’s half-billion dollar package to aid Syrian rebels, which I dismiss as duplicitous, and way too much and too late. Money quotes:

Thus, the U.S. should allow Prime Minister Maliki to twist in the wind as long as he is not willing to work to achieve a cross-sectarian coalition government, while quietly pushing for an alternative to him who would be willing to work on that basis. It should, however, hold out the prospect of expedited weapons deliveries, and even U.S. drone and air strikes against IS positions in Sunni-only areas in the north as an incentive.

And thanks to its rapid success, IS was transformed overnight from perhaps the richest terrorist group in the world, to one of the poorest (de facto) states in the world.

IS’s defeat of the ISF was also a major setback for Iran. And IS’s rise threatens the so-called ‘axis of resistance,’ from the Levant to Iran, as IS is active in Lebanon, Syria, Iraq, and its recent victories might inspire violent Salafists already active in Iran.11 This is yet another reason, barring any major change in policy by Baghdad, not to move too quickly to lavish military support on the Iraqi government, as it is worth letting Tehran consider how its own policies have contributed to the current state of affairs there.

In conclusion: Michael Eisenstadt has spoken. The ISIS is staying. Thousands of antiquities in its territory are doomed to be either sold or destroyed.