Fact checking @Bernie Sanders latest presidential debate
27 Nov 2015 Leave a comment
in applied price theory, applied welfare economics, economic growth, labour economics, politics - USA, poverty and inequality, welfare reform Tags: 2016 presidential election, Leftover Left, Twitter left
Eurosclerosis, Swedosclerosis, the British Disease and rising inequality harming economic growth
21 Nov 2015 2 Comments
in currency unions, economic growth, economic history, Euro crisis, fiscal policy, macroeconomics, politics - USA Tags: British disease, British economy, Eurosclerosis, France, sick man of Europe, Sweden, Swedosclerosis, Twitter left
The Washington Centre for Equitable Growth have joined the Wall Street Journal in falling for that dodgy OECD hypothesis about rising inequality holding back economic growth.
The chart below shows stark differences between egalitarian Sweden and France, and the more unequal UK since 1970 in departures from a trend growth rate of 1.9% in real GDP per working age person, PPP.
Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/
In the above chart, a flat line is growth at the same rate as the USA for the 20th century, which was 1.9% for GDP per working age person on a purchasing power parity basis. The USA’s growth rate is taken as the trend rate of growth of the global technological frontier. A falling line in the above chart is growth in real GDP per working age person, PPP, at below this trend rate of 1.9%; a rising line is above trend rate growth for that year.
- Sweden really had been the sick man of Europe until it turned its back on high taxing, welfare state socialism in the early 1990s.
- France has been in a long decline so much so that the global financial crisis is hard to pick up in the acceleration in its long decline in the mid-1990s.
Britain did very well, both under the neoliberal horrors of Thatcherism and the betrayals by Tony Blair of a true Labour Party platform. The UK grew at above the trend annual growth to 1.9% for most of the period from the early 1980s to 2007.
Neither France or Sweden, despite their egalitarian economies, kept up with the US growth rate since 1970. Under the OECD’s hypothesis, if France and Sweden had been more unequal, their trend growth rates would have been even more appalling since 1970.
British post-war productivity growth
17 Nov 2015 Leave a comment
in economic growth, economic history, global financial crisis (GFC), labour economics, macroeconomics Tags: British economy, British history
@JohnQuiggin on “How New Zealand fell further behind” @FairnessNZ
15 Nov 2015 1 Comment
in applied welfare economics, economic growth, economic history, economics of regulation, fiscal policy, labour economics, politics - New Zealand Tags: Australia, John Quiggin, lost decades
Leading Australian academic economist John Quiggin has just published an article arguing that New Zealand should not be a policy role model for anything. To quote Quiggin:
For most of the twentieth century, the New Zealand and Australian economies performed almost identically. New Zealand took a somewhat larger hit when Britain entered the European Common Market in the 1970s, but that impact has long since washed out. The real divergence came in the 1980s. Since then, New Zealand’s income per person has fallen 35 per cent behind Australia’s
He used Reserve Bank of New Zealand data going back to 1990, which is common starting point for most Reserve Bank data.
Source: John Quiggin “How New Zealand fell further behind”. Inside Story, 11 November 2015.
If he had taken that chart back to the 1970s and earlier using the Conference Board Total Database, Quiggin would have found that New Zealand economy diverged from Australia in the 1970s, not in the 1980s. His data from the Reserve Bank of New Zealand started at the low point in 1990 – at the end of that divergence that started in 1974. The New Zealand economy was depressed between 1974 and 1992. I label this Great Depression in New Zealand as New Zealand’s Lost Decades.
Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/
Real GDP PPP per working age New Zealander fell rapidly after 1974 (a 34% drop against trend) when that economy was a heavily regulated, highly taxed economy. This heavily regulated, highly taxed, economically stagnant New Zealand is the good old days in the eyes of the Twitter Left.
Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/
In the chart above, the base is 1974 which equals 100. A flat-line means annual growth equal to the trend rate of growth in the 20th century for the USA. A falling line means below trend growth; a rising line means above trend rate economic growth per working age Australian or New Zealander.
With the election of a National Party government in 1990 and a massive fiscal consolidation, New Zealand growth rate returned to the previous trend rate of 1.9% in 1992. Ruth Richardson’s horror budget of 1991 was so bad that the what became the Twitter Left called it the “Mother of All Budgets“.
What followed this massive fiscal consolidation where welfare benefits for cut severely was an economic boom that lasted until the GFC.
Source: Income Gap | New Zealand Council of Trade Unions – Te Kauae Kaimahi.
As shown in the chart conveniently compiled by the New Zealand Council of Trade Union, there was 20 years of real wage stagnation until the passage of the Employment Contracts Act in 1991.
Source: Income Gap | New Zealand Council of Trade Unions – Te Kauae Kaimahi with annotations.
What followed the passage of that Act was sustained real wages growth for the first time in two decades and the end of growing inequality under the previously highly taxed, heavy regulated economy that was good old days New Zealand if the Twitter Left is to be believed.
To do this, to paint pre-1984 New Zealand, pre-neoliberal New Zealand as a fairly egalitarian paradise, Max Rashbrooke is an example of that is had to ignore two thirds of the population and the inequalities they suffered:
“New Zealand up until the 1980s was fairly egalitarian, apart from Maori and women, our increasing income gap started in the late 1980s and early 1990s,” says Rashbrooke. “These young club members are the first generation to grow up in a New Zealand really starkly divided by income.”
Racism and patriarchy can sit comfortably with a fairly egalitarian society if you are to believe the vision of the Twitter Left as to their good old days. John Quiggin refers to the period in Australia known as the Menzies Era as part of his golden age of the mixed economy. The Menzies Era was most of the 23 years of uninterrupted conservative party rule between 1949 and 1972. The actual Menzies Era was the period up to 1966 when Liberal Party Prime Minister Sir Robert Menzies retired
The reforms of the 1980s known as Rogernomics stopped the long-term stagnation in real wages that started in about 1974. The reforms of the early 1990s under a National Party government including a massive fiscal consolidation and the passing of the Employment Contracts Act was followed by the resumption of sustained growth in real wages with little interruption since.
New work by Chris Ball and John Creedy shows substantial *declines* in NZ inequality.
initiativeblog.com/2015/06/24/ine… http://t.co/f94fw4Bhae—
Eric Crampton (@EricCrampton) June 24, 2015
This boom after two decades of minimal real economic growth per working age New Zealander benefited everyone. The unemployment rate fell to a record low of 3.5% about 2005. Maori unemployment was at a 20-year low of 8% in 2008. Maori labour force participation rates increased from 45% in the late 1980s to about 62% by the eve of the Global Financial Crisis.
The increase in percentage terms of Maori and Pasifika real household income is much larger than for Pakeha since the economic reforms of the 1980s and 1990s. As Bryan Perry (2015, p. 67) explains when commenting on table D6 sourced by Closer Together Whakatata Mai:
From a longer-term perspective, all groups showed a strong rise from the low point in the mid 1990s through to 2010. In real terms, overall median household income rose 47% from 1994 to 2010: for Maori, the rise was even stronger at 68%, and for Pacific, 77%. These findings for longer- term trends are robust, even though some year on year changes may be less certain. For 2004 to 2010, the respective growth figures were 21%, 31% and 14%.
What’s the difference between embedded neoliberalism and Director’s Law of public expenditure?
06 Nov 2015 Leave a comment
in economic growth, economic history, fiscal policy, George Stigler, Marxist economics, Public Choice, public economics Tags: conspiracy theories, growth of government, Leftover Left, median voter theorem, neoliberalism, rational ignorance, Sam Peltzman, size of government
I learnt a new word today off the back of Jane Kelsey winning a $600,000 Marsden grant to study embedded neoliberalism and her latest transnational conspiracy theory about trade agreements.
I’ve never heard of embedded liberalism before today despite a keen interest in popular and academic news. I don’t think I’m poorer for that ignorance but let’s push on. According to that source of all knowledge and truth Wikipedia, embedded neoliberalism’s been around for about 35 years:
Embedded liberalism is a term for the global economic system and the associated international political orientation as it existed from the end of World War II to the 1970s. The system was set up to support a combination of free trade with the freedom for states to enhance their provision of welfare and to regulate their economies to reduce unemployment. The term was first used by the American political scientist John Ruggie in 1982.[1]
Mainstream scholars generally describe embedded liberalism as involving a compromise between two desirable but partially conflicting objectives. The first objective was to revive free trade. BeforeWorld War I, international trade formed a large portion of global GDP, but the classical liberal order which supported it had been damaged by war and by the Great Depression of the 1930s. The second objective was to allow national governments the freedom to provide generous welfare programmes and to intervene in their economies to maintain full employment.[2] This second objective was considered to be incompatible with a full return to the free market system as it had existed in the late 19th century—mainly because with a free market in international capital, investors could easily withdraw money from nations that tried to implement interventionist and redistributive policies.[3]
The resulting compromise was embodied in the Bretton Woods system, which was launched at the end of World War II. The system was liberal[4] in that it aimed to set up an open system of international trade in goods and services, facilitated by semi fixed exchange rates. Yet it also aimed to “embed” market forces into a framework where they could be regulated by national governments, with states able to control international capital flows by means of capital controls. New global multilateral institutions were created to support the new framework, such as the World Bank and theInternational Monetary Fund.
Source: Embedded liberalism – Wikipedia, the free encyclopedia.
Decoding Marxist rhetoric is never easy, but I think what these academic Marxists are trying to do is describe the rise of the mixed economy and the welfare state over the course of the early and middle parts of 20th century.
The welfare state was never an easy thing for your card-carrying Marxist looking forward to the immiserisation of the proletariat as the trigger for the proletarian revolution.
Embedded neoliberalism mostly all about what Aaron Director in the 1950s explained as the reasons for the growth of government in the 20th century. He put forward what George Stigler label for him Director’s Law of Public Expenditure. George Stigler published an article on this law because Aaron Director published next to nothing for reasons no one understands. Director founded law and economics through teaching law classes at the University of Chicago law school.
Long live the Slopegraph. Long live Edward Tufte. tinyurl.com/naeh7rc http://t.co/C8Lgnupxz9—
Amity Shlaes (@AmityShlaes) May 16, 2015
Sam Peltzman pointed out that most of modern public spending is supported by the median voter – the ‘swinging’ voter. He observed that governments at the start of the 20th century were a post office and a military; at the end of the 20th century, governments are a post office, a larger military and a very large welfare state.
Studies starting from Peltzman in 1980 showed that governments grew in line with the growth in the size and homogeneity of the middle class that was organised and politically articulate enough to implement a version of Director’s Law.
Director’s Law of public expenditure is that public expenditure is used primary for the benefit of the middle class, and is financed with taxes which are borne in considerable part by the poor and the rich. Based on the size of its population and its aggregate wealth, the middle class will always be the dominant voting bloc in a modern democracy. Growth in the size of governments across the developed world took off in the mid-20th century as the middle class blossomed. Peltzman maintained that:
“The levelling of income differences across a large part of the population … has in fact been a major source of the growth of government in the developed world over the last fifty years” because the levelling created “a broadening of the political base that stood to gain from redistribution generally and thus provided a fertile source of political support for expansion of specific programs. At the same time, these groups became more able to perceive and articulate that interest … [and] this simultaneous growth of ‘ability’ served to catalyse politically the spreading economic interest in redistribution.”
After the 1970s economic stagnation, the taxed, regulated and subsidised groups had an increasing incentive to converge on new, lower cost modes of income redistribution.
- economic reforms ensued, led by parties on the left and right, with some members of existing political and special interest groupings benefiting from joining new coalitions.
- More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups.
- Most of the subsidised groups benefited as well because their needs were met in ways that provoked less political opposition from the taxpaying groups.
Sweden, Norway and Denmark could be examples of Gary Becker’s idea that political systems converge on the more efficient modes of both regulation and income redistribution as their deadweight losses grew in the 1970s and 1980s and after. Unlike some of their brethren abroad, more of the Nordic Left and, more importantly, the Nordic median voter were cognizant of the power of incentives and to not killing the goose that laid the golden egg. Taxes on income from capital are low in Scandinavia.
The rising deadweight losses of taxes, transfers and regulation all limit the political value of inefficient redistributive policies. Tax and regulatory policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.
An improvement in the efficiency of either taxes or spending reduces political pressure from taxed and regulated groups for suppressing the growth of government and thereby increases total tax revenue and spending because there is less political opposition. Efficient taxes lead to higher taxes.
Improvements in the efficiency of taxes, regulation and in spending reduce political pressure from the taxed and regulated groups in society. This suppressed the growth of government and thus increased or prevented cuts to both total tax revenue and spending since 1980. Economic regulation lessened after 1980 and there were privatisations, but social and environmental regulation grew unabated. Certainly in New Zealand the post-1984 economic reforms followed a good 10 years of economic stagnation and regular economic crises:
In the early 1980s, New Zealand’s economy was in trouble. The country had lost its guaranteed export market when Britain joined the European Economic Union in 1973. The oil crisis that year had also taken a toll.
The post-1980 reforms of Thatcher, Reagan, Clinton, Hawke and Keating, Lange and Douglas and others saved the modern welfare state for the middle class. Most income transfer programmes in modern welfare states disproportionately benefit older people. With an aging society, that trend can only continue. That is why these reforming policies survived political competition, election after election. The political parties on the left and right that delivered efficient increments and streamlined the size of government were elected, and in turn, got thrown out from time to time because they became tired and flabby.
The rest of embedded neoliberalism is trying to explain widespread economic deregulation and liberalisation of international trade along with the continual growth of social regulation. This is something that Gary Becker, George Stigler and Sam Peltzman have written on previously.
The continued growth of social regulation is best explained by the median voter theorem. Both Bryan Caplan and Sam Peltzman pointed out that it’s hard to think of any major government program or regulation that does not enjoy widespread popular support.
As for the public been duped by neoliberal economists, George Stigler argued that ideas about economic reform need to wait for a market. As Stigler noted, when their day comes, economists seem to be the leaders of public opinion but when the views of economists are not so congenial to the current requirements of special interest groups and voting public, these economists are left to be the writers of letters to the editor in provincial newspapers. These days they would run an angry blog.
Child poverty by British Prime Minister since 1961
03 Nov 2015 Leave a comment
in economic growth, economic history, poverty and inequality
When I pointed out yesterday that the only periods of sustained real household income growth in recent British history was under those neoliberal lapdogs Thatcher and Blair, the Twitter Left on Reddit decided rather prematurely I might say that:
The prime minister rarely influences broad economic realities — like commodity prices or interest rates, or double digit economic growth in china. Elections frequently change the party in power AFTER the economy turns downwards. As though that party had anything to do with the down turn.
I’m sure that the morally centred Twitter Left will be equally forgiving of the sustained rise in child poverty due to many more workless households shown in the chart below under Thatchernomics. The only sustained fall in child poverty rates in recent British history was under Tony Blair. The British Left and current British Labour Party leadership dismiss him as a continuation of Thatchernomics.
Source: Incomes in the UK – Institute For Fiscal Studies – IFS.
Did the British disease pass retirees by? British retiree and non-retiree median real household income by Prime Minister since 1977
03 Nov 2015 Leave a comment
in applied welfare economics, economic growth, economic history, macroeconomics, poverty and inequality Tags: British economy, British politics, Margaret Thatcher, Tony Blair
The British disease and the horrors of Thatchernomics past British retirees by as did pretty much the Global Financial Crisis. Slow and steady as she goes under every Prime Minister since 1977 has been year in year out result for the real disposable median incomes of British retired households. Despite it all, British retiree household incomes increased by 170% since the winter of discontent. The fastest growth in retiree incomes was under Tony Blair.
Source: Release Edition Reference Tables – ONS.
Notes:
1 Households are ranked by their equivalised disposable incomes, using the modified-OECD scale.
2 1994/95 represents the financial year ending 1995, and similarly through to 2014/15, which represents the financial year ending 2015.
3 Income figures have been deflated to 2014/15 prices using an implied deflator for the household sector.
It has been a much rockier ride for British households yet to retire. Once again, the only time a sustained real income increases for non-retired households was under Thatcher and Blair. Despite it all, household real incomes have doubled since the winter of discontent. The majority of that doubling was under the dead hand of Tony Blair. British Labour now spends a considerable amount of time repudiating that time of unusually rapid household income growth across all of British society.
Source: Release Edition Reference Tables – ONS.
Notes:
1 Households are ranked by their equivalised disposable incomes, using the modified-OECD scale.
2 1994/95 represents the financial year ending 1995, and similarly through to 2014/15, which represents the financial year ending 2015.
3 Income figures have been deflated to 2014/15 prices using an implied deflator for the household sector.
Growth in median British real household incomes by Prime Minister since 1977
03 Nov 2015 2 Comments
in applied welfare economics, economic growth, economic history, macroeconomics
The only two periods of sustained increases in median equivalised British real household disposable income is was under Mrs Thatcher, once she got going on Thatchernomics and under Tony Blair. Despite the ups and downs, real household incomes more than doubled in Britain since the winter of discontent. Equivalised income takes account of changes in the composition of households such as more single-parent households and fewer children since 1977.
Source: Release Edition Reference Tables – ONS.
Notes:
1 Households are ranked by their equivalised disposable incomes, using the modified-OECD scale.
2 1994/95 represents the financial year ending 1995, and similarly through to 2014/15, which represents the financial year ending 2015.
3 Income figures have been deflated to 2014/15 prices using an implied deflator for the household sector
New Zealand is as rich as Mississippi on a PPP basis
01 Nov 2015 Leave a comment
in economic growth, politics - New Zealand, politics - USA
British detrended economic growth and the top 1% income share
31 Oct 2015 1 Comment
in economic growth, economic history, macroeconomics, Marxist economics, public economics
Max Roser seems upset that British inequality rose since the 1980s for the top 1%. Other measures of inequality did not rise such as for disposable income.
https://twitter.com/MaxCRoser/status/657509056052133888
At the same time as top income shares grew at a pace, as shown in the chart below, the British economy boomed under the Thatchernomics, and if the British Left is to believed, under Thatchernomics by another name under Tony Blair. I’m not suggesting much in the way of linkages but the British Left gets excited about the relationship between top income shares and British economic prosperity. Britain grew at well above the trend rate of growth for the USA in the 20th‘s century for most of the period of Thatchernomics despite rising top 1% income shares or maybe course of that. Let’s not get carried away about linkages.
Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/ and Anthony B Atkinson and Salvatore Morelli CHARTBOOK OF ECONOMIC INEQUALITY.
In the chart above, British economic growth since 1970 is detrended by the growth rate of the USA for the 20th century. The USA is taken to be the global technological frontier. A flat-line in the chart above is British growth at the same rate the USA which is 1.9%; a rising line is growth in that year faster than trend; and a falling line is growth below the trend rate growth.
@MaxCRoser the impact of the top 1% on Swedish economic growth
25 Oct 2015 Leave a comment
in applied welfare economics, economic growth, economic history, macroeconomics, Marxist economics Tags: endogenous growth theory, envy, Leftover Left, politics of envy, Sweden, top 1%
#Sweden: Inequality decreased hugely in the 20th century – but is now rising.
bit.ly/1DEBY1P https://t.co/MHPgp29AWZ—
Max Roser (@MaxCRoser) October 24, 2015
A fall in the share of the top 1% of total Swedish total incomes was in tune with the emergence of a new word in the English language which was Swedosclerosis. That was the long stagnation in the Swedish economy in the 1970s and the 1980s with Swedish economic growth well below that in the trend rate of growth in the USA. Only after an increase in the top 1% share in Sweden did economic growth start recovering to trend.
Source: Computed from OECD StatExtract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/
In the chart above, a flat-line in real GDP per working age Swede is growth at the trend rate of the US economy for the 20th century which was 1.9% per year. A falling line is Swedish growth below trend, a rising line is growth above that trend rate of 1.9% in Sweden. A trend rate of 1.9% is the trend rate of growth currently used by Edward Prescott for the USA in the 20th century.
Taxation as a % of GDP in Australia and NZ and New Zealand’s Lost Decades
18 Oct 2015 1 Comment
in applied price theory, applied welfare economics, economic growth, economic history, politics - New Zealand, public economics
Revenue is a percentage of GDP has always been higher in New Zealand as compared to Australia for as far back as data is available. Tax revenue grew by a third as a percentage of GDP between 1965 and 1989 in New Zealand with a sharp spike from 1984 onwards. The growth in tax revenues as percentage of Australian GDP was smoother rather than spikes such as in the mid-1980s in New Zealand.
Data extracted on 18 Oct 2015 02:10 UTC (GMT) from OECD.Stat.
Interestingly, this faster growth in the New Zealand tax revenues as a percentage of GDP coincided with the two lost decades of New Zealand growth between 1974 and 1992. Furthermore, the chart below shows that an emerging recovery in labour productivity in the early 1980s stalled when tax revenues started growing again as a percentage of New Zealand GDP.
Source: Computed from OECD StatExtract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/
Between 1974 and 1992, New Zealand lost 34% and productivity against trend of 1.9%. In the chart below, a flat line is growth at a rate equal to the trend rate of growth for the USA in the 20th century which is 1.9%. A falling line indicates growth at less than 1.9% for the year. A rising line means growth in excess of 1.9% for the year. The chart below confirms what the chart above says. Productivity stopped falling in the early 1980s then started falling rapidly at the same time that tax revenues spiked as percentage of GDP in the early 1980s.
Source: Computed from OECD StatExtract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/
in the above chart, Australia had pretty steady growth since about 1970. There is a productivity slowdown in the 1970s and above-average growth as the economy recovered from the Keating recession in the early 1990s. The so-called mining boom is hardly noticeable in Australia’s trend growth rate.
Labour productivity per British, Australian, Japanese and New Zealand per hour worked (% USA since 1950, PPP)
06 Oct 2015 1 Comment
in economic growth, economic history
Australia stopped its very slow catch up with the USA in labour productivity at the end of the 1970s. The dramatic Japanese catch up stopped at the beginning of the lost decades in 1993. New Zealand had a dramatic decline in the early 1970s followed by a slow decline since 1990 relative to US hourly productivity. The British stopped catching up with the USA in 1990 after a catch up between 1964 and 1990 in hourly real labour productivity.
Source: Data extracted on 05 Oct 2015 22:01 UTC (GMT) from OECD.Stat and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015, http://www.conference-board.org/data/economydatabase/
dodgy @OECD paper on inequality & growth doing the Twitter Left rounds again
05 Oct 2015 1 Comment
in economic growth, economic history, economics of education, human capital, politics - New Zealand, politics - USA, population economics, poverty and inequality Tags: economics of personality traits, economics of schools, education premium, endogenous growth theory, IMF, James Heckman, Leftover Left, OECD, student loans, top 1%, Twitter left
Rick Noack did a great job in the Washington Post today to concisely summarise the hypothesis behind the OECD’s claim that inequality holds back growth. In the case of New Zealand 15 ½ percentage points of economic growth was lost due to rising equality since the late 1980s.
Source: How inequality made these Western countries poorer – The Washington Post.
According to the OECD, it is all about the ability to lower middle class and working class families to finance the human capital investments of their children. The OECD theory of inequality and lower growth is there is a financing constraint because of inequality that reduces economic growth because of less human capital accumulation by lower income families.
Source: How inequality made these Western countries poorer – The Washington Post.
In an age of interest-free student loans or cheap student loans everywhere for several decades now at least, the OECD is nonetheless hanging its head on the notion that not enough has been done to ensure there is enough graduates from the lower middle class and working class families making it to university. Taylor also has the same problem as me with the OECD’s human capital and inequality nexus:
There are a few common patterns in economic growth. All high-income countries have near-universal K-12 public education to build up human capital, along with encouragement of higher education. All high-income countries have economies where most jobs are interrelated with private and public capital investment, thus leading to higher productivity and wages. All high-income economies are relatively open to foreign trade.
In addition, high-growth economies are societies that are willing to allow and even encourage a reasonable amount of disruption to existing patterns of jobs, consumption, and ownership. After all, economic growth means change.
One of the findings of the Coleman report in the 1960s, which is been pretty much backed up since then such as by top labour economists such as James Heckman, is family background is the key to skills development in children, not the quality of their schools or their access to finance for higher education.
Schools work with what families present to them in terms of innate ability, and personality traits such as to pay attention and work. There is not much difference between an average bad public school and an average good public school when it comes to getting on in life. Going to really bad public school is different from just going to an average bad public school in terms of the chaos imposes on a child’s education and upbringing. What matters is the home environment rather than the ability to access good schools and families of ordinary means to finance higher education for their teenagers.
Most of the skill gaps that are present at the age of 18 – skill gaps which substantially explain gaps in adult earnings and employment in all groups – are also present at the age of five (Cunha and Heckman 2007). There is much evidence to show that disadvantaged children have lower levels of soft skills (non-cognitive skills): motivation, persistence, self-discipline, the ability to work with others, the ability to defer gratification and plan ahead, etc. (Heckman 2008). Most of the skills that are acquired at school build on these soft skills that are moulded and reinforced within the family.
In 2002, with Pedro Carneiro, James Heckman showed that lack of access to credit is not a major constraint on the ability of young Americans to attend college. Short-term factors such as the ability to borrow to fund higher education has been found to be seriously wanting as an explanation for who and who does not go on to higher education.
Only a small percentage of young people are in any way constrained from going on to higher education because of the lack of money. This is not surprising in any society with student loans freely available at low or zero rates without any need to post collateral. Heavily subsidised tuition fees and cheap student loans have been around for several generations.
Source: James Heckman.
The biggest problem with the OECD hypothesis linking a lack of skill development within lower income and working class families is it is such an easy problem to solve for the ambitious politician of either the left or the right by throwing money at the problem. Schooling until the age of 16 has been free for a century and universities have been virtually free for at least two generations. Lack of access to a good education does not cut it as the explanation for large disparities in growth rates.
The OECD and more recently the IMF have placed a lot of weight in access to human capital as a driver of inequality because human capital accumulation is hypothesised to be a major driver of economic growth.
The evidence that human capital is a key contributor to higher economic growth is weakening rather than strengthening. If human capital accumulation is not a major driver of productivity growth and productivity disparities, the inequality and growth hypothesis of the OECD and the IMF based on access to finance for human capital accumulation does not get out of the gate. Moreover, as Aghion said:
Economists and others have proposed many channels through which education may affect growth–not merely the private returns to individuals’ greater human capital but also a variety of externalities.
For highly developed countries, the most frequently discussed externality is education investments’ fostering technological innovation, thereby making capital and labour more productive, generating income growth. Despite the enormous interest in the relationship between education and growth, the evidence is fragile at best.
The trend rate of productivity growth did not accelerate over the 20th century despite a massive rise in investments in human capital and R&D because of the rising cost of discovering and adapting new technological knowledge. The number of both R&D workers and highly educated workers increased many-fold over the 20th century in New Zealand and other OECD member countries including the global industrial leaders such as the USA, Japan and major EU member states.
Cross-country differences in total factor productivity are due to differences in the technologies that are actually used by a country and the degree in the efficiency with which these technologies are used. Differences in total factor productivity, rather than differences in the amount of human capital or physical capital per worker explain the majority of cross-country differences in per capita real incomes (Lucas 1990; Caselli 2005; Prescott 1998; Hall and Jones 1999; Jones and Romer 2010).
Differences in the skills of the individual worker or in the total stock of human capital of all workers in a country cannot explain cross national differences in value added per worker at the industry level.
- The USA competes with Japan for productivity leadership in many manufacturing industries.
- The Japanese services sector productivity can be as little as a one-third of that of the USA.
- Japanese labour productivity is almost twice Germany’s in producing automobiles and is better that Germany by a large margin for many other manufactured goods.
- The USA is uniformly more productive in services sector labour productivity. For example, British, French and German telecom workers were 38 to 56 per cent as productive as their American counter-parts.
The USA, Japan, France, the UK and Germany all have relatively well-educated, experienced and tested labour forces. For example, the 1993 McKinsey’s study inquired into the education and skills levels of Japanese and German steel workers. Comparably skilled German steel workers were half as productive as their Japanese counterparts (Prescott and Parente 2000, 2005).
The ability to finance human capital accumulation and go to good schools is a weak theory of inequality. Human capital accumulation itself is a weak theory of growth unless linked to sophisticated theories of the institutions fostering innovation and technology absorption which it now is.
To be fair, I will not point out that this period of rising inequality since 1980s so damned by the OECD and the Twitter Left in the Washington Post today coincided with the return of real wages growth in New Zealand after 20 years of wage stagnation. That would be kicking the Twitter Left when they are down. I was a sneak in a graph instead.
Data source: New Zealand Council of Trade Unions.
I will leave it for your own imagination to think of what happened to female labour force participation, the gender wage gap and female participation in higher education since the late 1980s and the onset of this horrific inequality which was mainly for men.
The failure of the Twitter Left to undertake a gender analysis of any labour force or income statistic they use is a major analytical shortcoming. Hardly any labour force statistics make any sense unless broken down by male and female outcomes.
Deirdre McCloskey on Bourgeois Equality: How Ideas, Not Capital, Changed the World
02 Oct 2015 Leave a comment
in applied price theory, constitutional political economy, economic growth, economic history, liberalism Tags: Deirdre McCloskey, The Great Enrichment, The Great Fact
This chart shows one of humanity's greatest modern accomplishments vox.com/2015/8/13/9145… http://t.co/QSxzps2i3Z—
Vox (@voxdotcom) August 13, 2015
Utopia, you are standing in it! 
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