Rich States, Poor States* is a popular economic analysis in Utah. In large part, this is because Utah ranks very high in their analysis (# 1 in economic outlook for most of the last 10 years).
It’s difficult to deny that Utah is on a pretty good run. Macroeconomically, the state has been thriving since the resource extraction downturn of the late 1980’s.
The position of Rich States, Poor States is that this is due to economic policies pursued by Utah’s politicians. They rank Utah # 1 in 3 of 15 policy choices: having a flat income tax, having little or no estate tax, and having a low minimum wage. These are politically conservative policies (no surprise there in Utah), and clearly the publication is cheerleading for more of those.
The thing is, a measure of economic outlook ought to have predictive power for GSP (the state level version of GDP). EconBrowser reports a bunch of regressions and charts that show … pretty much no relationship at all. Here’s an example:
This shows last year’s ALEC ranking (lower is better), versus the differenced logs (approximate growth rates) of this year’s GSP. If ALEC is on to something with their rankings of policies, the red curve should be downward sloping. It isn’t.
None of this says that Utah’s policy choices are bad. But it does say that they are no better or worse than other states.
* The full cite is Laffer, A.B., Moore, S., and Williams J., Rich States, Poor States, 2016, 9th ed., American Legislative Exchange Council: Arlington, VA.
Cross-posted from SUU Macroblog, which is required reading for my macroeconomics classes.
Macroeconomics is generally not an experimental science. It’s observational.
One of the advantages of an experimental science is that you can control causes to isolate their effects. You can come up with different stories about what the causes are, but in principal you can confirm whether those stories are supported by the data. In some sense, you can go “fishing”.
In an observational science, you have to get your story about causality straight first. By that I mean what effects you expect to see and what you should not see. Then you can go and check your data.
Unfortunately, we’re bombarded with GDP data, but not with stories about the causality that generates it. This leaves a lot of room for getting things wrong.
Which brings us to Trump’s nominee for Secretary of Commerce: Wilbur Ross. Here’s his theory (taken from a Wall Street Journal editorial entitled “Trump’s Money Men”):
… Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”
Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. …
The causality Ross presumes is pretty clear: “… trade deficits … weaken…”
This is weird: GDP (and trade deficits) are something we measure after they occur. They’re a description of what did happen, not an explanation of how it happened.
It’s more correct to say that a trade deficit might be a symptom of a weak economy, rather than a cause.
Ross is making a ridiculous logical mistake here, but one that is all too common in thinking about macroeconomics.
First off, GDP is what we count up after production and consumption happen. And as we’re counting, perhaps we divvy it up into different bins, including (gross) exports and (gross) imports.
This is analogous to going to one of those old-fashioned machines where you put in a quarter and it dumps out a handful of, say, Skittles. That’s your macroeconomy.
Then you count up your Skittles. That’s your measure of your economy’s GDP.
Then you divide up the Skittles by color, and call the yellow ones exports. And then you announce that if you’d gotten more yellow Skittles you would have gotten more Skittles in total.
A child might make that mistake. An adult should not.
Secondly, there are interconnections within GDP besides Y = C + I + G + X. Let me introduce 4 alternative variables:
DP►DC, this is Domestic Production that goes into Domestic Consumption
DP►FC, this is Domestic Production that goes into Foreign Consumption
DC◄DP, this is Domestic Consumption that comes from Domestic Production
DC◄FP, this is Domestic Consumption that comes from Foreign Production
My notation is a little bit weird: do not think of the the ► as a >, or the ◄ as a <. But there is a method to my madness.
Note that DP►DC and DC◄DP have to end up with the same number (although you might make a measurement error here or there).
The cool thing about this is that we can think of these new variables in this way. Remember the fable about getting a mule to move with a carrot and a stick? The stick is work, and the carrot is your reward:
DP►DC, means that your carrot and stick are balanced
DP►FC, means that you’re all stick
DC◄FP, means that you’re all carrot
Now let’s think about some naive policy ideas.
Let’s export more! So we’re going to make DP►FC bigger. This means we have to both work more here, and somehow get foreigners to buy stuff they weren’t before. Maybe we could advertise to make the latter happen. But there’s only two ways to handle the former part: actually work harder (by using more stick), or divert some of our work by making DP►DC smaller to make DP►FC larger. Except that we can’t make DP►DC smaller without making DC◄DP smaller. If you think about it, this amounts to giving away our carrots. So there you have it: a proposal to increase exports either means more stick or less carrots.
Let’s import less! You can probably see where this is going. This means making DC◄FP smaller. One way to do that would be to make DC◄DP larger. That way we could keep the number of carrots the same, but just get less of them from foreigners. But again, it gets weird: we’re getting the same number of carrots, but because DC◄DP = DP►DC, we have to work harder. So there you have (part of) it: you get more imports with more stick and no extra carrots. You can work out on your own that you could also get less carrots with the same amount of stick.
I understand that these examples are not easy. But that’s the point: trade policy is not something that most people think about very clearly … including people we put in charge.
Cross-posted from SUU Macroblog, which is required reading for my macroeconomics classes.
What? You didn’t know he was a king? What do you call someone that ruled since 1959 without reasonable elections until they chose to retire, then abdicates in favor of a younger family member (i.e., King Raúl)? Oh, and there’s a son-in-law in the mix to succeed him; we’ll call him Prince Alberto. Oh, and somehow he’s worth a fortune, just like a king.
I’m going to pull rank here. King Fidel took over a country. The way to measure a country is with GDP. So, if you’re not getting information from a macroeconomist about Cuba and Fidel … you pretty much shouldn’t bother.
The thing is, it appears to be a huge mission of many people in the developed world to present Fidel as something that he was not, and this mostly begins with ignoring the GDP data.
From a macroeconomic perspective, Fidel is one of the worst humanitarian disasters in human history.
Data is not hard to come by on this. For all its faults, there is no competition for assessing economic conditions at the individual level than real GDP per capita. More on that later.
In the U.S., we are somewhat unsure of how we feel about Obama because the economy has struggled to grow real GDP at 2.0 to 2.5% per year. Even Obama’s supporters will typically admit that the economy doesn’t feel that great because we need to take away 1.5% to 2.0% population growth from the U.S. figure. Yet, from 1959 to 1999 Cuba’s real GDP per capita grew at 0.3% per year. Even in rather weak times, the U.S. has pulled away from Cuba.
One of the tightest arguments we make in science is to compare matched pairs. Try to find the closest analog, and then compare their differences with the passage of time. This is how we know North Korea is so bad — because it used to be comparable to South Korea. The same goes for the old West and East Germany. For Cuba, the closest analog is Puerto Rico. Both were Spanish colonies for 400 years. Both were occupied and dominated by the U.S. for the next 60 years. And Puerto Rico has quadrupled its real per capita GDP since 1959. The data on all this is solid, accepted, and widely used.
Fair enough. But supporters extoll the availability of free and effective healthcare and education in Cuba.
Let’s be very clear about this. If you don’t start with real GDP per capita, it’s easier to find claims about healthcare and education to be more convincing. But, if you do start with weak real GDP performance, then it should be clear that any claim that healthcare and educaton have gotten better in Cuba must be accompanied by a statement that everything else is even worse than we thought. Have you ever heard a statement like that? I didn’t think so.
Oh, and it’s very easy to find articles detailing how Cuba’s healthcare and education systems in 1959 were … already pretty good by international standards. Go ahead, dig into that on your own. Cuba only looks good on these counts if you forget the “compared to what” aspect.
Yes, there’s an element to this news story that’s jokey, and there clearly was some lack of editorial oversight here. But it shows how mood affiliation leads to policy activity, with or without deep background thought.
Anyway, Canada has 2 main parties that are each a little to the left of the their American counterparts. And it has a big third party, the NDP (New Democratic Party), which is even further left. In America it would be Sanders-esque. It tends to be strongest in the West, and here’s what happened in the Yukon Territory. They released these by accident:
The key word here is “will”, the only verb shared by both slogans. That word implies future activity. It doesn’t seem to matter what the specifics are though.
There’s no goal in these images. There’s no objective. What there is … is a predisposition towards busybodyness.
In macroeconomics this can be a problem. We have 200 or so countries around the world, and the record of those that interfere with their macoeconomies is not very good. That makes busybodies dangerous.
In the absence of clearly defined goals, we are forced to concentrate on activity and ultimately become enslaved by it.
I don’t have a source for this. I got the quote from my colleague Greg Powell, who used it in a brown bag about motivating student classroom engagement through questions.†
But I like the quote because it applies to another problem we have in understanding macroeconomics. Bryan Caplan dubbed this the “activist’s fallacy”:
Something must be done; this is something; therefore, this must be done.
I have lost the cite, but Lynne Kiesling paraphrased it as:
Don’t mistake activity for accomplishment.
When we think about macroeconomics — and certainly politicians talk an awful lot about it — what are their goals? No recessions on their watch? Low unemployment rate (how low)? Low inflation rate? Increased spending? Higher real GDP growth rate?
Consider the stimulus package of 2009. It was chock full of activity. But what was the goal? If it was stimulating the economy … it doesn’t seem like it did much (although I’m aware that we don’t have a control for this experiment).
On a different note, this brings me around to Hillary Clinton.
Does it seem like a lot of her supporters extol her activity without referencing many goals that were actually accomplished?
In 1979, James Fallows recounted why he had left his job as President Jimmy Carter’s chief speechwriter: “Carter believes fifty things, but no one thing. He holds explicit, thorough positions on every issue under the sun, but he has no large view of the relations between them.”
And, of course, coming from me, that observation should in no way be construed as support for Trump.
The first two sections of this are cross-posted from SUU Macroblog, which is required reading for my advanced macroeconomics class.
† Coonradt, Charles A. with Lee Nelson. The Game of Work, Shadow Mountain, 1991, p. 10.
The document … presents no concrete prescription to correct the trade imbalance it abhors. One key sentence: “Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports.” This is a tautology, equivalent to saying one plans to weigh less in the future through a combination of losing weight and not gaining weight. [emphasis added]
My American students’ minds are polluted and my foreign students minds are not.
I teach principles of macroeconomics. This is a second year course, that’s required for business majors, and a general education option for all students.
Bottom line, I get a big, varied group of students.
I also give extra credit questions on exams, based on extra topics I cover in class.
This time around I asked about the employment to population ratio over the last 50 years: is it higher or lower?
The fact is that it’s higher: there are ups and downs from business cycles, but in general there are more people working outside the home than there used to be.†
The myth is that it’s lower. This is what Donald Trump tells us with his “93 million unemployed” nonsense. This is what many conservatives want us to believe, with their harping about welfare queens and disability recipients. This is what progressives want us to believe, with their harping about how we need more jobs and no one else can grow the economy (as if it’s a “corpse flower” or something).
My students got a mini-lecture on this. They even got a handout with a graph showing a clear upward trend.
And then I asked about it on the exam: my American students got it backwards and my foreign students got it right. I think all the harping really has polluted their minds.
Here’s the breakdown.
My 34 American students averaged 1.3 points of extra credit, while my 9 foreign students averaged 1.1 points. So it’s not like the foreign students scored better overall.
But those numbers are based on 3 questions. On the one question about willingness of Americans to work, the results were upside down. Americans tried that one 27 times, and only 5 got it right. Foreign students got it right every single time.
As Mark Twain said: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”
† This is really a no-brainer. Of course there’s more people working outside the home than there used to be: everyone knows it’s much more common for women to work than it used to be.
In America, students from American Samoa are regarded as exchange students. You can’t make that stuff up, but I suppose it’s a lot better than many other countries that don’t even let their own domestic minorities get into college. Anyway …
One of these exchange students asked me if GDP (or GSP) is calculated for American Samoa. So I looked it up.
According to the BEA and the Department of the Interior (!!!), their real GDP was $648M per year in 2015.* Further, they appear to have only come out of the 2007-9 recession over the last couple of years (which is a good example of how recessions are geographically uneven).
With a population of about 55K, this amounts to a per capita real GDP of about $12,000 per year. That’s a bit less than a fourth of the rest of the U.S. But, internationally, it’s comparable to say Peru, Egypt, South Africa, Serbia or Indonesia.
That GDP figure is far smaller than any of the 50 states, or even most of the major metropolitan areas of the U.S. We’re in Utah, so using the Salt Lake City metropolitan area as an example, its GMP is just over $60,000m per year. That’s about 90 times as big as American Samoa, which isn’t surprising given that it has about 20 times the population. For curiousity’s sake, Vermont has the smallest GSP, which is about half of Salt Lake’s.
But, American Samoa actually looks pretty good compared to independent countries in the Pacific Islands. American Samoa would be about halfway down that list by GDP (if it were independent), and it beats almost all of those in terms of real GDP per capita.
Tim Worstall is not innumerate. He crunched the numbers out, and found out this is what the Joseph Rowntree Foundation says is the borderline for poverty (in the U.K.):
The JRF is using a definition of poverty that is higher than median income for the country. … It gets worse too. The band for higher rate income tax starts at £43,000. The JRF is defining a two parent, two child, household beginning to pay higher rate income tax as being in poverty.
To put this another way, a British family in the top 0.23% of the global income distribution for an individual is in poverty and one in the top 0.32% of that global distribution is deprived. Yes, after adjusting for price differences across countries.
The British population is some 1% of the global population.
Across the pond here, we prefer to call people in the top income tax brackets “the rich'”. So the JRF is advocating for the rich who are the poor … or is it the poor who are rich?
Tim also notes that this foundation started the push for a living wage in the U.K. about ten years ago. This is what they’ve moved on to.
I’m speculating here, but I think this has to do with the complete unwillingness for potential critics in the legacy media to do any math checking at all. If they did, wouldn’t someone push a lawsuit for false presentation on these people?
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