Lies, damned lies, and electioneering statistics: wealth is just accumulating at the top

In my last blog, I lamented the rise of questionable facts in the election campaign, as politicians bid for votes. I used the claim that there is a “tide of privatisation in our NHS” as case study. I now examine the claim that “The last four decades have seen wealth accumulate at the top of society while those at the bottom struggle to get by." The rich are getting richer, but so are the poor

The world is getting better. Just look at three of the key UN measures of poverty and living standards.

• Since 1990 extreme poverty (measured as living on less than $1.25) has more than halved.
• Since 1990 the proportion of people without drinking water has also more than halved.
• Since 1990 child mortality (deaths under the age of 5 per 1000 live births) has – you guessed it - more than halved.

For more on our better world, read Matt Ridley’s classic The Rational Optimist.

What about poverty in Britain? It’s getting better too.

Since 1977 disposable income for the poorest fifth of households in Britain has nearly doubled (even after taking account of inflation and changes in household structures). With the recent turnaround in the economy, and greater incentives to work from welfare reform, the employment rate and average income of the bottom fifth should continue to rise.

Even measures of inequality have been relatively stable since the late 80s.

Income stats hide services the poor can consume from the state

Income statistics only tell some of the story though. The poor are better off than is initially claimed. Firstly, these income statistics and most others, focus on disposable income. They don’t take into account the wide range of services that the poor consume from the state, free at the point of use.

Income statistics are a static snapshot, they don’t capture generational gains

Secondly, income statistics don’t capture individual progress across generations. The young are poor, indebted and have no assets. The middle aged at the peak of their careers are richer, have paid debts off, own property and have made some savings towards retirement. The young will all one day become old and with time, have opportunities to better their lot.

Income statistics don’t reflect the benefits of innovation

Finally, income and wealth don’t reflect the great technological advances of the last four decades. People in Britain are vastly better off today thanks to innovation, particularly driven by the private sector. The poor consume more services as the costs of the basics has fallen as a proportion of income, and have access to new services altogether.

Take computing, which has gone from a luxury good restricted to the super rich and big companies, to being accessible to all. A gigabyte of data storage cost around £200,000 in 1980. Today I was able to find storage on amazon at just 3 pence per gigabyte - cloud services will even give you a load for free. In 1980 we didn’t have mobile phones, today there are 1.3 per person in the UK and 86% of people use the internet. The pace of technology adoption is speeding up too.

An honest debate would reflect on our success and focus on creating more opportunities

For growth we want good institutions—democracy is irrelevant

It is eternally surprising to me that people keep doing studies of whether democracy affects growth using the same cross-country data but their regular findings—that institutions and the rule of law matter but democracy doesn't—are less of a surprise. The latest, "Democracy and Growth: A Dynamic Panel Data Study" (pdf) is from Jeffry Jacob, of Bethel University and Thomas Osang of Southern Methodist University:

In this paper we investigate the idea whether democracy can have a direct effect on economic growth. We use a system GMM framework that allows us to model the dynamic aspects of the growth process and control for the endogenous nature of many explanatory variables. In contrast to the growth effects of institutions, regime stability, openness and macro-economic policy variables, we find that measures of democracy matter little, if at all, for the economic growth process.

They look at a full 160 countries over 50 years, building on a large existing literature, which includes (my own picks, not theirs):

• Acemoglu et al. (2008) found that once you control for 'country fixed effects' (i.e. systematic and apparently intractable differences between countries) there is no link between the level of democracy in a country and its income. This is because democracies tend to (not necessarily coincidentally) have other good characteristics.
• Cervellati et al. (2004) found that never-colonies benefited from democracy whereas countries that had once been colonies did worse if they were democratic.
• Barro (1996) found that democracy was slightly negative for growth once you account for variables like the rule of law, small governments, free markets and human capital (i.e. skills, education and cognitive ability)
• Lehmann-Hasemeyer et al. (2014) found that democratising Saxony between 1896 and 1909 destroyed lots of stock market wealth in anticipation of worse laws
• Mulligan et al (2004) found that democracies and non-democracies choose very similar policies

That the evidence suggests democracies and non-democracies perform about the same might be surprising given the state of public ignorance. In Sam's words "the public is ignorant about politics and lacks even the basic facts that it would need to make sound judgments about political issues."

But at the same time, as people get more knowledgeable they get more dogmatic. Experts know a lot, but they gather evidence that fits their existing ideology; ideologies both help us understand the world and blinker us in some ways.

Perhaps democratic ignorance and expert narrow-mindedness roughly balance out—or perhaps representative democracies and non-democracies both choose similar sorts of people to rule anyway.

Either way, the evidence seems to suggest that insofar as we can help countries to develop, the key institutions we should be supporting are markets, property rights and the rule of law, and considerably less significance should be accorded to democratisation.

We might have an answer to where (some) of that missing growth is

It's a commonplace these days to shout about how growth rates are lower than when we had strong unions, nationalised companies and stinging tax rates. Therefore we should bring back unions, stinging tax rates and nationalised companies in order to have higher growth rates. The perceptive will note that there's a fallacy of composition in that argument: I once met a very pretty girl on a day that I had a cold. My getting a cold today will not make me meet a very pretty girl (nor would it please the pretty girl I am still with if I did). However, leave that aside and we do still have this point that growth rates these days are lower than that post-WWII heyday. One explanation is that there was pretty much no economic growth 1933-1945 but technology still marched on and thus there was some catch up after the unpleasantness was over. In conversation over the past couple of days another idea has popped up.

Take the contributions of Google and Facebook to the economy, to GDP. As we measure them those contributions are simply the value of the advertising they sell (or, the wages they pay and profits they make). That's just how we calculate GDP. That portion of whatever it is that is monetised. But this is near insane, to value having the world's knowledge at our fingertips (or, in Facebook's case, all the people you never want to meet again at hand) at only the value of the ads presented with it. we're simply not measuring the true contribution of the new technologies to our actual standard of living. At which point, Brad Delong:

 The key difference is between “Smithian” commodities–where it is a safe rule of thumb that the consumer surplus generated is about equal to the producer cost, so that GDP accounts that value goods and services at real producer cost will capture a more-or-less stable fraction equal to half of true standards of living–and… I might as well call them “Andreessenian” commodities, where consumer surplus is a much larger proportion of monetized value because what is monetized is merely an ancillary good or service to what actually promotes societal welfare. What is the proportion? 5-1? 10-1? Somewhere in that range, I think–at least.

It would be safe to argue that there's definitely some of this going on. The difficulty is quite how much. But it wouldn't surprise at all to find that our traditional measure of GDP is increasingly failing to measure economic progress.

Slow economic growth is the new normal apparently

So Gavyn Davies tells us over in the Financial Times:

The results (Graph 1) show an extremely persistent slowdown in long run growth rates since the 1970s, not a sudden decline after 2008. This looks more persistent for the G7 as a whole than it does for individual countries, where there is more variation in the pattern through time.

Averaged across the G7, the slowdown can be traced to trend declines in both population growth and (especially) labour productivity growth, which together have resulted in a halving in long run GDP growth from over 4 per cent in 1970 to 2 per cent now.

Obviously, for the sake of our grandchildren, we'd like to work out why there has been this growth slowdown. Fortunately, there's an answer to that:

But run the numbers yourself–and prepare for a shock. If the U.S. economy had grown an extra 2% per year since 1949, 2014′s GDP would be about $58 trillion, not $17 trillion. So says a study called “Federal Regulation and Aggregate Economic Growth,” published in 2013 by the Journal of Economic Growth. More than taxes, it’s been runaway federal regulation that’s crimped U.S. growth by the year and utterly smashed it over two generations.

A version of that paper can be found here.

No one is saying that there's not a case for regulation: there's always a case for every regulation, obviously. There's also a smaller class of regulations where the case made for it is valid: where it's worth whatever growth we give up in having the regulation in order to avoid whatever peril it is that the regulation protects us from.

But this doesn't mean that all regulations have a valid case in their favour: and one darn good reason against many of them is that we're giving up too much economic growth as a result of the cumulative impact of all of those regulations.

If we want swifter economic growth, something we do want for the sake of those grandkiddies, then we do need to cut back on the regulatory state. Hopefully before all growth at all gets strangled by the ever growing thickets of them.