Thursday, March 29, 2012

Inflation: a thing that doesn't really exist

Well OK, saying that such and such a thing is really treading on unsteady epistemic grounds.  What does it even mean for a number to exist or not exist anyways?  One position that you can take is that things that can be directly measured, like a person's height, exist; but that things that can't be measured, like their height in inches plus their age, aren't things that really exist.  And though people tend to treat and talk about inflation as one of the former, it really matches the later category much more closely.

The indomitable Google lists inflation as being "3: A general increase in prices and fall in the purchasing value of money".  That's all well and good, but there's never any general level of prices that you can directly observer.   You always have to combine the increases and decreases in various prices with some system to produce something you can call a general level, and the process is actually very straightforward.

First, there is the selection of the goods and services that make up you index.  The easy solution here is to just try to average across everything that makes up a country's GDP in proportion to its contribution, but that makes scaling things like income to GDP problematic.  For the last few decades healthcare costs and higher education costs have been the sectors of the economy that have seen costs increase at the highest rate, but you median worker receives their health insurance from their employer and doesn't have a college degree.  What you really want to do when talking about how inflation has affected a given group of people is to look at the rise in the costs of the particular package of goods and services that that group consumes, and not the price level overall.

Does that mean that they've experienced less inflation than official measures would suggest?  Well, maybe, there are more factors at work here too.

For instance, how do you compare prices levels when some goods are no longer produced, and some have just been invented?  For instance, how do you compare the price of a color TV to an old black and white TV from back in the day?  You could look at the times when both were sold and look at the price ratios then, but those prices were a function of both supply and demand, and the ratio varied over time.  The people who look into the matter tend to say that we overestimate inflation due to technological change, but who knows by how much.

And on yet another hand (where did I get a third?), there are things that don't contribute to what an economist would call inflation, but are rising prices.  If there's a rebellion in Libya and the amount of gasoline produced in the world decreases while the demand for gasoline stays constant, that means the price of gas is going to rise.  But because the price change is due to real constraints on supply, this isn't actually a matter of "inflation" based on an economist's standard definition, so there's an unfortunate disjoint there.  And you can't really say that economists are totally wrong because the rising price in't a result of some mistake in Federal Reserve policy, the thing that economists usually consider inflation with respect to.  On the other hand (wait, I have four now?) you could say that you typical consumer is right in thinking of rising gasoline prices as inflation, since that is an increase in the price of the overall basket of good that people like them buy.

So where does that leave us?  Given all of that, I think that maybe we could do well to follow Scott Sumner's lead by just not talking about inflation much.  Inflation per se doesn't tell us much that's practical from a policy perspective by itself, though it is very useful from an investing perspective.  Maybe if we just tried to get into the habit of only talking about supply shocks and demand shocks we could have more sensible conversations about the economy.

Wednesday, March 28, 2012

Book Review: Dancing in the Glory of Monsters

Go to the Wikipedia page on the bloodiest wars in history and look at it for a bit.  Everybody would expect WWII to be on there at the top.  Many people might not realize how many really bloody civil wars China has had, but it stands to reason that with the huge number of people who live there that this might be a significant number.  Most people also wouldn't be surprised that there were bloody conflicts centuries past which they haven't heard of in general.  But look down to conflict #14.  One of the bloodiest wars in human history ended less than a decade ago, and you probably didn't even know that it was happening.

I certainly didn't appreciate it as it was happening.  I read the newspaper and knew that there was a war in the Congo, but I didn't have any sense of the scope of it, nor did I really know what the issues involved were.  Finding that list on Wikipedia, though, helped me to realize that I had overlooked the greatest armed conflict (so far) of my lifetime, and that I ought to know a bit more about it.

When I picked up Dancing in the Glory of Monsters I was expecting a story about Congolese people, however I was surprised at how much of the story was about the neighboring states, especially Rwanda.  When we hear about Rwanda I think most people still think of the Rwandan Genocide, and that's almost central to this story.  The genocide of Tutsi civilians by the Hutu government happened in the shadow of a remarkably successful Tutsi rebellion.  

After the victory of the surviving Tutsis many Hutus feared that they would be treated the same way as they treated their enemies, and fled west into the Congo.  There they settled in refugee camps, ruled by the same military forces that had carried out the genocide, and fed by humanitarian organizations drawn by the suffering of the displace civilians.

This was one of the most interestng part of the book for me.  Everybody knows about conflict diamonds, and how resources that are easily looted by roving armies help contribute to war in countries without well developed human resources.  Well, suffering human being can be a lootable resource too, and with much the same result.  In the Hutu refugee camps western aid organizations worked to head off a potential humanitarian crises.  But because the same people who had perpetrated the genocide were in control of the refugee camps, they were able to charge foreign aid organizations money for access to the refugees, and use the funds to re-arm themselves.  Thus a suffering civilian populace was turned into a lootable resource, the same as mines elsewhere.  

The Tutsis in control of Rwanda, understandably, weren't willing to stand by while this happened and invaded.  They were successful beyond what you would expect such a small country could possibly do against a large country like the Congo, but soon the loot from the war made it an undertaking taht paid for itself, and then fed upon itself.  And all the states around Congo's border's had long ago become fed up with how Mobutu had allowed other country's rebels to use the Congo as a base, so that he could become a regional power broker.  

But the war which began with reasonable, or at least comprehensible aims was usurped to more venal ends.  Truly in the Congo "My eyes are the victim's eyes, my hands are the assailant's hands" became the truth everywhere as each act of violence spawned revenge far beyond the initial targets.  You can read the book, or Wikipedia, but the results are an almost perfect example of how violence can spiral out of control.  The Rwandans started out trying to punish the guilty, but ended up as just another force profiting from looting the Congo's natural resources by force.  

Tuesday, March 20, 2012

Measuring Inequality

I recently saw an article in Slate which was fine as far as it went, but which prompted me to deliver a bit of a rant at Hacker News about how we talk about income inequality in America, which I've cleaned up a bit and am also posting here.

The first thing that annoys me about how most people talk about inequality in America is that people often just use one metric, and ignore all the others.  You could talk about:

  1. Total Compensation - including untaxed things like health insurance as well as paychecks and capital gains.
  2. Taxed income - which the SSA confusingly refers to as "Total Compensation", which is income plus capital gains and bonuses but not things you don't pay taxes on.
  3. Pure income - your paycheck.
  4. Wealth -  how much you have in your bank account plus how much your house is worth.
  5. Private consumption - how much you spend each year on stuff for yourself, rent and food and fun things.
  6. Total consumption - private consumption plus whatever goods and services the government provides for you.
I always tend to prefer to look at consumption, because that is the metric that effects how people live.  Lets say the government passed some new law that said that all income from whatever source was going to be taxed at 100% and redistributed equally among all Americans.  That, I think, would be a pretty egalitarian society but it wouldn't change the US income statistics one iota.  It would, however, show up in the US consumption statistics.  Wealth is an even worse measure, since even in a perfect Utopia where everyone received the same paycheck each year the people who are just retiring are going to be much, much wealthier than the people who are just getting out of college.  

Also, its important to distinguish between statistics that are computed at a household level and statistics that are computed at an individual level.  Poorer households tend to have more children, but that effect is smaller than the extent to which higher income households are likely to have two adults and to be older and thus more likely to be married or have more children.

Another problem with the graph in the linked article is that it treats income before and after 1986 the same way, and doesn't even mention the huge discontinuity in the data that happens in 1986. The 1986 tax reform act strongly incentivised rich people to report things as income which they had previously claimed were business expenses. That does mean that the numbers after 1986 are more comparable to the numbers from before people started feeling the need to claim that things were business expenses, but it does mean that the numbers from 1988 aren't really comparable to the numbers from 1982. And its hard to compare across countries since AFAIK most of Europe is closer to the pre-1986 US system than the post-1986 US system.



And speaking of Europe, its important to remember than income inequality has been rising at more or less the same rate everywhere in the industrialized world (baring the US's 1986 jump). See pretty graphs here.  Now, I should point out that many other countries do more income redistribution than the US does, so similar share of income by the top 1% don't necessarily mean the same thing in different countries, but that's just another reason to look at consumption inequality instead.


Now, its true that the link in the last paragraph only talks about pure income, and doesn't deal with capital gains and such.  As far as I know other countries are broadly similar to the US in how they deal with this issue, but it would still be really nice to change the US tax code to make capital gains as progressive as income, either through a Friedmanequse system or through a consumption tax.  

Important Issues: Immigration

The snow has melted, the Republican candidates are busy beating each other bloody, and with the looming presidential election my thoughts turn to daydreams about my ideal candidate.  This is mostly a blue sky exercise here, some of my beliefs are well outside the mainstream and I'm not going to hold my breath waiting for my favorite policies to be implemented.  But maybe I can do something to help persuade people that these are issues that they ought to care about, like by writing blog posts say.

The most important policy issue I see in the US right now where thing aren't currently going the way I'd like is immigration.  It seems to me that we ought to be allowing much more immigration into this country, that this would give some net benefits to the US, and that it would be a huge boon for those allowed to immigrate.

At one point the US let many more immigrants in than it does today.  But panic about foreign anarchists and concern that too many immigrants were from Asia let to a succession of laws restricting immigration.  Despite the fact that the US has a far larger population nowadays than in the 1910s, we actually allowed more immigration back then in absolute terms.

The benefits to people who are coming to the US are pretty clear.  They'll be a lot better off materially in the US, even illegal immigrants to who don't get the full protection of US labor laws.  It isn't just that they're taking "our" resources, people from poor countries who move to the US benefit from our generally decent infrastructure and legal system, and genuinely produce more stuff than they would have in their home countries.  Some people have estimated that this difference could amount to trillions of dollars to the global economy if everyone who wanted to immigrate wanted to.

You could argue that allowing the best and brightest to come to the US will rob their home countries of those same people.  True enough, perhaps, but at the same time the remittances those people send home are by far the most effective form of foreign aid per dollar, and also far larger than all the other sources of foreign aid.

You could argue that immigrants steal our jobs, but that's just silly because the number of jobs changes with the number of consumers.  Just look at Texas which has done very well in growing it's employment while people have been flocking to the state, to the extent that it's doing much better than most of the country.  You could also argue that immigration drives down the wages of the those at the bottom of the economic heap and here you're on more solid ground.  But the great thing about growing the economic pie is that even if a rising tide doesn't lift all boats by itself, redistributing gains is actually one of the areas that the government is actually pretty good at.  If we're so much more worried about the livelihoods of native born Americans than about those born in, say, Cambodia that we would consider preventing the person from Cambodia from moving to the United States, well, instead we can just take some of that factor of ten or so more money that the Cambodian will make in the US, give it to the native born workers that he's competing with, and everybody will be better off.  Doing something like that would force us to give up the pretension that we care about all people equally, but I think illusions aren't worth much compared to actual improvements in people's standards of living.

One could also argue that we should worry about diluting our culture or such - that too many immigrants might be more than we can handle.  Since apparently 40% of the population of the third world would like to move to the US this is understandable, but that's no reason not to allow a factor of 10 or so more immigrants into the US each year.  The US managed fine in the age of Ellis Island - not perfectly but certainly well enough.

So, who on the current list of presidential contenders score well by this metric?  Assuming he gets the Libertarian Party nod Gary Johnson seems to be someone I agree with on this particular issue.  I'll also say that Obama and Gingrich seem to want to improve things from where they are now.  Conspicuously failing on this metric is Ron Paul, who despite his Libertarian leanings comes off as almost nativist at times.  And Santorum and Romney don't do well, either.

Book review: The Righteous Mind

The Righteous Mind: Why Good People Are Divided by Politics and Religion  by Jonathan Haidt is a book about morality.  It's about the wa...