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Saturday, July 12, 2008

American Pessimism in the Summer of 2008

                                             INTRODUCTORY COMMENTS

At an unusually good web site, Carpe Diem --- a libertarian economics blog run by Prof. Mark Perry of the University of Michigan at Flint --- Perry posted one of his markedly valuable charts, something he does daily. Thanks to his praiseworthy and copious use of charts and other forms of data, Perry's posts make his site one of the two or three most informative of all the economic blogs on the Internet.  (In some postscript comments at the end of today's buggy commentary, you'll find a list of a half dozen or so economic blogs that are readable and worth visiting frequently.)


This is the case, please observe, even if like prof bug you're not a libertarian --- rather, like him, a moderate independent who leans toward free markets and prefers the more rough-and-tumble nature of American capitalism compared to the highly regulated, redistributive EU welfare states . . . but who, simultaneously, knows from his theoretical and historical background that there is a necessary and indispensable role at times for certain governmental regulatory and distributive programs.

 First Mark Perry's Comments

"Doom watching has of late become too much of a national pastime. It has afflicted far too many aspects of national policy: international relations, defense, natural resources, the economy, the environment, energy, etc. There has been pessimism, talk of inevitable decline, and of the twilight of democracy.


"It is heady stuff. Entrapped by extrapolations and by rhetorical flourishes, it has too much affected the national mood. Yet, it too will be superseded. It is reminiscent of other periods of disenchantment. Yet, successfully to grapple with our problems, we shall have to diagnose them. Like Edmund Burke, two centuries ago, we are obliged to seek the sources of our present discontents. Yet we must avoid being swept up by the delights of diagnosis. We must assiduously avoid the seductive pleasures of making too much of our present discontents.


"... The media did not originate but certainly reflect these national predilections. The media, reflecting the market and the free enterprise system, are quite ingenious in serving up just what the public wants to hear. In another period, this may have been cold war truculence, but recently it has been a steady diet of faults and flaws, real or imagined. I am a great believer in muckraking, when there is authentic muck to be raked. But one regrets seeing muck artificially created or embellished simply to satisfy current tastes.


"... As Larry Kudlow reminds us often, the media today is trying to make pessimism our national pastime, reminiscent of the period in the 1970s discussed above. But before we buy into all of the media's "gloom and doom," consider the chart above [click on the Carpe Diem link for the chart], showing the U.S. unemployment rate over the last 50 years. Put into a broad historical perspective, our current 5.5% jobless rate is: a) below the 50-year average unemployment rate of 5.85%, and b) way below the 7% average jobless rate during the 20-year period from 1975 to 1995 that included 4 official recessions. Sure, it would be great if unemployment got down to 4% again, but it could also be a lot worse - we could have Canada's 6.1% jobless rate or Europe's 6.6% rate."

How the Buggy Replies Will Unfold

Today's buggy commentary, prompted by Mark Perry's chart and his comments on its topic --- American unemployment rates over the last 50 years--- deals with two things: first, the reasons for the noticeable pessimism of the US public, caught in opinion surveys among other things, and whether the pessimism is overdone or largely reality-based (or a mix); and second, how the use of the major criteria for judging both the "fairness" and "efficiency" of a market economy --- Pareto-optimality and Pareto-improvements or -impairments (or gains and losses) --- can help us make sense of the current US public mood. Both sets of buggy comments take issue with the libertarian views of Mark Perry and a couple of other posters, along with a brief criticism of a left-wing poster.

                                         FIRST BUGGY SET OF REPLIES

Another illuminating and very stimulating post, Mark: thank you.

1) To the first anonymous poster, who doubted the figures in your chart: employment rates were calculated differently across the two sides of the Atlantic in several decades after WWII: the Economist always added 1 to 2% unemployment to the West Europeans' rates to bring them into line with the US's (not the opposite!). For several years now, all advanced industrial countries use a standardized procedure recommended by the International Labor Organization, so comparisons across countries are generally sounder.

--- If there's any difference these days, it usually concerns the lumping of (involuntary) part-time job-holders with full-time ones . . . a problem that besets West Europe, as a general thing, much more than the US.

2) The biggest data-doubts fasten, as they have for a long time, on Japanese official reports: they tend to count people who have been employed, say, only a day in a recent period (more than a month, I believe).

3) On a different plane, I agree with Mark that pessimism is overdone for a variety of reasons --- but one of them is just part of normal everyday life. Namely? Peoples' self-reports of their satisfaction (happiness) with things are relative --- dependent on how they frame the status quo and with which reference groups they compare themselves.

As, say, living standards have improved enormously over the last few generations, people take the existing living standard, for instance, as a given, using it as the basis of how they frame the status quo. Downward movements from it, or even stagnation, are thus regarded as more deplorable than the enjoyment gained from an equal percentage of upward movement.

The same is true of unemployment or almost anything else that attaches to our economy.

4) Despite a recent study that questions it, the same is true of reported happiness within countries. The rich and well-to-do within any country report more happiness in general than the less well-off or poor, but there is no clear correlation across countries between happiness and levels of real per capita income.

In fact, in Japan, despite a much higher living standard today than in the 1970s, people report less happiness in several surveys.  And yet our economy is based on constantly stimulating consumption as one of the measures of a good life.

Two Other Buggy Comments

5) The media in general do tend to emphasize pessimistic news . . . partly because it's more sensational, partly because of the biases of journalists in the main.

6) And though there is no good survey evidence to back up this claim, it appears that three generations or so of considerable affluence and a stress in TV, movies, blogging, pop music, and what have you --- reinforced by all the other cultural changes since the late 1960s --- have tended to emphasize more instant gratification than was the case for Americans (and others) for a century and a half before WWII. If this is so, then people react even more pessimistically to temporary setbacks. Daniel Bell, a Harvard sociologist who was listed as the US's no. 1 public intellectual in the 1960s and 1970s once wrote a good book on how the two sides of capitalism --- hard work, savings and investment for production, more and more instant gratification (fueled if need be by loose credit) on the consumption side --- have diverged with modern advertising, modern credit cards, modern media, and the like.

                                        SECOND SET OF BUGGY REPLIES
A 7th After-Thought:

Namely? The upswing in the business cycle since the end of September 2001 --- almost 7 years ago --- has been a highly unusual one . . . the first since the mid-1930s, when there was a very brief upswing in the midst of the Great Depression, when average income hasn't risen.

True, as you noted in an earlier and thought-provoking post, the continued decline in the prices of certain staples and even minor luxuries (say, big-screen HDTV and I-pod imitations)--- thanks to globalizing trade and the growing efficiency of retail outlets like Wal-Mart --- has helped keep poor and low-income families from being hurt as much by the drag on income as it might otherwise have been.

A Problem Arises Here

Still . . . however much the overall US economy has benefitted from both globalizing trends and revolutionary technological breakthroughs in ICT (information-communication technologies), the Samuelson-Stolper theorem has proved robust for 65 years now in study after study, with its original restrictive conditions continually relaxed.

Meaning? The growing beneficiaries of increased trade-openness and specialization in the US economy since 1975 have been the holders of material and human-capital (the latter referring to university-educated Americans). The losers, as predicted by Samuelson-Stolper, have been low-skill Americans . . . through no fault of their own.

What Follows?

In effect, this: even in neo-classical economics, this is a situation of a Pareto-impairment: the gains in the overall economy and for large numbers of Americans have materialized --- partially anyway --- at the expense of low-skilled Americans. And in principle they should be compensated by the winners, who would have still be left with gains, probably noticeably so, compared to the status-quo in 1975. 

Note: this Pareto impairment or disadvantage for low-skilled Americans since 1975 does not reduce to a zero-sum game, to use game-theory terminology: it's a positive-sum game, with the gains in efficiency and in the growth-rates of productivity and GDP as well as in per capita income far overshadowing the losses for low-skilled workers.  All the same, Pareto-optimality and Pareto-gains or - losses are the minimal measure economists have at their disposal for two critical things when an economy is changing its production base and the allocation of input-resources: physical capital, human capital, natural resources, the work force, and technological advances:

1) Has the economy's reallocation of its production and resource-inputs moved the economy closer to the Pareto frontier of optimal efficiency?

2) Have the various moves toward the frontier been achieved by a series of Pareto-gains or improvements: at least one person's or one group's increase in income (or consumption) has improved, with, simultaneously, no one other person's or other groups' income or consumption reduced in the process? 

The latter is the minimal criterion for deciding whether such a change in production, caused either by market forces or by government policies, is equitable (as well as a gain or a loss in overall economic efficiency).  Or is there some other measure of overall economic welfare other than the Pareto-optimum that economists can agree on? 

If so, it must be a mystery unless --- as libertarians are wont to do --- Pareto-criteria are ignored and the outcomes of market forces are always efficient and equity of any sort should be ignored. 

There is also a variant of the libertarian view developed by a small group of scholars like Ludwig von Mises and Friedrich Hayek and Israel Kirtzner (Joseph Schumpeter to an extent too), originally from Austria and with followers elsewhere, who reject the whole notion of neo-classical equilibrium theory, which would include a series of Pareto-improvements to an optimal frontier.  Instead the Austrian school argues that the dynamics of decentralized market economies are always in a state of disequillibrium, with new economic agents like entrepreneurs quickly seeing opportunities if there are "market failures" and no less quickly exploiting them to improve the satisfiscations of individual economic agents. 

Today's market inefficiencies, it alleges, are tomorow's profit opportunities for the ever emerging entrepreneurial agents.  Inversely, government interventions will always entail, as they do for libertarians, government failures that are costly and never really correct these alleged market failures --- rather, are likely to make them worse by impeding entrpeneurial creativity in dealing with them, and for a variety of reasons.

What Ensues? 

Just this: if a Pareto measure is applied, those Americans who have benefitted from the technological and globalizing trends in the US economy since 1975 should, in principle, at least partly (or wholly) compensate the losers.  In doing so --- say, by increasing government support for trade-adjustment assistance and retraining of the laid-off workers (in cooperation with business firms and credentialed educational institutions) --- the gainers would still have noticeably improved their income or consumption compared to the original status quo in 1975.  (The next buggy article expands on the meaning and use of Pareto optimality in microeconomics, and whether, say, market failures that entail Pareto-losses for an individual or group as the economy reallocates its production techniques and resource-allocation can be improved by government policy or --- alternatively --- whether such policies are too costly or worsen things. We'll also look briefly at the "public choice" approach that libertarians use to underscore the problems of effective government intervention; and even more briefly at the Austrian variant.)

The End of the Bush W. Era Imminent

Actually, more thought just leapt to mind: what, it seems, more and more Americans are worried about is certain insecurities: health care (and its rising costs), rising energy prices, and concerns (no doubt overdone, and even overdone by the media) about the direction of the country in the Bush-W era.

The election in November will take care of the last concern, though I myself (who never voted for George W ever) have recently posted at my web site a lengthy analysis of why his foreign and security policies will likely be seen as a general success in 10-20 years . . . all this, despite the horrible blunders that marked the 3.75 years of the Iraqi occupation.

There is, of course, little that the government can do about rising energy costs, except for politicians to bluster and blame hobgoblin speculators. The fact is, though, that the US economy has shown itself to be remarkably efficient so far in dealing with the financial, housing, and energy problems, all heaped together.

The first problem, health care, does need a better set of insurance schemes and somehow better cost-controls, and here, I believe, something like Obama's scheme is fairly promising . . . always provided that we can get some specific cost-projections that can be openly debated during (and most likely) after the electoral campaign.

P.S. Soldatthetop: thank you for the kind comments. It's always a pleasure to encounter people with decent manners in this and in other blogs. -- Michael

 

Postcript Comments: Other Recommended Economic Blogs


These blogs, which represent a variety of different political leanings, are all very readable and worth regular visits by buggy visitors.
Econbrowser, run by two moderate economists, which does require a sound basis in economic theory; http://www.econbrowser.com/ ;
Marginal Revolution http://www.marginalrevolution.com/ a wide-ranging libertarian site, and not technical
Economics Policy Institutue: a very good liberal web site, full of wide-ranging articles and links that deal with the concrete problems of our work force and families as well as general economic trends in the US and global economy;
Financial Times: http://www.ft.com/home/us good economic journalism;
The Economist: http://www.economist.com/ good well-written economic and political journalism, but often delivered in an obiter-dicta manner that simplifies at times complex problems;
Wall Street Journal Real-Time Economics: http://blogs.wsj.com/economics/ similarly good journalism;
RealClearMarkets: http://www.realclearmarkets.com/ various links to non-technical daily Internet economic and financial analysis;
Economic RoundTable: http://www.rtable.net/index/rt/economics/recent/ Lots of other economic and financial links, somewhat more technical at times than RealClearMarkets' links;