2016: Obama’s World

Imagine 2008.

Marginal Counterrevolution

Before the 2008 election, James Dobson wrote this letter to Obama’s America. Of course, the vast majority of it was inaccurate, and much of it was hilariously off-base. Nevertheless, had it included the below points in 2008, it would have been the most prophetic document ever, and it would still have been laughed off by the vast majority of Americans for being ridiculous:

In Obama’s first term:

1. Don’t Ask, Don’t Tell will be repealed.
2. Bin Laden will be killed by U.S. forces.
3. Moammar Gaddafi’s government will be overthrown with U.S. bombs, with the U.S. taking advantage of a popular uprising in that country. Gaddafi will be killed by U.S. backed-rebels in Sirte after the rebel capture of Tripoli.
4. A series of protests in Syria will turn into a U.S. and Turkey-backed civil war, leading to much of the country falling outside government control and into…

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On Late 19th Century Indian Famines under British Rule

I’ve been researching this topic intensively over the past couple days and feel as though if I don’t type a post on it today, all my work shall be for nought, as my browser is piling up with tabs at a pace sufficient to prevent me from typing this post after today.

From some point in the first half of the twentieth century to 1990, Great Britain’s GDP (PPP) exceeded that of India. This was despite a much larger population and stronger population growth in the latter than in the former, the latter being ruled by the former, and a re-industrialization in the latter following an 18th and early 19th century de-industrialization. This curious absence of economic development despite the presence of British institutions shows the truth of Adam Smith’s claim that “The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries”. For reasons behind this, see Acemoglu 2001. In the late 19th century British Raj, tax revenues as a percentage of income were twice as high as in the U.K. And, indeed, during the first half of the British Raj, India was wreaked with famine so severe, the only only reliable source of food men had was in prison.

Which makes it all the more interesting why, even during the darkest days of the Indian famines of 1876-9, 1896-1897, and 1900-1901, Indian exports of foodgrains to the U.K. continued to constitute roughly 2% of total Indian grain production -enough to feed six million Indians per year in the same quantity they were commonly fed at the time. This was greater than the amount they are fed by foodgrains today, though India has been a consistent net exporter of foodgrains since about 1990 after being a consistent net importer of the same since independence, part of this, obviously, being a result of a dietary shift towards superior goods. The gap between deaths and food exports in the 1876-9 famine was even greater than that in the more severe ones of the 1890s and 1900s. Indian per capita foodgrain production also rose strongly during decades characterized by famine while declining in the decades after 1920, when Indian famines also disappeared, reaching a nadir in the years around independence. Several things may account for this phenomenon- the transformation of India from a net exporter to a net importer of foodstuffs by the 1930s, the revival of the Indian manufacturing sector, the end of the strong El Nino disasters, and the end of the process of the expansion of the cultivation of famine-vulnerable marginal lands.

No doubt this export of grain when there should have been imports took place due to lack of sufficient industrialization -anecdotally, despite British rule, it was still difficult for Indians to acquire European capital. The debt payments to Britain, which hurt, but did not totally prevent, equalization of Indian with world grain prices via inflow of specie, something essential to prevent some grim humor, also couldn’t have helped. Aid to the poor for the whole of India was generally less than half that for the U.K. in nominal currency, despite the latter having less than a sixth of the population of the former. And the vast majority of the British famine aid was spent not on actually delivering any food, but on building railroads. And, indeed, the Indian famines were perfectly soluble by a sufficient amount of British aid; the main victims of the famine were those unemployed by lack of employment opportunities to work the land or to supply those refocusing their purchases on consumption of foodgrains with their goods and services. This manifested itself as both a labor supply shock due to a rising reservation wage and a labor demand shock due to reduced nominal demand for farm and artisan labor.

The effect of the British railroads on Indian famines was decidedly mixed. While the rise of the railroad did lead to increased co-movement of prices throughout India, which might well have made famine toll more severe by raising prices strongly throughout the land, rather than to near-infinite heights in only some parts of it, as well as the elimination of actual shortages (in the economist’s sense) of grain, it also permitted the grain export trade out of India to rise, expand, and continue, even during times of the most dire famine. There were no foodgrain exports out of India before the rise of the railroads. Indian wheat exports, constituting 13% of Indian wheat production and 23% of British wheat imports in 1886, were quite significant, even in the famine of 1876-79. Indian rice exports and internal rice production, however, were much greater at the time, with Indian rice, due to its low price and quality, constituting the majority of rice sold in Europe, nearly half of it being used to produce alcohol, and much of the rice sold in South America during the famine of 1876-9. The rise of the railroads also permitted grain to be exported from already famished Indian provinces to others, with more purchasing power and different comparative advantages.

The stupidity of wasting food by making work a requirement for receiving welfare in order to prevent sloth does not need to be pointed out, of course. Especially in the 1876-9 famine, British famine aid was marked by stupidity.

Now, how, exactly, would Britain have been able to prevent the famines that afflicted India during the late 19th century? Firstly, ban food exports. That would have kept enough food in the country to save millions of lives without even much of an effort on Britain’s part. But, to prevent that food from being consumed solely by the unfamished,  Britain needed to do much more than just ban food exports; prices would have still skyrocketed even with this action due to internal crop failure. Consumption-side cash grants to the unemployed might have been disastrous and counterproductive, as would have price controls, which, while raising affordability of food for the poor, would have resulted in shortages (in the economist’s sense). What needs to be understood is that the demand for food in India was highly price-insensitive -the nominal revenue of able producers strongly spiked with price increases resulting from food supply shocks. The price sensitivity of Indian food supply is less clear. What was needed was to pay more producers to import grain into the famished provinces to sell at a price level set by the British government. This supply-side subsidy would have successfully lowered prices and prevented Indian famines by lowering producers’ marginal cost.

A supply and demand graph of a typical late 19th century Indian famine.

Obviously, structural changes, especially superior institutions, greater market integration, and faster industrialization, would have been superior to all this. But the conditions were not yet ripe for massive outsourcing and offshoring to be profitable for British business and the British government. Had they been, it would have led to changing government policy to promote export-led industrialization and economic development, as actually happened in Puerto Rico and other territories imperialist powers held on to in the age of independence from imperialism.

How does one rank the cruelty of these famines in comparison to those of the Communists? I believe that, overall, the British famines in India were comparable to those of Stalin in the southern Soviet Union. While Stalin did more for the Soviet Union than the British did for India (the Soviet economy was roughly twice the size of that of India at Indian independence; they were roughly comparable in size when Stalin came to power), and the famines under him were smaller than those of British India terms of pure human cost, the famines under Stalin did end up killing a larger proportion of the population in the affected areas than those under the British Empire (with exceptions in the 18th century). Stalin does get a demerit for covering up the famines going on under him in order to avoid embarrassment, while the British at no point did anything of the sort. The 1959-61 famine of Mao, meanwhile, was completely inexcusable; it took place during the early phases of the Green Revolution, when China could have imported millions of tons of grain, it took place over a background of declining mortality since the founding of the PRC, it was covered up by Mao in order to avoid embarrassment, and it was partly caused by Mao’s Great Leap Forward, which should have received special scrutiny of its results from the Chinese leadership, not the cover-up of its failures that it did. Those of Hitler were certainly worse, if not in raw human cost, then in intent. Those of Pol Pot, imperial Japan, and Kim Jong-Il deserve their own special place in hell.


The Ascent of the Second World

What I like to call the ascent of the Second World (that is, the second world of the 1950s) took place mostly between 1950 and 1980, though in some countries, the strongest phase of the ascent ended in the early 1970s.

Note that the ascent of the Second World was an era of the convergence of much of the Second World of the 1950s with Britain and the United States, not a narrowing of income gaps within that group of countries. In fact, the income gaps between the countries that were second-world in the 1950s had, on average, grown by 1973, only shrinking a little in the 1973-1980 period.

The countries, lands, and peoples I consider to have been a part of the Rise of the Second World include

1. Japan (but stronger than all those below, leading Japan to become the first of the East Asian Miracle countries).

2. PIGS+Israel

2.1 Southern Italy (Hat Tip: pseudoerasmus)

3. Puerto Rico

4. Mexico and Brazil (but not the rest of LatAm).

5. Communist Eastern Europe (variable).

6. to a small extent, Canada, Denmark, and Finland (not shown).

7. Black America (a third-world people in a first-world country make a second-world society), especially 1959-1973. See Thomas Sowell on this. Note that this occurred during the Golden Age of American Black residential segregation.

8. Austria (though it was already close to the First World due to its unification with Germany in 1938-1945).

Turkey was an interesting outlier in all this, as while its electricity consumption per capita and economic complexity of goods exports (can’t find the link, but in 1960, virtually all of Turkey’s meager exports were pistachios -I think it was a PDF with export treemaps) grew at a reasonable pace since 1960, it didn’t experience the sort of economic miracle seen in the PIGS+Israel. Indeed, it only experienced any sign of convergence with the U.S. only after 2003. Its economic trajectory seems to be similar to that of Argentina, only less volatile. Turkiye delenda est.
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Marked is the line between First and Second-World countries (around 44.2% of U.S. GDP/capita (PPP)), and the years 1973 (lots of things, but most importantly supply shocks and rough natural end of much convergence), 1982 (Latin American debt crisis), and 1991 (peak of the Axis Powers). I mentioned the Portugal-Mexico gap a couple days before.

Due to lack of data, much of Eastern Europe isn’t pictured. It is clear, however, that Romania suffered during the 1990s, and that, while it benefited from the E.U. integration, it has not yet finished its process of convergence (and if it has, that speaks poorly of the Romanians).

Puerto Rico and its transformation is a really interesting case and speaks much of the economics of imperialism and how might imperialism have progressed had it not disappeared. It will hopefully be dissected more thoroughly in a later post.

What are the causes of the ascent of the second world? The first thing to note is that the Southern Cone did not experience a process of convergence with the U.S. between 1950 and 1980, while Southern Europe, southern Italy, and American Blacks did. Causes include increasing prevalence among the leadership of Southern Europe of support for European (not just NATO) integration, thus leading to positive institutional change, urbanization, rising agricultural productivity resulting in technological unemployment, the adoption of old productive technology by previously long-stagnant countries in a process of acceleration of modernization, the ease of moving people into productive industrial and service sectors at the time, even for partly rural Mexico and Brazil, though not for the already upper-middle-income, highly urbanized, and red-tape filled Southern Cone, institutional changes in the Axis Powers resulting from the Allied occupation, and the decline of First World trade barriers and the rise of the container ship and the automobile. The rise of the automobile and changes in agricultural technology were, perhaps, the most important factors in the rise of Black Americans and of Puerto Rico.

The Decline of Male Work in America

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As Sumner says, there is nothing more abundantly clear: those workers who were permanently booted out of the workforce in America during the Great Recession aren’t coming back. And, yes, if those men wanted to work, they would be unemployed. And if employers wanted them, we would already be at full employment.

Note that the first failure of the male employment rate to recover was in the late 1990s, when the labor market was booming. The second failure was after the 2001 recession, which was much more mild than the 1980-1982 recessions. The third is taking place today. Those workers aren’t ever coming back. The pattern of descent proves it.

Miami, Boston, San Francisco

Home prices in San Francisco v. home prices in California:
Employment in San Francisco v. employment in California:
*San Francisco experienced a much smaller housing boom and bust than the rest of California, and even Boston. Similar to Boston, it also had a massive employment bust compared with the rest of California during the housing boom, and especially after the 2001 recession. Indeed, it could be that the flight of the information workers fired in the aftermath of the tech bust was a significant contributing factor to the California housing boom. Were it not for the tech bust, San Francisco might have had the same dynamic as Boston, where people were fleeing soaring rents and home prices, partly due to gentrification, partly due to speculation. California as a whole was experiencing an employment boom during the housing boom only slightly stronger than that of the rest of the country. But why was the Boston boom and bust much larger in the city than in the country, while the reverse was true for California? The answer lies in rent. From 2002 to 2006 real rents in San Francisco fell, while they rose firmly between 2002 and 2004 in Boston. They spiked in both cities in 2001. I presume this was due to the presence of speculators in Boston and their relative absence in San Francisco, but this is just a presumption, not a definite fact. Could the rent difference have been due to a positive supply shock? Partly. There was more homebuilding in San Francisco than in Boston between 1998 and 2004. But I still suspect speculators in Boston’s case. The main other plausible suggestion I can think of is massive housing destruction, which is implausible, to say the least.

Home prices in Miami v. home prices in Florida:
Employment in Miami v. employment in Florida:
*Miami experienced much less employment growth during the boom than the rest of Florida. It also experienced much greater housing price appreciation during and after the boom than the rest of Florida. Florida as a whole was experiencing an employment boom during the housing boom, as well as Miami (relative to the rest of the country, but not to the rest of Florida). Miami had soaring rents during the housing boom, suggesting the growing transformation of that city into, in Erdmann’s terms, a closed-access one, during the governorship of Jeb Bush. Indeed, from 2001 to 2003, Miami’s housing starts declined, while they rose strongly throughout the rest of Florida. Personal income grew strongly in both Miami and Florida during the housing boom, which certainly caused upward pressure on homebuilding, home prices and rents.

Home prices in Boston v. home prices in Maine:
Employment in Boston v. employment in Maine:
*Boston had a much larger housing boom and bust than Maine. Boston, a tech boom center, had an employment collapse during its housing boom (which peaked in 2004, when its employment bottomed out), more employment growth than Maine during its housing bust, and much more employment growth than Maine after the housing bust (though not much more than the rest of the country). This fleeing from higher housing prices in the city while not causing a bubble in the countryside is certainly a very interesting dynamic. It’s almost as if Boston experienced some sort of rapid accumulation of much of the housing stock by absentee speculators between 1998 and 2004, forcing much of the population to leave the city for greener pastures to avoid the horror of the skyrocketing rents. Boston did, indeed, experience skyrocketing real rents between 1996 and 2004, which have since flatlined, although it seems as though they have entered a new boom phase as of 2015. Whatever happened, speculators or not, it seems Boston c. 2004 was one of the most ultra-closed-access cities in the country. Unlike in Maine, where housing starts gently rose throughout the period 2001-2003, in Boston there was only a spike in homebuilding in late 2003-early 2004– something which may well have been responsible for the end of its rent hikes and housing price boom. As for income, while Boston’s per capita income did grow faster than that of the rest of the country between 1998 and 2000, when its home price appreciation relative to that of the rest of the country was most severe, it fell behind that of the rest of the country between 2000 and 2004, when home prices continued increasing faster than in the rest of the country, though at a slower pace, and real rents skyrocketed faster. This suggests that my suggestion of absentee speculators causing the 2000-2004 part of the rent and price boom is mostly correct, given the improbability of wealthy gentrifiers doing such a thing at that time. After 2004, when Boston’s housing price boom relative to the rest of the country ended and its construction boom began to yield fruit, Boston’s incomes started to rise faster than those in the rest of the country again.

In 1981, Mexico Was Richer than Portugal

I was highly surprised by this when I first heard of this fact. But it does seem to be true:

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The above is a graph of various countries not affected by war than managed to catch up to the U.S. in Real GDP per capita terms between 1950 and 1973.

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The above is a graph of the nominal dollar GDPs per capita of various Latin countries+Greece.

The economic divergence between Portugal and Mexico dates to the late 1980s.

So is there an inclining significance of race and average national IQ on economic development over the past thirty-five years?

Graph of the Day

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America’s history of female entry into the labor force seems perfectly comprehensible to me. Japan’s (decline in percentage of the labor force female from 1968 to 1976?) isn’t. The recent acceleration is certainly curious. What are those women not in the labor force doing? Not raising children, certainly; Japan has one of the lowest birthrates in the world.


Erdmann’s Right. The Rent Really is too Damn High

Kevin Erdmann has often complained about America becoming a landlord’s society. And, indeed, since the Great Recession, it certainly is on the road to becoming that:

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The fruits of deleveraging in the aftermath of the housing crash have been more than made up for by rent hikes resulting from housing scarcity. The ownership society is being replaced with the landlords’ society.

The Origins of the Great Inflation

The first post which began to tangentially broach on this subject was my Bretton Woods, Chaos, Price Stability. Read that post as well. The best graph, perhaps, to explain the origins of the Great Inflation is this one:

FireShot Screen Capture #003 - 'FRED Graph - FRED - St_ Louis Fed' - research_stlouisfed_org_fred2_graph__g=1sI7


The best thing to do with such charts is to start at the beginning, then reveal them slowly.

The first portion of the Great Inflation began in the late 1960s and early 1970s, when NGDP was at first growing at a fairly fast pace, then, during the near-recession of 1967 and the recession of 1970, began to slow down. Yet, the rate of inflation continued rising into the recession of 1970. At the time, the goods and services rising in price the fastest were shelter, services, and food. Energy inflation was near-nonexistent at the time. Throughout the course of 1971, however, inflation moderated, even before Nixon’s price controls. In the first quarter of 1973, year-over year NGDP growth per labor force rose to a high not seen in over a dozen years. Yet, inflation was contained, except in food, where prices spiked due to poor harvests. Food and energy prices continued spiking over the course of 1973, with food price inflation in August being over 19% and that in energy over 7%. Nothing extraordinary was happening anywhere outside these commodities. After August, services and shelter began spiking. The last months of the year experienced the second-largest energy shock in mankind’s history. After 1973, even while NGDP growth less labor force growth fell to below 5%, even commodities less food and energy commodities started spiking. The worst phase of the Great Inflation was on. This great supply-side inflation led monetary policymakers to be content with strongly above-previous-trend NGDP growth. This was so in Portugal, Spain, Greece, Italy, Britain, and Canada to a much greater extent than the U.S., while Japan and Germany moderated monetary policy to prevent such a great inflation from happening again. After 1975, U.S. NGDP/labor force growth never went below 6% until 1980. In 1976, it went over 10%, and in 1978, over 11%. In the U.S., inflation in all sectors fell from 1975 to 1976. In 1977, it began rising again, led by shelter and food. In 1979, the largest oil shock ever hit. Due to a moderation in NGDP growth, the economy slumped in 1980, despite the oil shock taking place a year earlier. In 1979, even consumer commodities less food and energy commodities inflation was over 6%. Supply was tight, nominal growth was high.

However, things were about to change for the better drastically. Between mid-1980 and mid-1981, a curious thing happened: while inflation declined strongly in all major areas, NGDP growth per labor force skyrocketed from under 6% to over 12.5%. The back of inflation had begun to be broken, not by monetary policy, but by the alleviation of supply constraints.

During 1981-1982, as you know, inflation and NGDP growth all fell rapidly in all areas, with NGDP growth, understandably, falling faster than inflation. This is from where the common half-true mythology of Volcker breaking the back of inflation by repressing demand came from. Yet, after this strong demand shock, Volcker allowed NGDP per labor force to rise back to its 1975-1980 trend. Yet, this strong positive AD shock was translated, not, as in the 1970s, largely into inflation, but largely into real growth. In Q1 of 1984, while the inflation rate of all major sectors except energy was around four or five percent, NGDP per labor force growth was over 10.5%. This was an extraordinary achievement, partly resulting from the re-hiring of millions of those workers fired in 1981-1982, but also resulting in part from the beginning of a new era growth in Real GDP per worker. This era would continue until roughly 2005.

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Another curiosity occurred after the end of the early 1980s recovery: nondurable goods inflation, and even durable goods inflation, became increasingly uncorrelated with services inflation, which began to be surprisingly stable over the decades, only suffering a major shock during the Great Recession. This newfound lack of correlation was especially clear by the 2000s, where massive energy inflation failed to make a dent on services inflation. This likely resulted from the decreasing importance of oil and food in the economy, as well as the newly increasing importance of services.
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Europe: The Real Problem is Real

The Great and Mighty (I do not use those words lightly) economist Scott Sumner has frequently claimed that the 2011-2013 Eurozone crisis was caused by the Eurozone Central Bank’s tight money and (bizarrely) that it’s Trichet’s fault, since it was under him that the Eurozone crisis began. Is this really justified by the facts?

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This is perhaps the clearest graph showing my point. While the ratio between Real GDP and the price level stayed the same in the U.S. during the EZ crisis, in the EZ, the ratio sharply collapsed, leading to a far greater crash than explicable by simple differences in nominal GDP. Another look at the same fact, though less clear than the first, and certainly not suitable for viewing without having seen the first:

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Reasoning from the above graph and imagining the RGDP/Price Level ratio was the same in Europe as in the U.S., while price levels were what they actually were, European RGDP would look something like this:

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Assuming European RGDP was multiplied by the quotient of the American and European price levels, European GDP would look like this:

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But, you say, this, of course, does not account for the effects of differences in NGDP, only for the effects of differences in price levels. But it does get us closer to imagining a Europe with NGDP problems, but without supply-side problems, which is what we want to do here.

And, indeed, this is what I’ve done. After literally hours of work and half a day after finishing this post (mostly spent asleep) I have at last created a graph that does account for differences in NGDP (or at least the average of the price level and Real GDP, which is close enough for our purposes). The formula should be easy enough to follow:

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The red and blue lines are the Real GDPs of the U.S. and the Eurozone, respectively. The green line is Eurozone Real GDP assuming the quotient of the American and Eurozone Real GDPs was just as large as the quotient of the American and Eurozone price levels. The purple line is Eurozone Real GDP assuming the quotient of the American and Eurozone Real GDPs was as just large as the quotient of the American and Eurozone averages of the price level and Real GDP (our substitute for nominal GDP here).

If the purple line is to be used, the divergence between American and Eurozone Real GDPs between Q4 2007 and Q3 2013 would be 34.5% due to real causes. If the green line is to be used, the divergence between American and Eurozone Real GDPs between Q4 2007 and Q3 2013 would be 67% due to real causes.

Were an aggregate demand shock the only shock that led to the divergence between American and Eurozone Real GDPs after Q4 2007, Eurozone Real GDP should have been somewhere between the green and purple lines -that is, either none or a negative percentage of the divergence between American and Eurozone Real GDPs would have been due to real causes, as judging by the purple line. As you can see from the graph, in real life, it is most definitely not- somewhere between one and two thirds of the gap is a result of supply-side factors, depending on which line one judges by.

For reference, here’s a graph of the averages of the Real GDP and price level for both the Eurozone and U.S.

So in Europe, the facts are clear: the real problem is real. Let us have no more talk that an aggregate demand shock killed Europe. Were Europe’s problems solely due to aggregate demand, the Eurozone crisis of 2011-2013 would have been known as a two-quarter-long slowdown in late 2012.