July 19, 2004



Richer All the Time

A pair of recent essays on Tech Central Station by the indispensable Arnold Kling drive home (in no uncertain terms) how good the economic news looks to those willing to see beyond the pessimistic obsessions of the media and apocalyptic campaign rhetoric.

First, Kling reports that productivity is not only up, it's way up. In fact, it's blasting through the roof.

The 17 percent productivity growth from the first quarter of 2000 to the first quarter of 2004 stands head and shoulders above the growth rate for any comparable period. In fact, it is better than any eight-year period since 1976. In the first 13 quarters of the Bush Administration, the basic determinant of our standard of living increased by almost as much as during the entire 32 quarters of the Clinton Administration.

How's that? Come again? The basic determi-thingy of our what?

Kling spells it out for us:

Productivity is probably the single most important economic statistic. Productivity is what determines our standard of living. In the long run, productivity is what determines how much workers are paid.

Sustained high productivity growth would cancel out any possible economic worry. Global competition from low-wage workers? High productivity would protect our standard of living. Rising costs from Medicare? As I pointed out in The Great Race, high productivity would make the welfare state affordable (although not optimal). Environmental quality? High productivity would give us the resources to devote to addressing any challenge. On the other hand, low productivity growth would mean that our incomes will be low, our tax burden to pay for entitlements will be high, and environmental issues will be much harder to address.

So our single most important economic statistic is showing marked improvement — unprecedented improvement, in fact. While Kling bemoans the fact that only bad economic news seems to get covered, I find it oddly comforting that no one is making political hay out of these productivity numbers. The whole thing would seem a lot fishier if these figures were being trodded out to prove that President Bush is saving or wrecking the economy. (Of course, I don't actually know of a way that a productivity increase could be used to show that the economy is going downhill, but I don't doubt there are those who could.)

The one political (or perhaps I should say politicized) question that came to mind when reading these numbers was what impact, if any, outsourcing might have on productivity. According to the Bureau of Labor Statistics, who have published a very handy little primer on productivity, the impact of outsourcing is greater than negligible, but not by much.

So here we have some extremely good news with very little downside. Kling's second essay, How Much Worse Off Are We? shows how productivity increases over the decades have raised our standard of living. Two tables tell the whole story. The first shows the change in the number of households lacking essential items over the past 100 years; the second shows the change in the number of households possesing certain luxury items over the same period of time. One item from the second table is especially telling. In 1970, 45% of all housholds had clothes dryers in them. Today, 45% of all poor households have clothes dryers in them.

That's right, Poor 2004 = Middle Class 1974. The bar has been raised.

Economist J. Bradford DeLong makes the same point in an essay exploring the extreme increase in wealth that occured in the 20th century:

Suppose that you stuffed me and my family into a time machine, sent us back a century to 1890, and then gave us an income equal to eighteen times that of 1890 average GDP per worker–an income that would put us at the same place in the relative income distribution then as some $1,200,000 a year would today. We would not be among the 500 or so richest families in the country that might be invited to the most exclusive parties in the mansions of Newport, Rhode Island; but we would be among the next outer circle of 5,000 or so.

Would we be happy–or at least not unhappy–with the switch? Our power to purchase some commodities would be vastly increased: we would have at least three live-in servants, a fifteen-room house (plus a summer place). If we lived in San Francisco we would live on Russian Hill, if we lived in Boston we would live on Beacon Hill. If we lived in New York we would live on Park or Fifth Avenue.

But the answer is surely that we would not be happy. I would want, first, health insurance: the ability to go to the doctor and be treated with late-twentieth-century medicines. Franklin Delano Roosevelt was crippled by polio. Nathan Meyer Rothschild–the richest man in the world in the first half of the nineteenth century–died of an infected abscess. Without antibiotic and adrenaline shots I would now be dead of childhood pneumonia. The second thing I would want would be utility hookups: electricity and gas, central heating, and consumer appliances. The third thing I want to buy is access to information: audio and video broadcasts, recorded music, computing power, and access to databases.

None of these were available at any price back in 1890.

Without a doubt, there is some connection between economic and technological development. Technological development fuels productivity growth, which in turn drives economic growth. This raises an interesting question: is there an economic version of Moore's Law? How fast is our standard of living increasing? If Poor 2004 = Middle Class 1974, is it fair to say that standard of living is doubling every 30 years? And if so, how does that rate of growth compared to what was experienced in years gone by?

My guess is that 30 years is a pretty short interval for Middle Class to be downgraded to Poor. And I bet the interval is getting shorter and shorter.

Posted by Phil at July 19, 2004 11:57 AM | TrackBack
Comments

I have mixed feeling about this. It's pretty clear that things are getting better. Relevant economic figures (global GDP per capita, income, etc) have risen above inflation for decades. But a lot of the benefits go to the politically connected rather than to the productive. Hear my rant.

For example, when Russian industry was privatized by Yeltsin, cronies often were able to purchase assets (which supposed were auctions open to other bidders) for a fraction of the estimated market price. For example, Yukos (once the premier corporation of the top oligarch, Khodorkovsky) was created ultimately with Russian governemtn assets loaned from a Khodorkovsky-owned bank. From the link:

A fortune built on privatization

Boris Yeltsin's elevation to power in 1991 meant an acceleration of the market reforms under Gorbachev and created a dynamic business environment in Russia for entrepreneurs like Khodorkovsky. By then Bank Menatep was by Russian standards a well-developed financial institution and became the first Russian business to issue stock to the public since the Russian Revolution in 1917.

The bank grew quickly, winning more and more valuable Government clients such as the Ministry of Finance, the State Taxation Service, the Moscow municipal government and the Russian arms export agency, all of whom deposited their funds with Menatep, which Khodorkovsky mostly used to expand his burgeoning trading empire.

Bank Menatep provided the foundation for Khodorkovsky's bidding for Yukos in 1995. Yukos says that approximately US$1.5 billion has been spent purchasing the assets that now make up Yukos, with a market capitalisation of US$31 billion.

In 1995, the Yeltsin Government decided to privatise sclerotic state industries, including the state owned oil company Yukos. They appointed Khodorkovsky's bank Menatep to conduct a public auction process.

A higher bid from a group of rivals was ruled out of the process by Menatep on a technicality. Menatep paid US$350 million for 78% of the company, which inferred a value of $450 million. When the company was listed two years later, it was valued at $9 billion. That transaction—and dozens like it—has fed the envy and suspicion of many Russians, some of whom believe the oligarchs like Khodorkovsky have stolen their fortunes from the state.

Despite these beginings, it's pretty clear that a good portion of the economic growth over the last few years in Russia is due to these oligarches improving their businesses. But my point here is that the greviously unethical beginnings threaten to derail democratic and economic reforms in Russia. For example, Yukos threatens to again be sold off far below its value to competitors and state corporations.

In a similar fashion, there are certain parties politically positioned to take control of new technologies and economic trends. Here's a scenario.

Suppose several US companies develope useful nanotech self-reproducing assemblers. US Congress bans use of these devices (on and off Earth) indefinitely. After the collapse of the industry, Boeing (or your favorite prime contractor here) acquires some substantially profitable contracts from the US government for unrelated services and uses the money to purchase these companies at a substantial discount. Other companies may be strongly "discouraged" by government power from purchasing these companies' assets (eg, you can lose your government contracts if you compete with Boeing). Once Boeing owns the market completely (with the approval of the Federal Trade Commission), the regulations suddenly relax and allow Boeing to use their acquired nanotech monopoly to compete on a massive scale.

Such parties might not damage the economy in the short term, but in the long term we could see a number of undemocratic or luddite initiatives fueled by unfair control of technology.

Posted by: Karl Hallowell at July 21, 2004 01:57 PM

Such parties might not damage the economy in the short term, but in the long term we could see a number of undemocratic or luddite initiatives fueled by unfair control of technology.

A scary thought, and all-too plausible. The combination of government power and luddism can have a devastating effect on economic development, just as the unholy marriage of corrupt government and business have in the past (and present.) I'm counting on competition to win the day, although there is no gaurantee. Ultimately, corrupt power oligarchies can't compete with free markets. Individuals can be greatly enriched, but the economy itself won't grow -- this is exactly what happened with the Soviet Union in the first place, and it is what will utlimately open China up.

In your Boeing scenario, I think a company with a nanotech monopoly would have a much shorter shelf-life than the old Bell System did. (And as evil as it was, it did a lot of good.) Ultimately, the market will be pried back open.

Posted by: Phil at July 21, 2004 02:26 PM

"is there an economic version of Moore's Law?"

Whoa. There's a doctorial thesis in that.

I had a relevant conversation with a professor a few years back. I commented that there are beginning to be fewer differences between the lifestyles of the middle class and the rich.

He wanted to know what I meant. I said that the typical middle class adult has an automobile, a television, a computer, lives in an air conditioned house, and has ready access to health care.

And most rich Americans work. The rich will have more expensive cars and perhaps more cars, bigger homes and perhaps additional homes, and additional toys like expensive boats they use maybe once a month, but how does that change their lives versus that of the middle class?

No matter how many cars they have, how many do they drive at a time? One. Will that car get them to where they want to go any faster? Usually no. How many homes are they sleeping in tonight? One. Is their air condition any cooler than that of the middle class man? Probably not. Will they eat more than three meals? Probably not. Do they get to see better movies or television or cruise a better Internet? For the most part, no.

There was once a much bigger gulf between the lifestyles of the rich and the middle class.

Is this what we are heading toward? A future where the differences of wealth mean less and less to actual lifestyle? Does the "economic version of Moore's Law" give us any idea how fast this trend will move?

"but in the long term we could see a number of undemocratic or luddite initiatives fueled by unfair control of technology."

Karl: Make sure to catch the short story "The Council"

http://www.speculist.com/archives/000890.html

by Kathy Hanson and I where we explore some of those concerns.

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