Democracies fading? Thailand, Turkey, Ukraine…

People in America love Thai food. But beyond that, we don’t know much about Thailand as a country. It is a complicated place, caught between the conservative military and loyalists to the King, who have helped develop Bangkok into an international manufacturing and commercial center and Thailand into a prosperous exporter, and a new media-driven populist movement based in rural areas who are eager to share in Thailand’s economic growth, and get a larger share than they have gotten in the past.

Very roughly, this is the division between the “Yellow-shirts” (supporters of the first group) and the “red-shirts” (supporters of the second group). The critical support for the conservatives has come from the military; the critical leadership for the populists has come from the mobile phone tycoon Shinawatra family, Thaksin (Prime Minister 2001-2006) and his sister Yingluck (Prime Minister 2011-2014).

Thailand looked like another one of the promising, economically booming and democratic countries around the rim of East Asia (Japan, South Korea, Taiwan, Singapore, the Philippines, Indonesia). Then in 2006, the army staged a coup against Thaksin Shinawatra, replacing him with a conservative government and triggering massive protests by the red-shirt movement. The army cracked down hard in response, with gunfire in the streets. At the time, I wrote that this boded ill for democracy; once the military uses force to maintain power it is hard to go back to accepting popular legitimacy as the only route to power.

I was therefore happily surprised when the army allowed Thaksin’s sister Yingluck to run for office and take power after leading her brother’s party to a landslide victory. But it was not as simple as that. A few years into office, after trying to set the stage for her brother’s return, the conservatives struck back. The Constitutional court found grounds to dismiss Yingluck from the post of Prime Minister. Her party chose a caretaker government and called new elections; but due to a boycott by the opposition, the courts declared the new elections invalid. So the current government exists without a political mandate.

Naturally, the yellow-shirts want the current government to resign and have a conservative government appointed to rule in its place. They claim that until this happens, no fair election can be held, and have been protesting in the streets to demand this. The red-shirts have argued that their popularly-elected leader is being unfairly driven from office.

Yesterday, the army declared martial law in order to restore order. They claim this is NOT a coup. (Observers have called it a “Semi-coup.”) But what will happen to democracy? The Shinawatra’s party has the overwhelming support of the majority of Thailand’s people. But that support is very concentrated in the rural areas and Northern portions of the country. In the south and in Bangkok, the military and royalist parties have substantial support.   We thus have the spectacle of a country sharply divided between regions who support different leaders and different visions of their country.

This is a particularly difficult problem for a parliamentary country, where the chief executive represents only the ruling party, and the legislature is run by them as well.  It is hard to assure minorities their rights, or manage a compromise, in such conditions.  And it is doubly hard when the courts become politicized, dominated by the interests of one or the other party as well.

Turkey now finds itself in the same difficulty.  The AKP, led by Prime Minister Erdogan, has rock-solid support in the pious Anatolian heartland of the country, where the conservative business community has prospered and the Islamist population have supported them.  But in Istanbul and Ankara, and along the western coast, a more cosmopolitan population wants a more relaxed and secular regime, more attention to green issues and less tolerance of corruption.  The protests over Gezi Square park and other issues have polarized the country, making Erdogan more defiant and determined to have his way, and more disdainful and dismissive of those who disagree with him.  In recent months, he has packed the courts and media with his supporters, and wielding a solid parliamentary majority, there is little his opponents can do about it.  Democratic freedoms of protest and media criticism are being trampled; the independence of the courts has been sharply reduced, and anger at Erdogan’s disregard for the views of the population who do not support him is growing.  Yet Erdogan seems eager to pursue polarization.  At a recent visit to Soma, where a terrible mining disaster took the lives of over three hundred Turks, Erdogan’s staff kicked one protestor and Erdogan himself apparently slapped another.  Protestors wanted an apology from the government, as the opposition had requested a safety review of the formerly government-owned, recently privatized mine a month ago, but were rebuffed by Erdogan’s party.  They got nothing of the sort, just a statement that accidents like this are normal.

Erdogan is now setting the stage to run for the Presidency this year.  If he wins, it increasingly looks like it will be a one-man, one-party regime.

Ukraine is very clearly headed for the same difficulty — a country that is sharply divided across regions with different goals and visions of their country.  The west wants to be a European country and part of the European community.  The east distrusts Europe and wants to be closer to Russia, feeling that their cultural cousins and historical partners will in fact care more and do more for them than the distant Europeans against whom they fought in WWII.

How to manage such divided countries?  I have been rereading The Federalist Papers, and you have to marvel at the foresight and ingenuity of our founding fathers.  They anticipated that their country would expand over an ever-larger territory and risked being divided.  In fact, they knew from the need to manage the issue of slavery that they already had a divided country, with the plantation/agrarian/slaveholding south holding a different view of America’s future than the smallholder/commercial/manufacturing and free labor north.  So they put multiple protections into the government — a legislature with non-proportional representation (the Senate) that gave all states an equal vote regardless of size, and a complicated procedure for selecting a president and vice-president that pretty much ensured the President had to carry a majority of votes in a majority of the states, not just a simple majority of the total votes which might be heavily concentrated in one region.

The essence of democracy is compromise, not confrontation; giving everyone, including minorities, a sense that their interests are secure and will be represented, not trampled by the regime.  Madison argued that simple parliamentary regimes could lead to the tyranny of the majority, which a carefully designed republican form of government could prevent.

There is a clear lesson here for states like Thailand, Turkey, and Ukraine.  They need constitutions that assure all regions and views can be represented; that the  rights of all groups will always be  protected even if they are not in the majority; and that require numerous and broad compromises for laws to be enacted.  In recent years, it has become fashionable to bemoan the inefficiency and polarization of America’s divided government, calling it dysfunctional.  Yet we should recall that the ultimate function of America’s complicated political system is to preserve democracy for all.  In that it has succeeded, and the travails of countries such as Thailand, Turkey, and Ukraine show us why.

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A Great Country

I grew up in a great country. True, we only had one bathroom for a family of four; getting two cars for the family seemed like a dream come true, and travel for vacations was never much more than a 2 hour drive to Lake Tahoe (until age 18, my only travel outside of California was one trip to Hawai’i for a “once in a lifetime” vacation). I spent most of the very rainy winters playing pinochle and singing songs with my friends, summers in a day-camp in San Rafael hunting for scorpions, deer bones, and arrowheads or swimming in a lake and riding horses (and shoveling out the stalls afterwards!). From the age of 10, I spent many of my Saturdays working in our family business for a pittance; but if it was enough to buy a plastic model of a naval ship or a fighter plane to glue together in my spare time, I was happy to do it. The nearby Golden Gate Park and Sunset Beach were free, open, and well-maintained playgrounds, and the city was safe enough for a 14 year old to travel almost anywhere by public bus and streetcar. And oh yes, we could fill our time listening to the greatest new music ever – from Elvis and Johnny Cash to the Stones, Beatles, Beach Boys, Zepellin, Airplane, Simon & Garfunkel and so much more.

What made it especially great was our optimism about the future. Our country’s free public education system, starting in kindergarten, was the best in the world. If you could go to college and become a lawyer, doctor, engineer, accountant, or professor, you were assured a prosperous middle class life. And that college degree was available for free at some of the best universities in the world for anyone who qualified to enter. Business was another option, but didn’t seem all that glamorous: bankers had great hours but incomes not any greater than other successful professionals. Even becoming a high-school teacher seemed like an interesting, secure job that would provide a solid income to raise a family, and almost any white male with a 9-5 job got decent health care, and a paycheck that would cover a home, car, some vacations, and savings for the future. We knew things were getting better because since 1950, incomes of average folks had been going steadily upwards. And you could be almost certain of a decent pension when you retired. True, if you were black or a woman, your opportunities were still quite limited, and you had to fight enormously hard against prevailing social norms to get any kind of important position. For Latinos and Asians, things were not much better.

Today, I live in a very different country. Where I live today, if you are not a business executive or in investment banking, it’s almost impossible to have a top-tier income. I “made it” to become a successful research professor, with a greater income than I ever imagined when I was working for cents on the hour unpacking merchandise crates in the back room of my family business. Yet it is still often a struggle to live somewhere to obtain, or to pay for, a top-quality high school for my kids (overall, the 16-24 years olds in the country where I live now have the worst performance on technology and numeracy tests in any developed country in the world), to afford decent health care (women in my country now are twice as likely to die in pregnancy or childbirth as women in Canada, and infant mortality ranks 34th in the world), or even to manage the costs of keeping up a car, a house, and to save anything for times ahead. I’m not alone in that; most people in my country in their 50s and 60s have wholly inadequate savings for retirement, will not get a government or job-guaranteed pension that meets their needs, and will likely have to keep working much longer than they expected just to get by. And as for college, the days of the free four-year degree are a distant memory; where I live today the same university degree that cost nothing beyond the cost of used books and travel to campus where I grew up now costs over $30,000 per year for local residents, and almost $60,000 for those coming from further away. What’s more, even when youngsters here get a college degree, their future may still be limited; upward social mobility in the country where I now live is the lowest in the developed world, with kids in Denmark twice as likely to move up if born into a low-income family as kids here.

Of course, it is all the same country: The U.S.A. Most of this data is taken from a recent op-ed by Nicholas Kristoff in the NY Times.  Kristoff is one of many who have been pointing to how much the U.S. has changed in things that really matter to people in the last forty years. Of course, if you are lucky enough to make it into the top tenth of the top one percent, you are one-in-a-thousand and doing better than anyone in living memory. That’s 300,000 people who collectively have more wealth than the other 270 million Americans in the bottom 90%.

The big book on inequality at the moment is Thomas Piketty’s Capital in the 21st Century, which argues that this is the natural tendency of capitalism, and that the country that I grew up in – American in the 1950s and 1960s – was an anomalous place in an anomalous time. It benefited from the great destruction of accumulated wealth in the Depression and WWII, and the fact that America alone among wealthy countries avoided the devastation of the great war. With a unique global position, and a special period in technology that was boosting productivity but not yet enabling the outsourcing or replacement of workers on a large scale, the growth of average incomes and the reduction of inequality of that period was a once-in-forever situation that we will not see again.

And yet I can’t quite believe that’s the whole story. The country that I lived in believed in the future and invested for it. We put children first in building schools and parks (of course with the fast expanding youth cohort of the baby boom bursting upon us, we had to build new schools, train new teachers in the latest methods, build new colleges and fund them, or we would have had a generation of kids growing up in the streets.) We built up social security and medicare, created the interstate highway system and electrified America, and by the early 1970s we even tackled our terrible air and water pollution head-on in the Clean Air and Clean Water Acts. We fought a terrible war with tragic mistakes in Vietnam, but we thought we had learned our lesson (only to find out in Iraq and Afghanistan that this was untrue).

We did all of this with very progressive taxes – from 1941 to 1981, the top income tax rate was over 70%, and the tax rate on inherited estates was also 70% or higher – rates that today would be equated with instant economic collapse. Yet the U.S. thrived. Stock options and 15% capital gains rates weren’t yet around, so it was darn hard to get filthy rich just by having a managerial job. So instead, top managers sought to increase their power and influence by expanding the size of their companies and their work forces – a very different incentive than squeezing out costs (and workers) as much as possible to maximize profits for executives and share-holders.

A different book from Piketty’s that I think explains more is Hedrick Smith’s Who Stole the American Dream?  Smith shows how it was a deliberate decision of executives in America to campaign for a system of rewards and incentives that would let them maximize their wealth, while minimizing the share of national income that went to everyone else in the form of either wages or public spending or government benefits. The real fundamental change in America is that from the 1940s to the 1960s, to greatly simplify, we believed that broad social benefits and gains were good, and concentrated individual wealth was bad (a belief held over from the early days of the country, when the founding fathers, rich themselves but only middle class by the standards of European aristocrats, sought to discourage the formation of an aristocracy of wealth in the US, a trend reinforced in the Jacksonian era, and again in the Progressive era as well.) So we arranged our social and economic institutions to provide broad social benefits, and make it difficult to accumulate and pass on concentrated personal wealth.

Of course, we still applauded, rewarded, and encouraged people who built great businesses. The people who founded and ran Ford, General Motors, Bell Telephone, Bank of America, IBM, Xerox, and tens of thousands of other companies, and who invested in real estate in New York and California still got rich and were regarded as the natural leaders of society. They had schools and libraries named after them too, appeared on magazine covers, and were revered for creating “the affluent society” in the words of Harvard economist John Galbraith. Yet that was the point – they were lauded for creating an affluent society, not for being as personally wealthy, compared to fellow-Americans, as princes or kings of yore.

What has changed is that today we have a system that scrimps on providing social benefits but maximizes the personal return on high-end capital intensive activities, so that those with large amounts of capital, or those who manage large amounts of capital, find it easy to accumulate ever larger amounts of capital for themselves. High marginal tax rates encouraged those in earlier decades, once they had achieve a certain income, to put their time and effort into other things than further increasing their own incomes; today both the tax and basic reward structures (stock options and low capital-gains rates) do the reverse, encouraging people to continue to find ways to increase their personal incomes because they reap almost all the benefits for themselves.

The confusion over more progressive taxes is often severe because they are portrayed as an attack on successful business people. That is not right. Successful people DO deserve to be exceptionally rewarded. But the choice is over how they should be rewarded. Should it be with fame, adulation, respect, and power, or with as much personal material wealth as possible? There is nothing in the stars or the constitution that says a society can survive only by providing the maximum in concentrated material wealth to its economic elite. After all, scientists, soldiers, politicians, teachers, and government officials are all expected to excel at their jobs with modest material rewards; why should a bank manager be different from a general or a top civil official in what motivates them to perform well?

In fact, there is quite a lot of historical evidence that an over-concentration of wealth, as opposed to growing and generous rewards, for the economic elite is dangerous to a society’s well-being. If ordinary people are unlikely to benefit from growth, they will eventually be discouraged and not invest in their own human capital; or they may attack the rich as such or the economic assets of the society, rather than simply modifying the reward structure to keep motivating economic effort and success. The road to socialism, in fact, has not come from too-generous investment in promoting broad social prosperity. Historically, the road to socialism has been the conspicuous over-concentration of wealth for personal benefits to the few at the expense of the many, leading to a revolt against the social order and demands for radical change.

I believe in capitalism, and I do not believe it has an inherent tendency to concentrate wealth. Capitalism only survives when governments insure contracts and private property, and they can do that under a variety of conditions and terms. In Canada for example, no less a success in capitalism than the United States, the top 1% of income earners take home 10% of total income, not the 23% taken by the top 1% in the U.S. In Germany, another success, the top 1% take home under 10%. So evidently government policies, not iron laws of capitalism, make a rather large difference, and having a rising share of growth going to top earners is not necessary for an economy to do well.

Thus our problem is not how to tax the rich or redistribute income; it is how to make sure capitalism works for the benefit of all. Other countries do this much better than we do, and unsurprisingly, the result is that they score much better than the U.S. on measures of health and education while doing no worse (often better) on overall economic growth.

Oh by the way, we used to be one of those “other” countries. Can we be again?

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Apologies to all; had a slight crash and lost the last few lines of yesterday’s post. It appears in complete form below. Thanks for your patience!

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Back in the USSR

I am back in Moscow, in the USSR (er, Russia). But more than at any time recently, it feels like the USSR. Not economically; stunning new apartment towers are gleaming in the late May sunlight, women are smartly dressed in European jeans and heels, and the stores — very unlike the Soviet Days — are full of everything from the latest French beauty creams to Italian designer goods. German and Japanese cars fill the streets.

Nonetheless, the anti-Western hyper-patriotic mood is strong. “Victory in Europe” Day, May 9, which celebrates the victory over Nazi Germany, was celebrated with a special “whoop” this year. After all, Crimea’s joining the Russian Federation is being portrayed as “saving” its loyal population from the neo-Nazi fascists in Kiev, giving people today a taste of “Victory in Europe” in the here and now.

And the blare of propaganda, the way people are careful choosing their words about politics, and anxiety about what competition with the West (not cooperation, which seems lost) will bring, seem to hark back to Cold War Days.

Where is this heading? It is difficult to know. I remain hopeful, perhaps irrationally, that Putin has succeeded and will not move further into Ukraine. At this point, at minimal cost, Putin has secured Crimea, and shown that Ukraine is vulnerable to being split wide open if its government tries to pull the country too far toward Europe and away from Russia. For any government in Kiev, it should now be obvious that the only way to keep a united Ukraine is to pursue a course balancing between Europe and Russia, and compromising between the radical Ukrainian nationalism found in the western part of the country and the pro-Russian identification found in the eastern part.

This means that a united Ukraine will not join the EU or NATO anytime soon, which is Putin’s main goal. So in that sense, he has already obtained success. If things go further, with additional parts of Ukraine being split off or absorbed into Russia, the result will almost certainly be much more severe and painful sanctions, and a rump western Ukraine that will feel driven into the arms of NATO, creating a NATO state right on the border of Russia, which is exactly what Putin has been trying to avoid. So given these choices — stop now and reap all the desired benefits at little cost, or continue to pry apart the Ukraine and lose all the desired benefits and suffer a much higher cost — it seems reasonable to suspect that when Putin calls for negotiations among the government in Kiev and its eastern regions, and says he intends to pull his troops back to encourage peaceful progress, he is sincere. At this point, further deterioration of the situation in Eastern Ukraine will likely do Russia more harm than good.

Still, things have a way of spinning out of control once a revolution has begun, and as I have maintained, what began last December in Ukraine is a true revolution. The elections that took place this weekend may lead to new calls by rebels in Eastern Ukraine for Russia to accept them; how Russia reacts will be the best test yet of Putin’s plans.

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Busy week

Sorry it’s been a longer gap in this space than usual. I am — despite, or because of — the situation, I am flying to Moscow today. Plus it was a week of interesting events in New York. Updates coming this weekend, so stay tuned!

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Is China the new Number 1 Economy, and India Number 3?

According to new figures issued this week by the World Bank, estimating the Gross Domestic Product for countries across the world, the rankings of major economic powers are in for a shake-up.

The new numbers show that China has nearly caught up to the US in economic output; in 2012 its GDP was already over 75% as large as America’s.  If current growth rates are maintained (7.5% per year for China, 2% per year for the U.S.), then China’s economy will surpass that of the US in six years, becoming the largest in the world. India, according to the new figures, had already become number 3 by 2012, bypassing Japan!  Russia, despite its problems, jumps up to become the sixth largest economy in the world, Brazil is at number 8, Mexico at number 11, and Turkey is at number 15, right behind Canada (thus making Turkey’s goal of becoming a top 20 economy a reality). Even more surprising, Iran comes in at number 18, despite sanctions, ahead of Saudi Arabia, and Egypt in 2012, despite its problems, shows up as the 24th largest economy in the world.

Fascinating — but are these numbers believable? This is just one ranking, and an alternative ranking, also from the World Bank, shows very different numbers.  The numbers above are based on comparing economies at Purchasing Power Parity (PPP), adjusting the entire economy for the relative purchasing power of their currencies to buy goods and services in their own economy.   A different ranking arises if we use a measure based on current exchange rates (e.g. how large is the Chinese economy if it’s total output in renminbi was converted to dollars).    One way to think of this is that if China were to sell ALL the output of its economy to American buyers making their purchases in current dollars, how much of the U.S. economy would it be able to buy with the money it raised by selling ALL of its output of goods and services?

In this current exchange rate approach, China’s economy is not 75% as large as America’s, but only 51% as large.  With that ranking, at current growth rates (same as above), it would take 13 years for China to surpass America’s economy; and if China’s growth rate should drop from 7.5 percent per year to average 6 percent per year over that period, it would take 18 years to catch the U.S.   So the U.S. is not really in danger of becoming #2 in the next decade, or perhaps even two, by this measure.  Moreover, in this mode of measuring economies, India’s economy is not larger than Japan’s, but only 30% as large;  Iran shifts from being roughly the same size economy as Australia to being only one-third as large; and Egypt drops to 39th, just behind Israel, whereas in the PPP rankings Egypt’s economy is twice the size of Israel’s.

Clearly, it makes a HUGE difference in comparing economies whether we assess them in PPP terms or in current exchange terms.  Many economists seem to prefer PPP estimates today.  They say this is because currency exchange rates can fluctuate wildly from year to year and even month to month — for example, the Russian ruble sank by 10% compared to the U.S. dollar in the last six months; would you then want to say that the entire Russian economy shrank by 10% relative to the U.S. economy?   Exchange rates can also be manipulated by governments, holding them lower or higher for extended periods.  That is true.  Yet I think that using PPP adjusted figures is the wrong way to compare economies as a whole.

Let us use the example of Russia.  If sanctions cause capital to flee and the ruble to sink, that IS real economic pain.  It may not change what Russians can buy inside Russia with rubles that much (although inflation has undercut that a bit).  But it immediately affects what Russia can buy on the world market with its own resources.  And that does suggest an alteration in its relative economic strength as a nation compared to others.

PPP adjustment takes into account the local costs of goods and services.  So, for example, if a Chinese household needs to buy 10 kilos of rice each week to feed the family, how do we value the income used for that purchase in GDP, versus what an American would pay for that much rice in America?  If we just added it up in current prices, and locally produced rice in China is very cheap, because labor and land are much cheaper than in the US, we would say that 10 kilos of rice consumed in China has much LESS value for GDP than 10 kilos of rice consumed in America.  The same for anything else.  For example, a nice apartment in Guangzhou costs a bit less than a similar apartment in San Francisco; so do we add all the housing costs up and say that housing consumption in Guangzhou is less than in San Francisco even if people have equivalent homes, just because real estate prices in San Francisco are higher?   In other words, PPP adjusted figures try to give GDP in terms of the things people actually have, the physical goods and services people buy each year.  So the PPP adjusted figures tell us that in 2012, the total amount of steel, cement, housing, rice, cars, meat, copper, even smart phones and laptops, actually purchased in China was about 75% of the value of the physical commodities and tangible services purchased that year in the U.S.

Now to my mind, that kind of PPP adjustment is valid, even essential, if we are comparing living standards across countries.  That is, if a Chinese household has a four-bedroom apartment, buys 10 kilos of rice and 3 kilos of meat each week, has a car and takes an international vacation, we want to compare that level of consumption with levels of consumption of households in other countries — regardless of whether the prices of rice and meat and apartments and cars in China is lower or higher than in other countries.  We would want to somehow adjust out price fluctuations and differences in price levels to get at actual consumption, and that is exactly what the PPP adjustment does.

However, when you use that adjustment to measure the consumption of entire nations, major distortions creep in.  After all, while you can compare the consumption of households, nations have VERY DIFFERENT kinds of consumption.  For example, in China today, fully one-half of GDP is investment, bulk purchases (often by government owned or backed companies) of steel and cement and copper and earth-moving and construction equipment to build cities, train lines, and power stations.  In most other countries, investment is a quarter or less of the economy, and consumer consumption is far greater.  So how do you assess the precise mix of goods and services and adjust for the amount and quality of goods that people are actually buying?

The answer is that you usually don’t.  Instead, PPP adjustments are based on a standard basket of commodities and services that is supposed to mirror what most people in the economy consume.  But as economies change and consumption patterns are altered, very VERY big adjustments in PPP corrections are sometimes required.

In 2007, the World Bank suddenly decided it had the consumption bundles in China wrong, and that consumption in an increasingly urban and expensive China was greater, and local prices not generally as low, as it had thought.   So it adjusted China’s PPP measured GDP downwards by 40%.   When compared to the U.S., the adjustment meant that China’s GDP fell from 71% of the US to 43% — a similar adjustment today would again set China back compared to the U.S.

Of course, when you visit any of China’s major cities today — Beijing, Shanghai, Guangzhou, Shenzen — the fancy restaurants, elegant apartment towers, endless ring roads filled with cars, and vast shopping centers filled with quality goods scream that China has caught up with the West.  And it has, at least in the better areas of the major coastal cities.  But that is only a slice of China’s economy and society; and for two-thirds of Chinese, living standards remain much lower.   Whether the overall size of China’s economy is really 50% or 75%  as large as America’s depends on how you value the consumption of that other two-thirds of China; at consumption in local prices at international exchange rates, which are low, or in consumption at prices adjusted for local purchasing power, by which the value of their consumption is much higher.

But perhaps more important is the PPP adjustment for countries like Iran and Egypt — is the former really as large an economy as Australia?  Or the latter really twice as large an economy as Israel’s?   Here the PPP scaled GDP figures make much less sense.

What the PPP adjustments inevitably do is raise the value of daily food and clothing consumption by poor people consuming local products.  In poor economies, food and clothing and most housing is much cheaper than the same items would be in rich industrial economies.  So in international exchange terms, the value of mass consumption by vast numbers of poor people doesn’t count for much.  All the rice consumed by the 1.3 billion people in India, valued at the cost of rice in India, isn’t a huge number in international value terms.  But if you raise the value of that rice consumption to an adjusted figure, say to what the cost of rice would be in Japan, then the value of India’s total consumption shoots up and surpasses the value of Japan’s economy.  By contrast, small but rich countries generate a lot of goods that have high values on international currency exchange markets — the cost of a Nikon camera is high in Japan, Hong Kong, or America, and so where a lot of fancy cameras are consumed, PPP adjustments are small.  But when we are talking about local goods like rice or cotton shirts, which are very much cheaper in local markets in poor countries, the adjustments are quite large.

So large countries with low income per capita and lots of consumption of locally produced and priced goods tend to benefit a lot from the PPP adjustments — Iran and Egypt, for example.  Small countries with high income that consume lots of internationally-priced goods, like Japan and Israel, have small PPP adjustments and thus fall behind larger poor countries when the PPP adjustments are made.

So what is the best measure of reality?  Will China have another major downward adjustment of its PPP-adjusted GDP when the Bank again assesses the complexity and consumption baskets of the country, as happened in 2007?   I should point out that adjustments can also go the other way.  Nigeria this year recorded an 89% increase in GDP — not by any magical super growth, but by rebasing its GDP measurements in current prices, to take better account of production of services, communications, electronics, entertainment and other items that were virtually absent from its GDP index in 1990 when it was last revised.  But that adjustment had no effect on the living standards of the tens of millions of Nigerians living in desperate poverty!

So my advice is: Take all GDP measures with caution.  To compare the real-world power of global economies for nations as a whole, take the GDP in current international exchange rates.  Yes, currency exchange rates fluctuate and can be manipulated, but this is a better measure of an economy’s ability to produce and purchase high-value internationally traded goods and services, whether it is oil, iron ore, and copper or airplanes, cameras, and computers.  But to compare the standard of living of households in different countries, use the GDP/capita measures in PPP adjusted terms, to get more closely at actual consumption levels.  But use caution here too, and look at poverty levels, infant mortality, and income inequality to get a better sense of whether the average GDP/capita is misleading as to how people are faring.

Confusing?  Yes.  But imagine your country’s GDP was suddenly adjusted up by 89%, or downward by 40%, overnight.  You would wake up, and nothing would be changed — except the rank of your country is some tables published by international agencies.  So keep a look out, and remember there are lies, damn lies, and statistics.


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A Blast from the Past

On a recent flight from Geneva to Moscow, I noticed a familiar face in First Class (as I passed through on my way to the economy seats).  It was the Italian actress Sophia Loren, now 79 but still a commanding presence.

I mention this because I recently saw that Ms. Loren who rose to fame in films in the late 1950s, 1960s, and 1970s, was ranked as the highest paid actress of 2013!   Income from residuals for showings of her movies, advertising endorsements, product lines, and other related business ventures lifted her income above that of any actress performing today.

I really shouldn’t be surprised.  The Beatles, who disbanded in 1970, and Elvis Presley, who passed away in 1977, are still the top-selling recording artists of all time.  I listen to satellite radio in my car (Sirius-XM), and I am always glad there are so many, many stations playing classic rock, classic vinyl, and hits from the 60s and 70s.  What surprises me is that teen-age children listen to exactly the same music.  While I have since acquired a healthy admiration for the music of Frank Sinatra, George Gershwin, and Cole Porter, I have to say that most of the music of the 1930s and 1940s left me flat; and still does.  Yet today, songs that were hits fifty years ago are as popular as ever.

I thought this was perhaps just a feature of pop music, for after all the 1960s were a golden age.  British pop, folk, rock, heavy metal, and everything in between thrived in those days of great invention.  But as I look at the movie screens today, the blockbuster hits are overwhelmingly from the comic books I devoured in the 1960s — Avengers, Spider Man, Iron Man, Thor, Batman.

So why is it that the last fifty years have found it so hard to eclipse the popular entertainment innovations of the 1960s era?

It may be that we have too many choices now, with audiences so divided among YouTube and cable channels and do-it-yourself internet production that it’s hard for anyone today to claim a dominant audience.  Yet I do not think that’s it.  Real talents, like Nora Jones, or Adele, can still come out of nowhere and find a global audience. But even they may not have the staying power of even the Beach Boys or Supertramp, not to mention the Beatles or the Rolling Stones.

No, it just seems that there isn’t as much that is new and exciting.  This may have to do with life itself getting to be more of the same old, same old (and excuse me if this is just nostalgia from an aging baby boomer, but I think there is an important sociological and economic argument here).

My colleague Tyler Cowen reminds me that we are living in the best of all known worlds.  Infant mortality, even in the poorest countries, is a fraction of what it was for most of history.  We have operations and pills for almost everything (my brother survived a bout of deadly illness that he likely would not have survived in the 1960s).  Things that were aspirations and dreams for most people in the 1950s — air conditioning, washing machines and dryers (most people, like my family, still dried their laundry on outdoor clotheslines in the 1950s), color TVs, multiple cars, vacations with air travel — are now commonplace elements of middle class life.  The world as a whole is safer, healthier, and more accessible than ever.

And yet, do most people feel the quality of their life is better?  I have a cell phone in my pocket that serves, in one neat package, as a telephone, music player, radio, calculator, address book, calendar, flashlight, email/message center, newspaper, alarm clock, etc.  But except for email, it doesn’t actually let me do more than I did before on my telephone, music-player, radio, calculator, address book, etc.  Because of computers, I no longer can ask for a secretary (standard for most full professors at major universities 50 years ago).  Yes, I can call up my own plane tickets, read my own emails, type and edit my own manuscripts, and do all the things I once would have had to rely on a secretary to help me accomplish.  But I don’t spend any less time on work, and I don’t think I can claim my work is any better, than that of the distinguished faculty under whom I studied 40 years ago.

And yes, cars are more efficient and more comfortable than they were 50 years ago; but the cars of the 1960s were super-cool and just as fast (and in today’s traffic congestion, using cars doesn’t get you anywhere you want to go faster than a generation ago).  Airplanes too are much more efficient, and carry far more people to more places at much cheaper prices.  But the charm of air travel has been lost for those of us still flying economy commercial fares (private jets still have some romance, or so I’m told).  And waiting for two hours to get through check-in and security for a two-hour flight to an airport two hours from your city destination makes air travel seem clumsy today.

So while we do have incredible video games and movie special effects that were unattainable just a few years ago; and we have some cheaper amenities, the bottom line for me is that our cars and planes are not significantly more enjoyable, our furniture and clothing no more comfortable, our heating and cooling not much cheaper, and the hourly pressures of day to day life not less, than they were decades ago.

There has been some social progress, to be sure.  Minorities, gays, and women have far more freedom and opportunities than they did in the 1960s, even if true equality remains a goal.  We no longer need a military draft.  Crime, especially homicides, have fallen dramatically. And more people go to college than ever.

Yet some of the most crucial aspects of middle class life — college education, good elementary and secondary schools, medical care, open public space and recreation — have become far more expensive than before.  My kids can go to any Best Buy and for $1000 get computing power in a laptop that beats what took up a whole room at UC Berkeley in the 1960s.  But if they wanted to actually go to UC Berkeley to get a degree, it is ten times more expensive, and many times more difficult to get into, than it was in the 1960s, when virtually any high school graduate with a B+ average could go to a UC for almost free.

And what are today’s equivalents of the washers and dryers, color TVs, air travel, cars, air conditioners, and other things that suddenly, in the 1950s and 1960s, transformed middle class life?   Is the flat-screen TV or X-Box the new game-changer?  If you ask me today, what can a family buy for $500 that would change their life as much as a washer or dryer or air-conditioner or TV did in the 1950s for families that didn’t have such amenities, I can’t think of one.  Can you?

So let’s enjoy the blasts from the past while we have them — Sophia Loren movies, Beatles’ records, Marvel films, and such.  And of course enjoy Apple’s latest toys.  But meanwhile, let’s think about what we could wish for that would be affordable, really improve the quality of life for people, and make us feel that we were living in an exciting, ever improving age where life if more convenient, more fun, and more enjoyable.

Google glasses, anyone?


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