US Income Inequality: Real, Perceived, Desired

Michael Norton and Dan Ariely, by producing the graph below, have provided an interesting addition to the growing discussion of income inequality in the US.

The two columns on the left come from representative national samples of the American public.

The one on the far left shows the wealth distribution their respondents said would be ideal. In other words, in an idealized version of America, the public thought that the wealthiest 20% of the population (the purple bar) should control about 32% of the total wealth, the second and third quintiles (the blue and green bars) should control slightly more than than their proportionate 'share' (about 22% for each), while the poorest 40% of the population (the yellow and red bars) should control substantially less of the total wealth. In short, the American public embraces the concept of inequality of wealth, but not extreme wealth inequality.

The middle column captures American perceptions of how wealth is currently distributed. Clearly, Americans perceive the country as being more unequal than their 'ideal' distribution. They perceive the wealthiest 20% as having substantially more than ideal, the second 20% as having close to their ideal share and the bottom 60% having substantially less than ideal.

The column on the right shows the actual distribution of wealth in the United States, which is substantially more unequal than the perception. In sum, "respondents to his surveys universally think that wealth is more evenly distributed in the United States than it actually is—and what’s more, respondents say they would prefer for the wealth to be still more evenly spread around."

For more:  What We Know About Wealth

Mash up: Joseph Steiglitz, Edward Wilson and Bicycles

A miscellany of links:

Joseph Steiglitz, Thomas Kuhn and the state of economic theory

One of the central ideas in Kuhn's Structure of Scientific Revolutions was the recognition that scientific knowledge changes by evolving away from failed theories rather than toward truth. A large portion of the book is devoted to describing the processes whereby anomalies that are recognized (but largely ignored by the discipline) are transformed into central problems that can't be fixed through the puzzle solving process of normal science and, hence, necessitate a paradigm shift. In a recent interview, Joseph Steiglitz unleashes a devastating critique of economists, noting that discipline as a whole has failed to internalize the events of 08 in a manner that would serve as a stimulus for the reformulation of economic thinking.

Academic economists played a big role in causing the crisis. Their models were overly simplified, distorted, and left out the most important aspects. Those faulty models then encouraged policy-makers to believe that the markets would solve all the problems. ... After the crisis, you would have hoped that the academic profession had changed and that policy-making had changed with it and would become more skeptical and cautious. You would have expected that after all the wrong predictions of the past, politics would have demanded from academics a rethinking of their theories. I am broadly disappointed on all accounts. .... Within academia, those who believed in free markets before the crisis still do so today. A few people have shifted, and I want to give credit to them for saying: “We were wrong. We underestimated this or that aspect of our models.” But for the most part, the response was different. Believers in the free market have not revised their beliefs.

In the longer view, Steiglitz sees changes in economic thinking coming, potentially, from a generational shift in economists:

I think that change is really occurring with the young people. My young students overwhelmingly don’t understand how people could have believed in the old models. That is good. But on the other hand, many of them say that if you want to be an economist, you still have to deal with all the old guys who believe in their wrong theories, who teach those theories, and expect you to believe in them as well. So they choose not to go into those branches of economics.

Or, more ominously, from yet another crisis:

If my forecast about the consequences of austerity is correct, you will see a new round of protest movements. We had a crisis in 2008. We are now in the fifth year of crisis, and we haven’t solved it. There’s not even a light at the end of the tunnel. When we come to that conclusion, the discourse will change.
The European: The situation needs to be really bad before it will get better?
Stiglitz: Yes, I fear.

E.O. Wilson  On the Origin of the Arts

Among many interesting nuggets, Wilson argues the following:

Substantial evidence now exists that human social behavior arose genetically by multilevel evolution. If this interpretation is correct, and a growing number of evolutionary biologists and anthropologists believe it is, we can expect a continuing conflict between components of behavior favored by individual selection and those favored by group selection. Selection at the individual level tends to create competitiveness and selfish behavior among group members—in status, mating, and the securing of resources. In opposition, selection between groups tends to create selfless behavior, expressed in greater generosity and altruism, which in turn promote stronger cohesion and strength of the group as a whole.

An inevitable result of the mutually offsetting forces of multilevel selection is permanent ambiguity in the individual human mind, leading to countless scenarios among people in the way they bond, love, affiliate, betray, share, sacrifice, steal, deceive, redeem, punish, appeal, and adjudicate. The struggle endemic to each person’s brain, mirrored in the vast superstructure of cultural evolution, is the fountainhead of the humanities. A Shakespeare in the world of ants, untroubled by any such war between honor and treachery, and chained by the rigid commands of instinct to a tiny repertory of feeling, would be able to write only one drama of triumph and one of tragedy. Ordinary people, on the other hand, can invent an endless variety of such stories, and compose an infinite symphony of ambience and mood.

Steiglitz, in the earlier article, makes a parallel observation about the ambiguity the individual versus the collective within economic theory:

The European: What do you say to someone who argues thus: Demographic change and the end of the industrial age have made the welfare state financially unsustainable. We cannot expect to cut down on our debt without fundamentally reducing welfare costs in the long run.

Stiglitz: That is absurd. The question of social protection does not have to do with the structure of production. It has to do with social cohesion or solidarity. That is why I am also very critical of Draghi’s argument at the European Central Bank that social protection has to be undone. There are no grounds upon which to base that argument. The countries that are doing very well in Europe are the Scandinavian countries. Denmark is different from Sweden, Sweden is different from Norway – but they all have strong social protection and they are all growing. The argument that the response to the current crisis has to be a lessening of social protection is really an argument by the 1%

BICYCLES !!

After all the doom and gloom of the above, you need to check out the uplifting history of bicycle transportation in the Netherlands which explains how the Dutch got their cycle paths. 

Is there a 'middle income trap?'

Development economists have spent a lot of time recently talking about various types of poverty traps -- conditions which function to keep countries locked in low-income positions. For example, Paul Collier, in The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, identifies the following traps: conflict trap, natural resources trap, landlocked with poor neighbors trap, and the bad governance trap.

More recently, economists have identified the existence of a 'middle-income trap' -- the notion that many middle income countries are also locked into their structural position in the global economy (For additional details about the concept, see the citations at the end.)

These two 'traps' are shown diagrammatically in the figure to the left (see the bottom left quadrant and the middle quadrant). The figure plots each country’s income per person (adjusted for purchasing power) relative to that of America, both in 1960 and in 2008. In other words, countries such as Burundi, Brazil and the United States that fall into the quadrants along the diagonal running from the lower left to the upper right have 'stayed put' in the global economic order over a period of nearly 50 years. Barundi started out poor and remains poor. Brazil was a middle income country in 1960 and remained a middle income country in 2008.

Countries in quadrants to the left of the diagonal (e.g., Botswana, South Korea) have improved their relative economic status over the past 50 years. Botswana was a poor country in 1960 and rose to middle-income status by 2008. Similarly, South Korea improved from a middle-income country in 1960 to a high income country in 2008. On the other hand, countries in quadrants to the right of the diagonal (e.g., Niger, Argentina) have experienced a relative decline in their economic status over that 50 year period.

Interestingly, the figure doesn't identify the 'staying rich' countries of the upper right quadrant as experiencing a high-income trap. This is because economists operate with a progressivist bias -- they presume that all countries should be able to achieve economic growth if the proper policies are followed. Thus, remaining at the top is 'staying rich' or doing things right while failing to advance implies falling into some type of trap which limits the opportunities for economic advancement.

Stated another way, economists operate with a theoretically inconsistent view of stability and transformation. Stability is taken as desirable for one group of countries (those staying rich) while transformation (economic growth) is the goal for all others and remaining stable becomes the result of a 'trap.' Panarchy theory, by way of contrast, would render stability (no matter which quadrant along the diagonal a country was located) as the product of a set of factors controlling the stability state while transformation would result from disturbances leading to the shift to another, different stability state of the system that is controlled by a different set of processes.

One final note, even if you leave out the countries in the unlabeled high-income to middle-income quadrant (Argentina, Kuwait, etc.) because they are all clustered near the border with the high-income countries, the number of countries that are becoming poor (21%) exceeds the number experiencing relative economic growth (3% of the countries improved from low-income to middle-income status while 11% improved from middle-income to high-income status -- for a total of 14%). Counting by country rather than by population obviously isn't the best way to conceptualize the change but it is instructive none the less.

Or, to render the diagram in yet another way, the evidence it presents seems more consistent with the perspectives advanced by world systems theorists (i.e., that one group can only stay at the top by exploiting another) and ecology (e.g., not all animals can be at the top of the food chain) than that advocated by traditional economics (i.e., that all countries can rise to the top and their failure to do so is evidence of some sort of 'trap').

Additional resources:

• For additional information about the figure, see pages 11-12 of the World Bank report China 2030.
• The term “middle-income trap” was first defined on pages 17-18 of Gill, Indermit, Homi Kharas, and others. 2007. An East Asian Rennaissance: Ideas for Economic Growth. Washington, DC: World Bank. 
• The globalization of labor markets may make escaping the middle-income trap even harder according to Eeckhout, Jan, and Boyan Jovanovic. 2007. “Occupational Choice and Development.” Working Paper 13686, National Bureau of Economic Research, Cambridge, MA

Limits to Growth Revisited

It was forty years ago today,
Donella Meadows taught the band to play
They've been going in and out of style
But they're guaranteed to raise a smile.
So may I introduce to you
The act you've known for all these years,
Donella Meadows' Limits to Growth.


.... Well, truthfully, it was forty years ago on March 1, but close enough.

This book, which sold over ten million copies in various languages, was one of the earliest scholarly works to recognize that the world was fast approaching its sustainable limits. Forty years later, the planet continues to face many of the same economic, social, and environmental challenges as when the book was first published. Suitably, the event has spawned a number of retrospectives. The most fulsome occurred at the Smithsonian where the Club of Rome sponsored Perspectives on Limits to Growth: Challenges to Building a Sustainable Planet. Among the presentations were the following:

• Dennis Meadows It is too late for sustainable development
• Jørgen Randers Lessons of forty years of promoting limits to growth
• Lester Brown World on the Edge
• Doug Erwin Biodiversity: past, present and future
• Richard Alley Climate change and energy; challenges and opportunities
• Neva Goodwin Labor’s declining share and future quality of life
• Panel discussion moderated by Eva Pell, Under Secretary for Science, Smithsonian Institution 

The full nine hour program -- including 10 minutes watching the audience mill about before the first presentation -- is archived at the above link.

For those who would like their celebration served up in a more time efficient manner, journey on over to Resilience Science where Garry Peterson has two interesting posts: Forty Years of Limits to Growth and Paul Gilding talks about Limits to Growth which includes Gilding's recent Ted Talk.

Local Pollution Havens in the US

Todd Matthews just published The Enduring Conflict of ‘‘Jobs Versus the Environment’’: Local Pollution Havens as an Integrative Empirical Measure of Economy versus Environment.

Building of Fruedenberg's concept of disproportionality -- unequal access to environmental rights and resources observable in the privileges accrued by relatively few actors to create highly uneven levels of polluting emissions per job created -- Matthews develops the concept of a Local Pollution Haven. These are counties that combine three characteristics: 1) high levels of pollution per amount of economic reward, 2) high levels of toxicity per amount of economic reward and 3) low levels of regulatory control. Here's a map showing the distribution of such counties. Not surprisingly, the havens are heavily concentrated in the South (specifically, the states of Alabama, Tennessee and Mississippi). When compared to non-pollution haven counties, the havens are typically metropolitan or adjacent to metropolitan counties with higher levels of economic inequality, more than twice the proportion of blacks, and little in-migration. Notably missing is the state of Louisiana, often targeted in the environmental justice literature for its predilection to locate refineries and other aspects of the petrochemical industry in poor counties populated by people of color.

Additional details are in the abstract:

The ‘‘jobs versus the environment’’ dichotomy has been a recurring theme in the United States for decades. It is typically taken to refer to a choice or trade-off between economic growth and development and environmental quality or the lack of environmental degradation. Little resolution has occurred after decades of research because of inconsistent or problematic conceptualization and the use of inappropriate spatial units of analysis. Research on international and domestic pollution havens is reviewed in an effort to introduce the Local Pollution Havens concept. Local pollution havens are conceptualized as counties with high levels of pollution per unit of economic reward, high toxicity per unit of economic reward, and low regulation or other social controls. Traditional and spatial statistical techniques are utilized to construct this measure and determine which counties fit the conceptualization. Descriptive statistics and the results of t-tests and logistic regression analyses are presented to demonstrate how these areas differ from other counties. Implications for the remediation of these areas and also avenues of future research are offered.

Reference: Sociological Spectrum 31: 59–85, 2011; DOI: 10.1080/02732173.2011.525696

The Economics of Peak Oil

James Hamilton, professor of economics at UCSD, runs the useful Econbrowser site providing links to a diverse set of resources dealing with the analysis of current economic conditions and policy.

He is also responsible for OIL PRICES, EXHAUSTIBLE RESOURCES, AND ECONOMIC GROWTH, an analysis of the implications of peak oil. Specifically, the paper analyzes data spanning the life of the oil industry in order to detail the phenomenal increase in global crude oil production over the last century and a half. The analysis demonstrates that a key feature of the growth in production has been exploitation of new geographic areas rather than application of better technology to existing sources, which suggests the end of that era could come soon. The paper then turns to an analysis of the history of temporary supply dislocations in an attempt to come to grips with the potential economic consequences of the peaking of conventional crude oil production.

One of the more interesting sections discusses the price elasticity of demand over the long run and whether or not the reductions in demand that accompanied the run up of oil prices during the 70's and 80's were historically unique.

Here one might take comfort from the observation that, given time, the adjustments of demand to the oil price increases of the 1970s were significant. For example, U.S. petroleum consumption declined 17% between 1978 and 1985 at the same time that U.S. real GDP increased by 21%. However, Dargay and Gately (2010) attributed much of this conservation to one-time effects, such as switching away from using oil for electricity generation and space heating, that would be difficult to repeat on an ongoing basis. Knittel (forthcoming) was more optimistic, noting that there has been ongoing technological improvement in engine and automobile design over time, with most of this historically being devoted to making cars larger and more powerful rather than more fuel-efficient. If the latter were to become everyone’s priority, significant reductions in oil consumption might come from this source.

Systems: Economic and Ecological

Two items worth contemplating:

1. Simon Johnson in The Libertarian and the Lobbyists explores the role of government regulation (or lack thereof) on the recent financial crash. Of particular interest is the discussion of the findings from two recent IMF reports by Prachi Mishra analyzing lobbying practices in the US.
   

   Legislators, of course, have different preferences about what kinds of laws to support, which can make it hard to study mechanisms of political influence precisely. But Igan and Mishra approach the problem in a clever way – they look for instances when elected officials switched their position on legislative proposals that surfaced more than once. And they devote a lot of effort to figuring out what caused this switch. ...
   A big increase in lobbying expenditures helps to persuade legislators to switch their votes. And “whether any of the lobbyists working on a bill also worked for a legislator in the past sways the stance on that bill in favor of deregulation.” It is deregulation, of course, that financial firms want – fewer rules and less oversight of any kind. And it really is all about whom you know, and how you know them. In particular, your value as a lobbyist seems to depend very highly on whom you worked with in the past. Igan and Mishra find “spending an extra dollar is almost twice as effective in switching a legislator’s position if the lobbyist is connected to the legislator compared to the case where the lobbyist is unconnected.” ...
   Essentially, financial firms have been buying the right to take on more risk. When things go well, executives in these firms get the upside – mostly in terms of immediate compensation, because few executives are compensated on the basis of risk-adjusted returns. That means that when the risks materialize and the firms suffer losses, the costs fall on taxpayers.
   Ron Paul is right to point to imbalances of power and massive distortions within the financial sector. He is also correct that many government policies favor relatively few big firms – and favor them in a way that encourages excessive and dangerous risk-taking.
   But Paul and others are wrong to argue that the government is the ultimate cause of all financial evil. Executives in financial firms want to take big risks. They like arrangements under which they win even when they lose.
   Big financial firms can more readily buy the necessary political protection (in the form of deregulation), enabling them to become even bigger and more dangerous. This incentive structure has only become more extreme since the financial crisis of 2008.

2. Erle Ellis describes the findings of his most recent publication, All is Not Lost: Plant Biodiversity in the Anthropocene, as:
   

   the first spatially explicit global assessment of contemporary patterns of terrestrial plant biodiversity (native loss + exotic species gain) at regional landscape scales.The main result: humans have caused a net increase in plant species richness across two-thirds of the terrestrial biosphere, mostly by facilitating species invasions. In most regional landscapes, native species losses were significantly lower than exotic species gains, with agriculture species causing minor increases, but ornamental species sometimes play a large role that is still hard to assess.

   
   While I'm not convinced Ellis's focus on the shift from biomes to anthromes captures the most fundamental characteristics of the Anthropocene, the work is both provocative and, as a result of his heavy use of maps, visually interesting. A number of relevant links are contained in this post by Andrew Revkin.

Economics and shifting stability states

The BBC News has an interesting collection of economic graphs from 2001 put together by top economists. My personal favorite is shown below, along with its caption.

"For a long time the perception was that the creation of the euro meant sovereign risk was effectively the same across all countries. That of course proved to be wrong. The Lehman's crisis and financial meltdown that followed affected the deficits and debt levels of different countries in different ways. Interestingly it is much the same countries now with very high yields as it was pre-euro, suggesting little has changed fundamentally in a decade." VICKY PRYCE, SENIOR MANAGING DIRECTOR FTI

Seems like a classic example of shifting stability states with interesting implications for managing socio-ecological systems if you think of the adoption of the euro as the creation of a meso-level institutional structure (larger than the individual participating states, but not encompassing the entire global economy). Conceived that way, the new institutional structure temporarily managed to equalize risk, but a distant disturbance in the larger system (the Lehman bankruptcy) undid it and shifted system control back to the higher (global) level.

Stability is Destabalizing

A post from a couple of months ago charted the course of various post-WWII US recessions and posed the question Was there a structural change in the economy in the late 1970s - early 80s?

Over the period from the late 1950's to 1980, US macro-economic policy became better and better at managing recessions. They continued to come at roughly the same frequency, but they were shorter and shallower than the earlier ones. This could, potentially, indicate an increase in rigidity over time as US macroeconomic policy attempted to 'smooth out' the business cycle.

A recent post at Resilience Science draws attention to a similar matter and provides a nice set of links to analytic resources relative to the issue. Here is a key passage:

In complex adaptive systems, stability does not equate to resilience. In fact, stability tends to breed loss of resilience and fragility or as Minsky put it, “stability is destabilising”. Although Minsky’s work has been somewhat neglected in economics, the principle of the resilience-stability tradeoff is common knowledge in ecology, especially since Buzz Holling’s pioneering work on the subject. If stability leads to fragility, then it follows that stabilisation too leads to increased system fragility. As Holling and Meffe put it in another landmark paper on the subject titled ‘Command and Control and the Pathology of Natural Resource Management’, “when the range of natural variation in a system is reduced, the system loses resilience.” Often, the goal of increased stability is synonymous with a goal of increased efficiency but “the goal of producing a maximum sustained yield may result in a more stable system of reduced resilience”. The entire long arc of post-WW2 macroeconomic policy in the developed world can be described as a flawed exercise in macroeconomic stabilisation.

Human agency and the Euro crisis

Social systems, unlike natural systems, involve human agents who act with particular intentions. The current Euro drama illustrates this nicely. Paul Mason's 'tankist view of the Euro crisis' uses a brilliant physical analogy to clearly explain the deal that was struck a week ago:

In search of a metaphor in this crisis, I repeatedly come back to tank armour. An ultra-modern tank is almost impossible to kill because it is covered with a mixture of ceramic, textile and metal plating that is designed to disperse the incoming energy of an anti-tank projectile: laterally.

After it's done its job the armour does not look pretty, but it works - as long as you don't get hit again.

For all the criticism of the eurozone - the greyness of the political elite, the indecision, the bunga bunga etc - their strategy is not just "kicking the can down the road". It is about dispersing the energy of the debt explosion. For velocity itself is important in the kind of collision we are talking about: over-accumulated debt impacting on real world growth. If you can slow it down, a debt explosion looks like just a long, dreary recession as people pay down their borrowings.

Now to the design of the armour: the complex system being - I will not say designed, but improvised - is composed of layers.

Layer one is the Greek debt write-off. This disperses the stress away from the Greek treasury - which can no longer control its ballooning deficits - and into the EU banking system. ....

The second layer of armour is the 108bn euro bank recapitalisation programme: money from states, Far Eastern investors and the EFSF bailout fund (see below) will be used to shore up the balance sheets of the affected banks. To visualise this, again, imagine a uranium dart hitting a surface that spreads the impact - in this case across a complex fabric of financial entities stretching from Dubai to Shanghai. ...

The deepest layer of armour Europe is trying to clad itself with is the EFSF. There is 726bn euros of taxpayers money committed, which translates into 440bn euros lendable. What they are trying to do is turn that into 1.4tn euros lendable - and the Brits want even larger - by getting, again, global lenders - including China, Brazil, the IMF and Middle East Money - to lend against the 440bn: once again spreading the impact laterally. ...

At each level then, the EU response consists in taking a concentrated impact and spreading it out - across Europe, across the world, and over time.

Given that the post was written a couple days before Greece's decision to hold a referendum on the European Union aid package intended to resolve the country's debt crisis (a decision that has now been withdrawn), Mason was prescient in his observation on the limits of his physical analogy.

However, in economics as opposed to inert matter, there is the problem of people not wanting to take the hit. Right now nobody wants to admit they are even putting themselves in line to take the hit: the German parliament, the kebab-shop phobic Italian right, the IMF, the Greek people. Everybody wants someone else to take the hit.

Cesar Hidalgo on Economic Complexity

As evident from the voluminous discussion of the concept of biodiversity, the significance of diversity within ecosystems has long been recognized.  Generally speaking, this isn't the case in economics where the focus has typically been on identifying a small list of 'factors of production' (labor, capital, technology, etc.) and their transformation into a single comparable product ($ value). Taking a complexity view, Hidalgo and his collaborators argue that Adam Smith and Durkheim (with their emphasis on specialization and the division of labor) provide a more fruitful way of conceptualizing the economic realm.

Conceptually, as shown at the left, Hidalgo divides the countries of the world up into four groups: 1) Countries whose few major products are also produced by a number of other countries (e.g., the sugar producing countries of the Caribbean), 2) Countries with diversified economies, but all their major products are produced in a number of other locations, 3) Non-diversified economies that produce unique and exclusive products (such as Saudi Arabia and other oil based economies) and 4) Countries producing a diverse range of unique and distinct products.

Using a measure of economic complexity described in this paper, Hidalgo locates the economies of the world in a quantified representation of that basic conceptual space. Two points are worth of note. First, the countries locate themselves along a diagonal with almost every world economy being located in either the first or the fourth quadrant. As summarized by Ethan Zuckerman:

The nations that make only a few things all tend to make, more or less, the same things. Basically, we can divide the world into two sets of countries – those that have sufficient personbytes of knowledge to produce a wide range of goods, and those that can produce only a few simple things. The places that make everything make things that few others make. Hausmann explains that products require a specific set of personbytes to produce. When you gain additional personbytes of skill, it’s like getting new letters in Scrabble – you can produce a new set of words, but only within the constraints of the letters (skills, knowledge) you already have.

Second, this approach does a much better job than traditional economic analysis in addressing the classic question: "Why are some countries rich and other countries poor?" It explains 73% of the variance in income across nations.


Hidalgo describes his approach to complexity economics in the following two videos.



The same basic ideas are covered in more detail in this version.



His webpage is a wealth of information, including (among other things) pages with links to all his publications, to supporting materials for classes on complex systems, and access to the data sets used in his research.

Was there a structural change in the economy in the late 1970s - early 80s?

(Click on the graph for a larger view.) I really don't know what to make of this graph, other than it is really interesting. My thoughts are below, feel free to share yours.

The lines trace the impact of various recessions on employment. Each color refers to a particular recession. The individual lines trace both the extent of job loss (the deeper the drop, the greater the drop in employment) and the length of time to get back to the pre-recession rate of employment (the further to the right, the longer the recovery takes).

The striking thing about the graph is that something fundamental appears to have occurred around 1980/81. If you look at the lines for the seven recessions that occurred between 1948 and 1980, they all have the same basic V shape. There is also a fairly systematic relationship between the depth of the recession, the length of time until the bottom is reached and the time until employment returns to the pre-recession level. In systemic terms, all recessions up to 1980 behaved in a generally similar fashion.

There is also a noticeable difference between the earlier V shaped recessions and the later ones. The earlier ones (1948, 1953, 1957) have very similar profiles; they were deeper (job losses of 3.4-5.2%) and longer (with 13 months until the bottom) than the later V-shaped recessions. The recessions of 1960, 1969, 1974 and 1980 were shallower (job losses of 1.3-2.7%) and shorter (between 4 and 10 months to the bottom).

The three most recent recessions (1990, 2001, 2007) have a very different profile. Rather than the sharp drop and bounce back of the V shape, the whole process appears to have slowed down. The rate of decline and the rate of recovery are both much slower and the impact of the recession on employment is much longer. The profiles of the three most recent recessions look more like a river basin than the V-shaped valley of the earlier ones. It has taken longer to reach the bottom (24 months, or almost twice as long as the 48-57 recessions) and, once there, the percentage of job losses has flat-lined for close to a year before starting to recover. 

The transition appears to have occurred in 1980/81. This is the only case where there is a double-dip recession. Moreover, where the 1980 recession looks like the smallest of the V-shaped recessions, the 1981 curve has a transitional look. Unlike any of the previous recessions, the bottom comes a few months later and flatlines for a few months before the upsurge in employment occurs. The other point of significance. Where recessions had occurred on a crude 5 year cycle up to 1980, the cycle is more like 9 or 10 years since the 81 recession. This, like the shifting shape, suggests the overall process has slowed.

As noted in an earlier post, there are other indicators that the global economy significantly changed at this time, a period linked with the early phases of economic globalization.

So, to take a shot at translating this into panarchy terms, recessions are a product of the adaptive cycle. Over the period from the late 1950's to 1980, US macro-economic policy became better and better at managing recessions. They continued to come at roughly the same frequency, but they were shorter and shallower than the earlier ones. This could, potentially, indicate an increase in rigidity over time as US macroeconomic policy attempted to 'smooth out' the business cycle. This national level process, around 1980, confronted a different dynamic -- resulting from changes to the higher (global) level cycle associated with economic globalization. In other words, the shift from one form of recession (V-shaped) to another (river-shaped) involves a cross-scale interaction where changes in the global economy (outsourcing of manufacturing and the increasing financialization of the US economy, for example) affect the ability of the US to rebound from recessions and, in particular, to create jobs.

Budget Smog

A recent graph from the Congressional Budget Office (below) puts the US budget situation in an interesting light. Once you take the cost of running multiple wars off the books (the decade long decline in the green line) the spending side of the budget is pretty much in a steady state -- except for the cost of healthcare, which is rising dramatically.

So, you would think that environmental regulations that would limit air pollution and save billions in healthcare costs would be a good idea. Instead, as described in detail in Obama pulls back proposed smog standards in victory for business, the Obama administration has crumpled in the face of political pressure. Afraid of being labeled as responsible for "job killing regulation" during a period of high unemployment, the move effectively leaves in place 1997 era standards which even the Bush administration  admitted were lax and out of date. (The 1997 regulations were based on science showing that low-level ozone and other atmospheric pollutants contributed to various lung disease but not to death. Subsequent research has unequivocally tied such pollutants to both disease and death.)

Significantly, the regulations are, from a macro-economic perspective, effectively neutral. They would cost industry somewhere between $19 and 90 billion per year by 2020 (depending on the precise standard implemented) and would result in between $13 and 100 billion in healthcare savings. In other words, the total level of economic activity would remain the same, there would just be a shift from government expenditures on healthcare to private sector expenditures on pollution control.

Ominously,

The ozone standard is one of several air-quality rules the administration is in the process of adopting or has already finalized that are under attack. Others include new limits on mercury and air toxins, greenhouse gases from power plants, and a range of emissions from industrial boilers, oil refineries, cement plants and other sources.

This was the easy one. So the likelihood of action on the others is even less. Inaction on smog turns the big club of unilateral action on carbon emissions that the US courts gave the EPA when they ruled carbon was a pollutant into a plush toy. It is looking more and more like US environmental policy is another casualty of the divisive political culture. Return to slow and costly litigation in the courts may be the necessary path

Ecological Mayhem as Economic Opportunity

Can Jeremy Grantham Profit From Ecological Mayhem? analyzes the neo-Malthusian outlook of financial guru Jeremy Grantham, manager of $150 billion in investments, author of a financial newsletter with a wide following and benefactor to The Grantham Foundation for the Protection of the Environment. 

Grantham argues that the late-18th-century doomsayer Thomas Malthus pretty much got it right but just had the bad timing to make his predictions about unsustainable population growth on the eve of the hydrocarbon-fueled Industrial Revolution, which “partially removed the barriers to rapid population growth, wealth and scientific progress.” That put off the inevitable for a couple of centuries, but now, ready or not, the age of cheap hydrocarbons is ending. Grantham’s July letter concludes: “We humans have the brains and the means to reach real planetary sustainability. The problem is with us and our focus on short-term growth and profits, which is likely to cause suffering on a vast scale. With foresight and thoughtful planning, this suffering is completely avoidable.”
...
While it may be too late to “gracefully” deal with depleted resources­, climate change and related crises, it’s never too late to mitigate the damage. And, crucially, the consequences will be unevenly distributed, creating angles for you to make money and look out for your interests, however you define them.

 
Grantham has a fairly standard Malthusian take on the future and an interesting recognition of his status: “The rather burdensome thought is that people won’t listen to environmentalists, but they will sometimes listen to people like me.” Building on this, Grantham thinks economics rather than politics may be the way to address climate change -- particularly for the US. “People are naturally much more responsive to finite resources than they are to climate change. Global warming is bad news. Finite resources is investment advice.” He believes this shift in emphasis plays to Americans’ strength. “Americans are just about the worst at dealing with long-term problems, down there with Uzbekistan, but they respond to a market signal better than almost anyone. They roll the dice bigger and quicker than most.” Grantham says that corporations respond well to this message because they are “persuaded by data,” but American public opinion is harder to move, and contemporary American political culture is practically dataproof.

Here's his assessment of the standard litany of potential problems.

Energy “will give us serious and sustained problems” over the next 50 years as we make the transition from hydrocarbons — oil, coal, gas — to solar, wind, nuclear and other sources, but we’ll muddle through to a solution to Peak Oil and related challenges. Peak Everything Else will prove more intractable for humanity. Metals, for instance, “are entropy at work . . . from wonderful metal ores to scattered waste,” and scarcity and higher prices “will slowly increase forever,” but if we scrimp and recycle, we can make do for another century before tight constraint kicks in.


Agriculture is more worrisome. Local water shortages will cause “persistent irritation” — wars, famines. Of the three essential macro nutrient fertilizers, nitrogen is relatively plentiful and recoverable, but we’re running out of potassium and phosphorus, finite mined resources that are “necessary for all life.” Canada has large reserves of potash (the source of potassium), which is good news for Americans, but 50 to 75 percent of the known reserves of phosphate (the source of phosphorus) are located in Morocco and the western Sahara. Assuming a 2 percent annual increase in phosphorus consumption, Grantham believes the rest of the world’s reserves won’t last more than 50 years, so he expects “gamesmanship” from the phosphate-rich.

And he rates soil erosion as the biggest threat of all. The world’s population could reach 10 billion within half a century — perhaps twice as many human beings as the planet’s overtaxed resources can sustainably support, perhaps six times too many.

And why he thinks the results of the famous Ehrlich-Simon bet didn't really settle the matter; if we extend the original bet past its arbitrary 10-year limit to the present day, Ehrlich wins the five-commodity bet 4-1, and he wins big if the bet is further extended to all important commodities.

“The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70 percent. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II. Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed — that there is in fact a Paradigm Shift — perhaps the most important economic event since the Industrial Revolution.”
When prices go up and stay up, it’s not a bubble. Prices may always revert to the mean, but the mean can change; that’s a paradigm shift. As Grantham tells it, oil went first. For a century it steadily returned to about $16 a barrel in today’s currency, then in 1974 the mean shifted to about $35, and Grantham believes it has recently doubled again. Metals and nearly everything else — coal, corn, palm oil, soybeans, sugar, cotton — appear to be following suit. “From now on, price pressure and shortages of resources will be a permanent feature of our lives,” he argues. “The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.”

Global Economy: Are we approaching Peak Standard of Living?

Back in 1956, M. King Hubbert advanced the basic idea behind peak oil theory: the recognition that for any given geographical area, from an individual oil-producing region to the planet as a whole, the rate of petroleum production tends to follow a bell-shaped curve. For example, the chart contrasts Hubbert's prediction for the continental US against observed data. The implications of the idea -- that once a peak occurs the slide downward is inexorable and unstoppable -- have resulted in lots of attempts to determine the peaks of various regions and the globe as a whole.

Hubbert, while famous for applying the idea to oil, viewed it as a process applicable to a wide variety of natural resources. Indeed, he got the idea from an study of coal resources done in the 1920's. Thus, not surprisingly, the idea has spread to other areas. The most expansive treatment occurs in Richard Heinberg's Peak Everything: Waking Up to the Century of Declines which argues that the twenty-first century ushered in an era of declines, in a number of crucial parameters.

While peak oil types have spent lots of time and energy examining the relationship between energy and the economy, the bulk of the analyses are similar to this (where they measure economic activity in terms of gross domestic product (GDP) or this (where economic drivers such as productivity are the focus). But, at the experiential level of the individual, a much better approximation of the key economic measure is not total GDP but GDP per capita (per person).

What follows are figures calculated from Angus Maddison's annual data for worldwide GDP. They show that, despite the rapid expansion of the BRIC economies, the global rate of economic growth since 1974 is LESS than it was from 1951-1973.

			per capita GDP growth rate
Years			World Average	World,           excluding China
1951	-	1973	2.9%	3.0%
1974	-	2003	1.6%	1.1%
1951	-	1960	2.8%	2.7%
1961	-	1970	3.0%	3.1%
1971	-	1973	3.1%	3.2%
1974	-	1980	1.4%	1.3%
1981	-	1990	1.3%	1.0%
1991	-	2000	1.6%	1.1%
2001	-	2003	2.5%	1.0%

So we see that GDP per head grew at a pretty constant average annual rate of about 3% per year through 1973. Toward the end of 1973, the global crisis erupted. Since that point, GDP per head has again grown at a pretty constant average annual rate. But that rate of growth is only slightly more than half the rate during the postwar boom, or slightly more than 1/3 the rate during the postwar boom if China (with its dubious official economic data) is excluded.

What the data show is a clear slowing in the rate of growth -- the global standard of living is still increasing (the values are still positive), but the rate of increase in per capita GDP is less than it was prior to 1974. Placed in the context of peak oil theory, this suggests that the global economy -- understood as the average global standard of living -- is nearing its peak.If you look at the graph above, you will see an S shape leading up to the peak -- growth begins slow, then there is a period of rapid growth (where the curve rises steeply) and, just before the peak, you get another inflection (change in the rate) as the curve flattens out near the peak. It is this flattening out immediately prior to the peak that Maddison's data captures.

(Technical note:  Angus Maddison's annual data for worldwide GDP, which span the 1950-2003 period, are available at www.ggdc.net/maddison/Historical_Statistics/horizontal-file_03-2007.xls. Maddison is the world's foremost expert on economic growth and its measurement. His GDP figures are measured in 1990 international dollars (Geary-Khamis dollars). Above, the average annual growth rate for each period is the mean of the annual growth rates; the results are almost identical if one estimates a continuous growth rate throughout the period based on the start-of-period and end-of-period figures.)

Padgett, Part III: Autocatalysis in the Economy and in Persons

This is the third in a series dealing with one of the most interesting ideas I've come across in a decade: the theory outlined in John Padgett's The Emergence of Markets and Organizations. For an overview of the book and description of the network perspective, see Part I. Part II provides a concrete illustration of the approach, the emergence of the partnership structure in Renaissance Italy. This  post summarizes the chemical process (autocatalysis) that Padgett uses as a conceptual model for understanding the production of goods and people. This post begins with a description of autocatalytic networks in chemistry and then applies the concept to economic production and, finally, to the production of persons.

World's strongest banks

There are two basic explanations for the recent global financial collapse. The first, the Marxist account, emphasizes the role of capitalist accumulation and, in particular, the ability of the financial classes to profit from asset bubbles. The second account emphasizes complexity and uncertainty. According to this account, lax regulation was a major contributing factor. In light of these competing accounts it is interesting to look at the information below, identifying banks in Singapore and Canada as the world's strongest. Both locations came through the crisis comparatively unscathed and both are noted for their relatively high level of bank regulation.

Toward a new economic system

Interesting interview with Tim Jackson, author of the acclaimed Prosperity Without Growth (which expands on this free earlier publication put out by the recently eliminated UK Sustainable Development Commission) . (Yes, the irony of trying to cut the deficit in order to get a sustainable economy by axing the Sustainable Development Commission is, indeed, palpable.) Here are some of the more interesting bits:

The European: When did that psychology come into existence? For much of human history, economic activity was not intimately tied to the idea of growth.

Jackson: That’s a very interesting question that I cannot fully answer. I have written on that topic in the past, and my sense is that our idea of progress derives somewhat from the ideas of the Enlightenment. In the 18th century, you see the emergence of the science of rational discovery and the project of improving man’s condition. And that was accompanied by shifts in religiosity and spirituality. By the time the Enlightenment met Darwin in the middle of the 19th century, established religion had become secularized at least in the protestant countries. That was a very potent mix in which our sense of spiritual progress disappeared.

The European: We began to think of our lives as finite existences?

Jackson: Right, the idea of the immortal soul lost its influence. That obviously placed a huge importance on our physical existence. So progress came to be framed within the context of those finite existences: Future generations deserved better lives, they deserved more than we had. We secularized the original idea of the progress of the soul. And in the process, it became very much tied to material possessions.

.....

The European: Change is uncomfortable.

Jackson: It requires us to engage in a dialogue about power, about who we are and who we want to be in the world. For example: We are confronted with the question of what is defined as success: A big car? Material wealth? If we reject those norms, we have to accept the potential loss of social standing that comes with it. That is the paradox of transformation: People desire change but they are hesitant to pursue it because of the potential pitfalls and structural constraints. So for me the lesson is that agency is insufficient by itself in the context of mainstream change. I find it critically important that we reshape the framework itself.

.....

The European: Still, we are left with the question of what such a structure might look like…

Jackson: We don’t quite know. It would do more to align rights with responsibilities. It would place less emphasis on private ownership over the returns of public assets. It would encourage investments into public goods. It has company structures that code social and ecological returns into the structure itself. It focuses on bridging the sharing gap between the individual and the community.

The European: There’s a lot of Marx in that statement. First came feudalism, then came capitalism, then we threw off the shackles. How would your idea differ from the very illiberal manifestations that grew out of Marxism?

Jackson: It is explicitly post-Marxist and post-capitalist. The Marxist critique of capitalism was probably right in many of its elements but wrong in its outcomes. The idea that the alternative to the market is simply state control fell foul for several reasons: Totalitarian states are suffocated by a large bureaucracy that surrounds the state. And they encouraged the animal spirits that Adam Smith originally regarded as the basis of capitalism. The idea of rights and responsibilities got lost in the process: People didn’t enjoy many rights and didn’t really care about the things that they were supposed to own collectively. I don’t want to return to that.

The European: So this is another attempt at pursuing a Third Way, but without the focus on growth?

Jackson: At any point in history you are a product of ideas and systems that came before you. I would argue that both capitalism and communism have failed as systems of social organization. There is a vacancy right now that demands new ideas. And if we are successful, we will achieve a genuinely different fusion of ideas.

The Price of Gas

WalMart, the Supreme Court and Marxism without Revolution

In Marxism without Revolution John Quiggan provides an interesting analysis of the current socio-economic situation: There isn't a proletariat calling for revolution in the Western world. But there clearly is a ruling class, a top 1%, which controls wealth and power. Based on the insights from several books, most notably Jerry Cohen’s if You’re an Egalitarian How Come you’re so Rich, Quittan poses the following question: How can we more effectively oppose the rule of this 1%? (Note: for a wonderful, interactive graph displaying the changing proportion of US income allocated to different groups through time, click here.)

As Cohen puts it, the revolutionary working class postulated by Marx had to satisfy four conditions:
1) They constitute the majority of society;
2) they produce the wealth of society;
3) they are the exploited people in society;
4) they are the needy people in society.
. . . . 1. and 2. give the proletariat the capacity to revolutionise society, and 3. and 4. give them the reason to do so.

It seems clear, as Cohen says, that no sensible definition of the working class is going to satisfy all four conditions.

On the other hand, there clearly is a self-conscious and generally dominant class, centered on control of capital, but including plenty of people whose source of power and wealth is derived from their job rather than from capital income. On a narrow definition, it includes the top 1 per cent of US households which now receive 25 per cent of all income and hold around 35 per cent of all wealth. More broadly, the top 20 per cent of the population has, in broad terms, increased or maintained its share of national income as the top 1 per cent have become richer. This broader group controls more than half of all income and wealth.

. . . .

Coming back to Cohen’s conditions, the case to be made against the top 1 per cent is that:

1) They constitute a tiny minority of society
2) they consume far more of the wealth of society than they actually contribute
3) they exploit their control over capital for their own benefit
4) they are the primary obstacle to meeting a wide range of social needs

. . . .

The existence of those structures mean that a relatively simple set of feasible political demands, primarily involving reversal of the losses of the past few decades, could form a basis for political opposition to the rule of the top 1 per cent. The key elements are fairly obvious, and include

• reimposition of control over the financial system
• restoration of a progressive tax structure, combined with a more vigorous assault on international tax evasion/avoidance
• shifting the burden of ‘austerity’ back to those responsible for the crisis, and rejection of cuts to the welfare state
• repeal of anti-union laws and measures to make union organization easier

With those modest goals in mind (particularly the idea of making it easier for workers to organize and pressure for their needs) it is useful to consider the recent WalMart supreme court ruling. The broad evidence clearly shows that women are, on average, paid less, are less likely to be salaried, and hold lower-ranked positions than men. This is true even though there is less turnover among women, meaning that the average female employee has been working at Walmart significantly longer than the average male employee. You can see the data for yourself here.

The Supreme Court ruled unanimously that the plaintiffs' lawyers had improperly sued under a part of the class action rules that was not primarily concerned with monetary claims. But they were divided 5 to 4, along ideological lines, on whether the suit met a requirement of the class action rules that “there are questions of law or fact common to the class.” Stated another way, the conservative majority among the court used the case as an opportunity to up the threshold for class certification. Room for Debate has an interesting mix of informed reactions to the ruling.

In simple terms, the underlying issue involves the 'homogeneity' of the class. Class action lawsuits are typically done on a contingency basis and are expensive. Thus, in situations where the individual claims are likely to be small, lawyers who undertake this work need to come up with a large class in order to justify their upfront expenses in bringing the case. In the WalMart case the average damage was approximately $1100 per year. So the lawyers devised a scheme that would let them claim 1.5 million potential class members in order compensate for the relatively low per-person claim. And, as a result, the individuals in the class were much more diverse in their personal situations than, for example, individuals exposed to asbestos on the job.

So, how does this all relate back to Quiggan's analysis? One of his suggestions was changes in laws to make union organizing easier. Or, to put the point more generally, to make it easier for the less-powerful to advance their position. This is exactly the opposite of what has happened in the Supreme Court ruling. By upping the bar for what counts as a homogeneous class the Court has made it harder for large, relatively heterogeneous classes with small individual claims to organize in order to redress their grievance.