« The future of Toyota | Main | Million dollar blocks »
Bad Money
That's the new book by Kevin Phillips. He concludes:
The thirty- to forty-year tumble from national preeminence that made life more glum for most folk in seventeenth-century Spain, and eighteenth-century Holland, and the Britain from the 1910s to the 1950s may be somewhat moderated for the United States because of a position as a North American continental economic power with a large resource and population base...
Boo hoo, I say; I'll be crying all the way to Rio. Overall this book is a catalog of the usual arguments about the financial problems of the United States, peak oil, the potential weakness of the dollar, and related worries. Phillips doesn't seem to think that finance is much of a productive economic sector. He is keen on the "inflation is larger than we realize" line, citing high growth rates for M3 (he doesn't realize how much the different aggregates can move around and differ from each other) and then the Fed's discontinuation of that statistic. But who has been tricked? Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man. I find the former scenario more plausible.
If there's anything wrong with gdp statistics, it's either environmental problems or that we don't have good measures of the productivity of government itself. Those problems are built into how the number is calculated and there is no conspiracy to make America look much richer than it really is.
There is remarkably little on future expected productivity growth or whether America will solve the problem of educating its non-upwardly-mobile, which are both (the?) major issues for our economic future. The author should spend a week locked in a room with the Solow model. There is also precious little recognition that America in twenty years' time will almost certainly be a good bit wealthier than today. Given that no other country is about to take us over, does relative international status really matter so much for the happiness of Americans? I don't think so. The richer the Chinese get, the more I feel good about living in the world's first country to be a true product of The Enlightenment. If only Phillips could feel the same way.
Posted by Tyler Cowen on April 21, 2008 at 06:58 AM in Books, Current Affairs | Permalink
Comments
Haven't read the book so far...still
-the Solow defense?
-retrain the laggards initiative?
-the happy Americans defense?
Maybe this is Kudlowism [bullish on America etc etc etc] dressed up in academic arcana.
Tyler - your readers, including this one, want more...
Posted by: stevehar at Apr 21, 2008 8:18:44 AM
Long-term readers of this blog know far better than to expect any kind of balanced analysis of criticism of the US. Sometimes we get some pretend analysis but it always seems to end with "yet on balance it is hard to ignore how fucking superior the US is to everywhere else". It's a bit tiresome.
Posted by: Finnsense at Apr 21, 2008 8:50:03 AM
Kevin Phillips really rubs me the wrong way. He make all these negative claims that seem just wrong.
Posted by: Floccina at Apr 21, 2008 9:05:08 AM
@finnsense:
"It's a bit tiresome."
And yet you return...
Posted by: Bill at Apr 21, 2008 9:14:55 AM
I think something funny is going on. There is a lot of money washing around in the investment (rich man's) world, but at the same time the middle (and lower) classes are being squeezed.
What's more ;-), I believe the above is a statement of fact, and that I haven't got to politics or prescriptions yet ... and I may not.
Where I'm going is to a question ... if seas of investment monies flow, even as "inflation" rises ... how exactly can investors demand the kind of premium you are asking for?
How do I, as an investor, demand it at this point?
Posted by: odograph at Apr 21, 2008 9:17:39 AM
He is keen on the "inflation is larger than we realize" line, citing high growth rates for M3 (he doesn't realize how much the different aggregates can move around and differ from each other) and then the Fed's discontinuation of that statistic. But who has been tricked? Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man. I find the former scenario more plausible.
This assumes there's some way to get rich off of inflation being underestimated, and that there's a
generally-known security that captures a true individual's purchase basket. Keep in mind, the argument
is NOT "inflation-indexed bonds underestimate what future inflation will turn out to be", in which case
there is a clear, exploitable mispricing. The argument is that, consumer prices, as experienced by actual
consumers, are increasing faster than official figures say.
So to exploit such an underestimation, you have to know in what financial market it will show up.
It's not foreign currencies, because they could be inflated too. It's not even a commodities basket,
because there could be non-commodity inflation in the path to the end consumer.
So, what security actually captures my purchasing basket?
Posted by: Person at Apr 21, 2008 9:40:25 AM
I think one thing going on, Person, is that people are changing their expenditure basket. It is being called a slowdown in consumer spending in face of both higher prices and lower confidence ... but it doesn't seem to be producing the price moderation predicted.
It's not a happy situation, even if average growth over then next 20-30 years proves strong.
(Talk to many poor people Tyler?)
Posted by: odograph at Apr 21, 2008 9:48:30 AM
Finnsense, remember those posts I wrote about how wonderful the Nordic countries are and how the average person is Western Europe has a quality of life at least as good as in the United States? As a general rule of thumb, when you see abusive reactions, it is best to ask what is going on in the user. A lot of the Phillips book is simply economically illiterate. For sure America has its economic problems, but they are not the ones identified in *Bad Money*
Posted by: Tyler Cowen at Apr 21, 2008 9:58:13 AM
Is it safe to assume we can just ignore these types of books? How many times do we need to vacillate between "Dow 36000" and "Bad Money" before we stop reading? It might be instructive, Tyler, to post a chart of log GDP per capita over the past, say, 100 years; I'm looking at that chart right now, and aside from the Great Depression, the business cycle is essentially invisible.
Recessions do not mean America is doomed, and booms do not mean America is destined for eternal prosperity. We're only six years away from $.85=1 Euro and "The Era of $10/barrel oil", which was only 10 years away from "the giant sucking sound" that would destroy American wealth, which was...
If people should be upset about anything, they should be upset about the enormous relative decline of our infrastructure and education level.
Posted by: cure at Apr 21, 2008 10:21:17 AM
Oh, Tyler. Love your blog, but I have to agree with Finnsense. I know that whatever compliments you heap on Western Europe will always be matched by the observation that Europe will inevitably become more like the US. (I'm still not sure why you believe that, but perhaps that's another question for another time.)
I won't defend Phillips's economics, but I do think he's right on the psychology. Americans have so much mental equity invested in the idea of being the biggest and the best, the shining city on the hill, etc., that, in my experience, it's deeply disturbing for many Americans to recognize that other countries may offer just as good a life to their citizens, may provide more opportunity to their people, and may, in sum, outweigh the US in total influence.
You're right that Americans have no rational reason to be unhappy, but a loss of comparative stature can still be deeply disturbing---as Britain demonstrated in the 1950s and 1960s.
Posted by: Ian at Apr 21, 2008 10:33:58 AM
the usual arguments about....peak oil
As a layperson, I have always been confused by the dismissal of system limits in economic discussions, and peak oil is as baffling as the rest.
Let's say that the average person is able to apply every calorie they consume every day to productive work. Further, let's say that the average person is a Tour de France competitor, putting away as much as 10,000 calories/day.
A single gallon of gasoline contains roughly 300,000 calories. Put another way, having a gallon of gasoline is the same as having 300 people work for you for a day. Hence, slaves in America prior to the industrial revolution.
When we reach peak oil, what will replace it? Natural gas is already in decline in the US; using coal in your car via Fischer-Tropsch is inefficient (and we'd need a long lead time to build plants, anyway); nuclear power also had lead time problems and would require electric cars, which we don't exactly have ready at hand, and it's not clear that .
The geologists generally agree that we have burned though very close to half of what is profitably extractable, and have no replacements close at hand -- and this doesn't even address non-fuel uses of oil (agriculture, plastics, pharmaceuticals, etc.)
So why the dismissive attitude about peak oil? It seems a huge economic event to me.
Posted by: Doug Blair at Apr 21, 2008 11:15:52 AM
cure, would you put median net worth over time on the same graph as GDP per capita?
some graphs here, not perfect.
Posted by: odograph at Apr 21, 2008 11:19:14 AM
"Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man. I find the former scenario more plausible."
Because the market is *always* right, innit? Ergo these persistent bubbles in which the market is dead wrong to such a large extent and for long enough periods that our economy swings precariously in the balance. Precarious enough to warrant government bailouts of private corporations, for example.
But nothing to worry about really.
Posted by: meter at Apr 21, 2008 11:32:06 AM
Person, I got your point. The spread between nominal Trasury and TIPS yields is a speculation on how the CPI will print not how actual inflation will run. Accordingly, it is completely irrelevant to the point you raise. I am surprised Dr. Cowen chooses to ignore your point, particularly as he has chosen to respond to another. Odograph completely missed your point. I feel your pain.
But having got your point, please allow me to say I disagree. Inflation is impossible to measure because the ratio of nominal spending to aggregate utility (the price level) cannot be measured on the grounds that aggregate utility cannot be measured. But there is no reason to believe that the data we have understate inflation. The data are unavoidably unreliable but not apparently biased, IMHO.
Posted by: Gerard MacDonell at Apr 21, 2008 11:37:16 AM
"The spread between nominal Trasury and TIPS yields is a speculation on how the CPI will print not how actual inflation will run."
I probably missed some point ... but I don't believe "spreads" even if they chronicle Delphic prediction in general, are likely to do do so at this particular point in time.
We are in the midst of a strange credit crunch, with a lot of money fleeing to "safety" even at uncertain "costs."
When buyers are arguably betting on the "smaller loss" of available choices, spreads are pretty meaningless.
Posted by: odograph at Apr 21, 2008 11:48:15 AM
shorter - if you were to participate in the coming TIPS auction, what would you be gambling against: general panic in bond markets, or inflation?
Posted by: odograph at Apr 21, 2008 11:51:09 AM
Doug Blair: Peak Oil would not mean the end of oil supply. It only would mean decades of rising prices, during which substitutes become both more technologically possible and more price competitive. 300 slaves cannot convey me from LA to Chicago in 24 hours, even if they are Lance Armstrong.
System limits are dismissed because they usually assume no reaction to changing costs and dismiss the value of human innovation.
Ian: Psychology may explain why people take a dismal view of the world. Economics explains why, despite their bad attitudes, people aren't starving to death. Eventually the facts of wealth overcome the angst. Sadly, it seems that people use their increasing free time to find shinier and more grand ideas over which to despair.
Posted by: foxmarks at Apr 21, 2008 11:53:45 AM
I haven't read the book, and after Tyler's review I won't be reading it later either, although I doubt I would've stumbled on it either.
However, based on what Tyler wrote, he was correct to bash the book. The issue Tyler had was that it was economically illiterate.
Scientific research, business that creates and adopts better technology (broadly defined) invented elsewhere, and education are what will make or break any developed country with a decent formal or informal legal infrastructure. If the author managed to miss that then his book belongs in the recycling bin.
Are there other issues worth talking about? Yes, but to discuss future economic prospects of a developed country while basically ignoring the above is just plain ignorant.
Posted by: happyjuggler0 at Apr 21, 2008 12:00:28 PM
Hi Foxmarks.
Thanks for the response. Two quick thoughts:
Doesn't it make as much sense to disregard human innovation as it does system limits? I think we have to consider both if we're to be realistic.
Note that relatively mild disruptions of oil supply in 1973-74 and again in 1979 had significant impacts on our economy. I imagine that a global version of these same disruptions would have much more significant impact, no?
Posted by: doug Blair at Apr 21, 2008 12:48:43 PM
Were "most folk in seventeenth-century Spain, and eighteenth-century Holland, and the Britain from the 1910s to the 1950s" truly feeling "more glum" as time went on?
Certainly, being in Britain during the depression, WW2, and the after-war rationing wasn't so great, but would they have been any better if American power hadn't eclipsed British power in those years? Was the average Briton in 1953 less happy than the average Briton in 1923 or 1913?
Posted by: Anthony at Apr 21, 2008 12:58:30 PM
Re. energy - the market will produce new energy sources OR new efficiencies OR (failing those two) reduced productivity.
I personally think new efficiencies will pan out better than new sources (as they have done over the last say 20 years).
Posted by: odograph at Apr 21, 2008 1:21:19 PM
On peak oil, let me cut and paste something I wrote elsewhere last night...
Peak Oil hysteria violates pretty much every economic precept you can name. Its most grievous error is in failing to understand that effects happen at the margins. The thought that a production peak would raise prices enough to collapse the entire economy depends on the fallacy that everyone will respond to a shock identically and equally. But -- barring idiotic government action that forces everyone into such lockstep behavior -- the reality is far different. Peak oil production means that oil production will decline in the future: It does not mean that it will instantaneously end. In actuality as prices rise, those at the high margin will move toward alternate sources of transportation energy, and those at the low margin will find alternatives to transportation. Those in the middle will suffer a higher price for oil, but will not suffer shortages.
and this doesn't even address non-fuel uses of oil (agriculture, plastics, pharmaceuticals, etc.)
You can make the same argument for every other use for oil as that made above, including the marginal values between the different uses as well. The various different uses of oil are cited as problems. Frankly, they are advantages, as each has different substitutions and a different substitution price where oil becomes uneconomical. That is the sort of robustness at the margins that is utterly ignored by Peak Oil sellers.
Posted by: MikeP at Apr 21, 2008 2:04:58 PM
Note that relatively mild disruptions of oil supply in 1973-74 and again in 1979 had significant impacts on our economy.
Those impacts on the economy were caused far more by government reaction to the OPEC embargoes than by the embargoes themselves. The proper government reaction is to do nothing, allow prices to rise, permit the landing of windfall profits, and watch the domestic supply increase along with the global market of sellers and resellers. In 1973 and 1979, government responded with price controls, rationing, and taxes on producers -- a practical recipe for shortages and economic disruption.
So, yes, if governments behave like economically illiterate idiots -- see, for example, Kevin Phillips and the panoply of Peak Oil doomsayers -- then peak oil could prove a problem. But it should not pose more than a recession-inducing bump to a free economy.
Posted by: MikeP at Apr 21, 2008 2:09:43 PM
Gerard_MacDonell: I appreciate your reply, but think my point still stands -- I do have a purchase basket, and that can be measured reliably enough, even with the incomparable utility issue you talk about. It's just that it's not. So long as there is no security I can buy that tracks this, I can't profit from inflation or inflation underestimation, and there's no security on the market that's proving me wrong by my not buying. If someone wants to point out to me what it is, I will buy it.
The best I could think of would be an insulin ETF, since with insulin:
-Demand is inelastic
-There are many inputs, immunizing it against any sector-specific shock
-It has a precise, medically-driven definition, meaning it won't (can't) be debased in response to cheaper money or more costlier inputs.
That means that any remaining influence on its price will be due to general falling value of money, which itself roughly tracks my purchasing basket.
So what's the insulin ETF's ticker symbol? DIAB?
And yes, I definitely have noticed my prices increasing faster than 4%. Pretty much everything I buy has gotten smaller or lower quality or seen bigger price increases. For example, pepperonis I buy were quite clearly diluted with non-meat. (plural of anecdote, blah blah, but I can't think of one case of the price staying steady or falling and I've looked hard)
Posted by: Person at Apr 21, 2008 2:26:08 PM
I'm not sure that saying that limits on natural resources should be considered as serious as human ingenuity constitutes "hysteria," but anyway....
I agree with you that the various capabilities of oil are advantages which we have enjoyed immensely. I'm saying the absence of the advantage is likely to cause some sort of economic difficulty -- or "change", if you prefer. For a gross non-1970's USA example, consider WWII. This was largely fought over access to oil; Japan lost almost entirely due its inability to maintain certain levels of access to oil, and Germany lost for mostly this reason. (The eastern front being opened as Hitler needed the Baku fields to fuel his war machine). The Germans did the rational thing at the time: made gasoline from coal. it wasn't competitive, as the "marketplace" of the European theater showed.
What reason do we have to think that there will be no economic repercussions to peak oil, as the original post seemed to imply?
Posted by: Doug Blair at Apr 21, 2008 3:10:06 PM
