May 11, 2016

Educational outcomes in the United States

This article in the NY Times deserves reading on a desktop -- or maybe a tablet if there's a way to hover over the bubbles to see what's what.
In the upper right hand corner -- the richest people and the best educational outcomes -- are dominantly towns in Western Massachusetts -- Concord, Carlyle, Acton, and so on.
There's a search box, so you can see what schools in this region look like relative to the country as a whole.
The breakdown by race is interesting and prompts questions. Is the gap due to some institutional bias? Is it due to differences in IQ? And if so, are the differences due to environment, or are there genetic differences?

May 5, 2016

How the worst possible plan made things better


In a previous post I analyzed real per capita GDP of the United States and found -- to my surprise -- that the economy prior to the Great Depression and WW II grew at a roughly constant rate; that the economy afterward, grew at a different roughly constant rate; and to my even greater surprise the post-depression-and-war economy grew faster than the pre.

Huh?

How could that possibly have happened? The post-war military takes millions of people out of productive roles in the economy. The anti-productive federal bureaucracy grew from around 600,000 pre-war to more than 3,000,000 during the war, and has hovered around 2,000,000 since. The burden on the economy caused by those useless bureaucrats writing regulations; the wasted time spent reading regulations and complying with them; the money spent on beltway bandits living off the federal tit; the growing deficit -- all that must surely have taken a huge toll on the economy.

Apparently not.


1.
By all reasonable expectations of conventional (conservative) economics the US economy should have been permanently ruined during the period of recovery from the depression. As we know, during the buildup to the war, the war itself, and the aftermath, the economy recovered.

But forget there was a war. Let me stick to the economic facts but change political narrative to tell the story of how, and perhaps why it not only recovered but came out better than it went in.

Our story begins after the Roosevelt administration failed to fix the broken post-depression economy. In my version, the government empowers a group of people who -- from their behavior might be considered insane economists and incompetent bureaucrats. They are given the power to do everything wrong that they can do.

They set up a huge bureaucracy, hiring hundreds of thousands, and eventually millions of people whose main jobs is to purchase things that no one in the country wants or needs and pay for it with other people's money. An enormous slice of the economy's production pie gets ripped out the hands of the private sector and gobbled up by the government sector. Markets are distorted to to meet these demands. There is rationing. Wage and prices controls. All the bad economic moves.

To pay for this wasteful production, these madmen do the wrong thing attack the engines of productivity: they raise income and corporate taxes. They raise them most on those people with the highest income  -- the "job creators" as they are called today. But that's not enough for these nutjobs. They want to spend more! More! More! Despite greater tax revenue, they drive the national debt from an already too-high 40% of GDP to a completely ridiculous 110% of GDP in just a few years.

They bar millions of new potentially productive entrants from the workforce and extract many who had been productive workers from the force; they pay them low wages, largely unrelated to economic contribution. How could they do otherwise, because almost all of them are assigned unproductive tasks. Some learn new skills, but the majority either produce nothing, or produce things that are temporary -- and are soon destroyed destroyed. Massive amounts of human talent are wasted.

The products that the government demands are built in such volume that new factories have to be built, new roads and trucks, railways and railway cars need to be built (all at great cost and with stolen taxes and borrowed money) to move resources, intermediate products, and final products around.

Eventually these government-mandated products are transported, to airports and to harbors, loaded into planes and ships, taken to distant destinations; and there they are destroyed.

The result of all this economic activity is nothing of value to a single American consumer. It is waste on the grandest of possible scales, paid for by theft and debt.

The result must certainly be disaster.

Except it wasn't

2.
How could it not be a disaster. Read your economics books, FFS. This is government at its very worst. It would be hard to find a worse way to spend the money that was taxed away from productive citizens and businesses and that was borrowed, burdening our future economy. Nearly everything that was built at the direction of these moronic government programs was destroyed or consumed without meeting any consumer preference.

True, there were some benefits from this insanity, but they were mainly unintended. The demand for labor to build these useless government-mandated products created so many jobs that many of the long-term structurally unemployed return to work. Women entered the workforce. New roads and factories and railways and vehicles had to be built to handle the volume of raw materials used to create the glut of useless products that the government insisted on. People had to be trained to build these things. And the government poured money into research and development to find other useless products to spend money on and to find better ways to build the useless products.

Later, the government slowed their spending on useless products, but instead of returning immediately to sound fiscal policy these morons threw money at the people they had displaced from the workforce. They gave them low cost business loans and low cost mortgages; they gave them cash payments for tuition and living expenses at school or vocational education; they gave them and a year's generous unemployment compensation if they could not find jobs right away.

Instead of husbanding resources for the domestic economy, these nuts gave enormous sums to foreign governments, which used that money to divert this country's productive resources. As a result, those countries had their needs met, while our citizens had to wait in line. Or go to school. Or something.

Notwithstanding the unintended benefits, the whole program violates every tenet that reasonable, economically literate people hold dear.  You don't get prosperity by distorting markets this way. You don't get jobs by raising taxes -- to 94% -- on the job creators. You lay the foundations for complete disaster by running the debt to 110% of GDP. You create wealth by putting people to work producing things that you simply destroy.

It just doesn't work that way.

3.
Yet it did. It's the economic history of the United States in World War II. From a political perspective the "wasteful production" of bombs, and bullets, and shells, of tanks and bombers, and guns supported a widely held goal: defeating nations that we regarded as threats. It's not strictly fair to say that "nobody but the government wanted these things." Plenty of people did.

But from an economic perspective, a bomb is something that you expend resources on, and then destroy. And while you're at it, if the bomb is used effectively, you not only destroy what you built but other things as well. Including people.

From a purely economic perspective, the there is not much that is less productive than spending on military hardware and ordinance.

Quoting the renowned crypto-communist (at least according to the John Birch Society), Dwight D. Eisenhower, in his "Chance for Peace" speech:

"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed."

4.
Supposing in the most recent downturn, the government had done something similar. Supposing we had increased taxes -- especially on the rich -- increased debt, perhaps even intervened in the economy, only instead of building guns, warships and rockets, the government had put people to work repairing infrastructure, building of schools, educating people, doing more research.

Of course the government would often find the wrong roads to build. It would fix the wrong bridges. It would build schools that were too large. Or too small. Or the wrong color. It would give people skills that were not in demand. It would try to train the untrainable. It would dole out research money to hucksters.

But it would also do things right. Say half of what they did was wholly wasteful. Or even 90%. Let's say that the government always and uniformly spends money inefficiently and stupidly because no competent person would ever, ever, ever work for the government.

Let's even suppose the the government spent by putting candidate projects on the wall and letting moneys throw darts or dung at the wall land funding the projects that got hit. Or that didn't. The net benefit of such a criminally insane funding strategy would still be better than spending money on something as worthless as a gun or a bomb.

And yet, the insane program of the 1940's and early 50's not only brought the country back to prosperity, but also put it on a better growth track than before.

Why? How?

5.
I don't know. We can disagree on why it happened, but we can't disagree on the facts. It did happen, and to first order, in economic terms, my description is accurate.

Maybe it was because we killed 400,000 able-bodied, mentally fit individuals, and Cthulhu rewarded us for the blood sacrifice. Maybe it was because we kept millions of testosterone-poisoned young men out of college and let them work it out of their system by killing other young men while they bonded with people from different backgrounds.

I don't know the answer, but I will speculate. At least part of the reason is that the war effort caused an enormous, albeit inefficient, capital investment program. The government invested in roads that were easily repurposed for carrying peacetime goods;  invested in bomb factories later repurposed for making consumer goods; invested in training people and so that they could enter the workforce and become productive.

And R&D. The pressure of war causes everyone to find ever-more-efficient ways to kill people and to keep from being killed; ever better ways to repair bodies and minds torn apart by war; and ever more efficient ways to build and deliver everything that was needed.

And all these investments were easily repurposed for peace and productivity.

6.
What might have happened in other economic downturns if the government had done similar things? We don't know because attempts to do something like this were limited or thwarted entirely.

But what if, in the most recent downturn, the government had been allowed to do some of what was done during World War II -- higher taxes, greater deficits, economic intervention -- but not killing young people. What if it had been allowed to spend the money on things that were actually useful: better training for the untrained; improved roads and infrastructure; more R&D.

The spending would have been inefficient -- relative to what an omniscient deity might have done. But however inefficient the spending might be, I find it unlikely that the stupidest bureaucrat in Washington would spend money on something worse than a bomb.

And I find it likely that the capital investment would have paid off.

Sadly, I don't get to find out because the common wisdom of markets and economics -- the same wisdom that would have predicted that the spending patterns during WW II would have destroyed the economy -- won the day. And so the recovery was what it has been -- weak.

7.
I conclude with more of Eisenhower's speech:
This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter with a half-million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. . . . This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

May 4, 2016

Surprising US historical growth rate statistics



It's always interesting to make predictions based on your theory of economics before you see if the data support it. Here's the exponential growth of our economy -- in terms of GDP per capita -- from 1790 to 2015.

United States per-capita inflation-adjusted GDP growth

It's clear that per capita GDP has increased steadily and exponentially. Liberals might point out that their programs didn't stop GDP growth and made life better and fairer for millions; conservatives might argue that if liberals had not taken us off gold standard, instituted the income tax, built a huge federal bureaucracy and increased regulation we would have done even better;and the resulting reduction in poverty would have done more than all these economically crippling programs. Not to mention more freedom! Yay freedom!

I would have assumed there was a decline in growth rate, but it would have been moderate at worst, and worthwhile.

I was not expecting what I found.

Data Source
Measuring Worth is a web site that collects economic data and makes it available. Its goals, founder and advisors are listed on the About page.

There are two missions of this site. The first is to make available to the public the highest quality and most reliable historical data on important economic aggregates, with particular emphasis on nominal (current-price) measures, as well as real (constant-price) measures. The data presented here on the United States, the United Kingdom and Australia, have been created using the highest standards of the fields of economics and history, and they were rigorously refereed by the most distinguished researchers in the fields. The second is to provide carefully designed comparators (using these data) that explain the many issues involved in making value comparisons over time.
I know the work of a couple of the economists, and without going through the entire list I can say that they range from pretty liberal to pretty conservatives. Regardless of orientation, data is data, and it seems to match up with other sources.

The site has a time series for GDP, inflation rate and population from 1790 to 2015, from which one can calculate real (inflation adjusted) GDP and real per-capita GDP over that period of time. Clearly real GDP per capita is what we want to see. GDP growth in nominal terms does not take inflation into account, or does it account for population growth; cheaper money = more GDP with no one better off; more people = more money, the nation is stronger, but people may or may not be better off.

Prediction
I expected to see steady growth (and I did) with growth slowing in recent years for a lot of reasons. I expected to see significant differences between the growth rate under conservative and liberal administrations (or Congresses). I hoped that my side (liberal-ish) would perform well, but I expected that business-friendly administrations would increase GDP (possibly with a lag) and that those concerned more with social equity would slow economic progress as the price paid for social progress.

The real per-capita GDP graph looks like this, but it doesn't tell you that much.


If you plot the same data on a log scale you can see the rate of growth over time, you see the first thing that surprised me: it's pretty much a straight line. Wiggly in places -- particularly the depression and WWII, but to first glance, straight.



Interestingly, there are lots of wiggles prior to 1930 and many fewer once the economy stabilized, post-war. And stable it is:


It's almost a dead straight line. Which means, kind of, that it didn't matter (that much) which party controlled the legislature or which party controlled the presidency. Or maybe it did matter, and things balanced out. We can look at this later in more detail.

Now look at this one (the trend lines are eyeballed, rather than being true regression lines. They are a) clearly different; and b) the rate of growth is clearly greater after the war than before.


So here we have the young United States, unburdened by modernity, growing at what is clearly a slower rate than the post war economy. Prior to WWII the economy had lot of variance due -- I think -- to periodic financial panics. Afterward, with a lot of new governmental bureaucracy in place, with millions taken out of the productive work force, with higher taxes, more regulation, you name the bad thing that was going on, the economy both grew faster, and with fewer bumps.

Anyone who knows economics will tell you that volatility is bad, so the post war economy is double-good: faster growth AND less volatility.

So whatever it is that is driving the United States economy, we have some evidence that there were two, distinct economic regime: the first from 1790 to about 1929, the second from about 1948 to present.

A third, possible regime is the performance of the economy during the most recent period, from 2006 or so to 2015. We'll dive into that later. But first, in the next post, I'm going to let's look at "The Great Disruption" the period of time when we moved from one growth rate regime to the other.