The French Have It Better?

As I keep saying, facts matter. Facts matter more than ideological consistency if you want to know. That’s why I keep comparing us with the other society I know well, France. I am up-to-date on it, a task facilitated by the fact that I read a major French newspaper online every day, by the fact that I watch the French-language Francophone television chain, TV5, nearly every day, and by occasional recourse to my brother who lives in France. My brother is especially useful as a source because he is well-informed by French standards, articulate, and an unreconstructed left-of-center statist. I suspect he has never in his life heard a clear exposition of how markets are supposed to work. He is a typical Frenchman in that respect.

I almost forgot: I must admit that I watch a French soap opera five days a week at lunchtime. And finally, I spy on my twenty-something French nieces and nephews through Facebook. I never say anything to them so they have forgotten I am their so-called “friend.” I almost forgot again: Until recently, I went to France often. Every time I was there, I made it my duty to read local newspapers and newsweeklies and to listen to the radio and to watch the news on television. I said “duty” because it was not always fun.

So, those are my credentials. I hope you find them as impressive as I do.

And, incidentally, for those who know me personally, mostly around Santa Cruz, the rumor that I am a guy from New Jersey who fakes a French accent to make himself interesting to the ladies, that rumor has no foundation. In fact, the accent is real. French is my first language; the accent never went away and it’s getting worse as my hearing deteriorate. I like to write in part because I don’t have much of an accent in writing. Got it?

I found out recently that the French national debt to GDP ratio is about 85. That is, French citizens, as citizens, owe 85 cents for every dollar they earn in a year. The debt is a cumulative total, of course, And “national debt” refers to what’s owed by the national government of a country. The private debt of the citizens of the same country is an unrelated matter. Another way to say the same thing is that, should you reduce the national debt of your country down to zero, it wouldn’t help you directly with your personal credit card balance. (It might help you indirectly to some extent because you wouldn’t be in a position anymore to compete with the federal government for credit. This competition raises interest rates.)

The national debt also does not include the debts of states and local governments. In this country, the aggregate of these non-federal government debts is also high because of our decentralized structure. Let me say it another way: The national debt, associated entirely with the federal government, is a relatively small fraction of the total debt US citizens owe by virtue of the cost of their overall system of government. It’s relatively small as compared to the same quantity for France, for example. The French national debt includes most sub-debts that would be counted as state debt and local debt in this country. Accordingly, the French national debt is overestimated as compared to ours. If French accounting were like ours the French national debt would be considerably less than 85% of GDP.

Well, you ask: What’s ours, our national debt as a percentage of GDP? Fair enough:

It’s about 100% of GDP, 15 points higher than the French percentage. We are closer to Greece than France is in that respect.

This pisses me off to no end. The divergence between the directions taken by French society and American society occurred during my adulthood. I witnessed that divergence in concrete terms through my French relatives and directly, through my visits to France, and the occasional longish sojourn there, and so forth. So, let me summarize what I saw in France during the past thirty years.

The French eat better than Americans. They always did but their food could have become worse under “socialism.” Even the children who stay at school over lunch eat good meals for a nominal sum. School lunches in the average French town taste better than the fare of a better-than-average American restaurant, in my book.

The French have longer vacations than Americans. That’s all of them, all Americans, including civil servants and bricklayers’ union members. Five weeks is the norm in France. You read that right: 5!

In many French municipalities – I am tempted to say “most” but I have not done the research – children go skiing at public expense one week each year or more. There are also many subsidized “initiation to the sea” summer camps.

It’s also true that Americans have bigger houses and bigger cars than do French people. Personally (and I am a kind of small expert on the topic) I think French universities are not nearly as good as their American counterparts. I mean that the best French universities don’t come close to the best American universities and that the worst American universities maintain standards absent in the worst French universities. Elementary and secondary French schools seem to me to be about equivalent to American schools. They also turn out large numbers of functional illiterates. But, there is more.

The French have universal health care that is mostly free. It hurts me a lot to say this but I saw it at work several times, including under trying circumstances, and the French national health care system performed fine every time. (There is an essay on this topic on this blog, I think.) I know this is only anecdotal evidence but the raw numbers don’t contradict my impression. In point of fact, French males live two years longer than American men. I realize this superior longevity could be due to any number of factors (except genetic factors, both populations are very mixed). However, it is not compatible with a truly horrendous “socialized medicine” system. And, yes, I too would like to credit Frenchmen’s longevity to regular drinking of red wine but it’s not reasonable. If it were, a health cult of red wine would have been launched by the wine industry in this country a long time ago.

The French collectively spend about half as much as we do on health care.

I can hear my virginal libertarian friends howling: The French can afford all those tax-based luxuries because they are less likely than Americans to become involved in military ventures. (And I would add, they cut out earlier, as they are now doing in Afghanistan.) But the numbers have to jibe: In the past thirty years, the US never spent more than 5% of GDP on the military. In most years, it was under 4% . Both figures include incompressibles such as veterans’ benefits that aren’t really spent to wage war, now or in the future. Those costs, about ¼ of the military budget in the average year, would be more or less made up elsewhere if they did not exist. So, it seems to me that higher military budgets cannot begin to account for the fifteen percentage points the French have over us in their national debt relative to GDP.

I am a small government conservative who would call himself a libertarian if I did not see the word as associated with pacifism. Yet, I cannot look away from these simple facts. I wish I had an answer to the quandary they pose but I don’t. Any ideas?

Not all GDP measurement errors are greater than zero!

Bryan Caplan is an optimist. He thinks that economists do many errors in estimating GDP (overall well-being). He is right in the sense that we are missing many dimensions of welfare improvements in the last half-century (see here, here and here). These errors in measurements lead us to hold incorrectly pessimistic views (such as those of Robert Gordon). However, Prof. Caplan seems to argue (I may be wrong) that all measurements problems and errors are greater than zero. In other words, they all cut in favor of omitting things. There are no reasons to believe this. Many measurement problems with GDP  data cut the other way – in favor of adding too much (so that the true figures are lower than the reported ones).

Here are two errors of importance (which are in no way exhaustive): household output and adjustments for household size.

Household Output

From the 1910s to the 1940s, married women began to enter moderately the workforce. This trickle became a deluge thereafter. National GDP statistics are really good at capturing the extra output they were hired to produce. However, national GDP statistics cannot net out the production that was foregone: household output.

A married woman in 1940 did produce something: child-rearing, house chores, cooking, allowing the husband to specialize in his work. That output had a value. Once offered the chance to work, married women thought the utility generated from producing “home outputs” was inferior to the utility generated from “market work”. However, the output that is measured is only related to market work. Women entered the labor force and everything they produced was considered a net addition to GDP. In reality, any economist worth his salt is aware that the true improvement in well-being is equal to the increased market output minus the forsaken house output. Thus, in a transition from a “male-labor force” to a “mixed labor force”, you are bound to overestimate output increases.

How big of an issue is this? Well, consider this paper from 1996 in Feminist Economics. In that paper, Barnet Wagman and Nancy Folbre calculate output in both the “household” and “market” sectors. They find that even very small changes in the relative size of these sectors alter growth rates by substantial margins. Another example, which I discussed in this blog post based on articles in the Review of Income and Wealth, is that when you make the adjustment over four decades of available Canadian data, you can find that one quarter of the increase in living standards is eliminated by the proper netting out of the value of non-market output. These are sizable measurement errors that cut in the opposite direction as the one hypothesized by prof. Caplan (and in favor of people like prof. Gordon).

Household Size

Changes in household sizes also create overestimation problems. Larger households have more economies of scale to exploit than smaller households so that an income of $10,000 per capita in a household of six members is superior in purchasing power than an income of $10,000 per capita in a single-person household. If, over time, you move from large households to small households, you will overestimate economic growth. In an article in the Scottish Journal of Political Economy, I showed that making adjustments for household sizes over time yields important changes in growth rates between 1890 and 2000. Notice, in the table below, that GDP per adult equivalent (i.e. GDP per capita adjusted for household size) is massively different than GDP per capita. Indeed, the adjusted growth rates are reduced by close to two-fifths of their original values over the 1945-2000 period and by a third over the 1890 to 2000 period. This is a massive overestimation of actual improvements in well-being.

HouseholdAdjust

A large overestimation

If you assemble these two factors together, I hazard a guess that growth rates would be roughly halved (there is some overlap between the two so that we cannot simply sum them up as errors to correct for – hence my “guess”). This is not negligible. True, there are things that we are not counting as Prof. Caplan notes. We ought to find a way to account for them. However, if they simply wash out the overestimation, the sum of errors may equal zero. If so, those who are pessimistic about the future (and recent past) of economic growth have a pretty sound case. Thus, I find myself unable to share Prof. Caplan’s optimism.

Is minimalism immoral?

I came across a simple but important question on Quora: Is it wrong to aspire to be a minimalist? Doesn’t this negatively affect the country’s GDP?

I see two big lessons here: 1) wise use of metrics requires wisdom… i.e. appropriate interpretation and critical thinking. 2) Maximization is just one version of one part of the whole story. (There are also important questions to ask about what we can expect from others, but I’ll leave that for the comments.)

Readers of NOL should be familiar with the notion that GDP is only an imperfect proxy for well being. But not everyone is so we have to repeat ourselves. There’s what we’re after, and there’s what we can measure, and the two are not the same. GDP is a really clever way to aggregate total production in an economy, but production is only valuable to the extent we’re producing the things that actually improve people’s lives. It’s easy for busy people to confuse a proxy measure for the latent variable we actually care about, so we need someone whispering in the emperor’s ear “the metric is not the mission.

Economics is easier to describe using the simplifying assumption that people want more stuff. It’s easy to forget that people also want more leisure (and so less work). This is a subtle reappearance of the seen and unseen. We can see when someone gets a cool new car and we can’t see when someone has a fun evening with friends and family. We have to check our bias towards trying to get more stuff and remember that reducing work is another feature of human flourishing.

No, natural disasters are not good for the economy.

Every time there is a natural disaster old economic fallacies make their appearance. And they are usually always the same. In particular, the argument that a natural disaster is good for the economy. This should make little sense. Wealth is not created by destroying things. A natural disaster destroys wealth, doesn’t create it. I doubt anyone affected by a hurricane would argue that he is better off after the natural disaster than before.

The argument that an event such as a natural disaster is good for the economy rests in the positive impact seen in GDP (as is argued) after the natural event. If GDP increases, then the economy is doing better. But this is a misreading of GDP. This variable is a flow of wealth, it is not a stock of accumulated wealth. It is possible that wealth creation (flow) increases at the same time the stock of wealth is decreasing. And this is what happens during a natural disaster.

Imagine that someone’s house caught fire and burns down. Because of this situation, this person decides to start working extra hours to increase his income and be able to buy a new one. The extra hours makes his income (GDP) increase. But his situation is considerable worst because he lost his stock of wealth (remember Bastiat’s broken window fallacy…?). Arguing that a natural disaster (or a war, etc…) is good for the economy is like arguing that this person is better of because he has to work extra hours to recover his loss.

This is just another case of a too common fallacy in economics. We know that if the economy is doing better the result will be better GDP and unemployment indicators. But from observing a better GDP and unemployment indicators we cannot, and should not, conclude that the economy is doing better. More important than observing what is happening to GDP is understanding why is changing its behavior.

It could be argued that one of the problem of the Keynesian view of the world is the focus on what happens to output and unemployment rather than why these variables are moving. Not surprisingly, we get to the conclusion that going to war (or having a natural disaster) would be a good way to achieve full employment.

Did the Thirty Glorious Years Actually Exist?

Okay, I am going for a flashy title here. I should have asked whether the Thirty Glorious were as glorious as they are meant to be. This is a question that matters in debates about both inequality and the often-bemoaned growth slowdown.

In the past (say before 1950), labor force participation was quite low (relative to today) by virtue of large family sizes and most married women not working. However, when they were at-home, these married women produced something. That something was simply not included in our national accounts. When they entered the labor force, they produced less of that something. However, since it had never been measured, we never subtracted that something from the actual output generated from their increased participation.

Even before the 1950s, this mattered considerably as growth tended to be heavily underestimated (by 0.3 percentage points from 1870 to 1890, overestimated by 0.38 points from 1890 to 1910 and by 0.06 percentage points from 1910 to 1930).This was at a time when variations between the household economy and the market economy were small. Imagine the importance of overestimates since the 1950s! In a short comment reply to Emily Skarbek last year, I pointed out that adjusting for the size of the household economy meant that 1/7th of Canada’s economic growth from 1960 to 1997 (see image below and this was before one additional surge of labor participation resulting from daycare and unemployment policy reforms).

SEcularStagnation2

Recently, I found an old book in my library. It is Kenneth Boulding’s Structure of a Modern EconomyIn it, he makes this exact same argument. Basically, actual output today is overestimated relative to output in the past. And there are many, many, many other articles on this. In all cases, the rate of growth is heavily reduced. In a way, that means that the Thirty Glorious are less glorious (which makes the growth stagnation argument seem more defensible).

And you know what? This is consistent with attempts to correct inequality measures. Most of the attempts made to correct inequality for age, number of workers per household, the size of household and prices, they generally increase very modestly the income growth of the bottom centiles and decrease appreciably the actual level of growth of incomes at the top. While these corrections reduce the level of inequality (and the growth thereof), they also reduce the growth rate of incomes.

Is it possible that the correction to make inequality measures more comparable over time are allow us to see the point about overestimating growth since the 1950s? It means that the Thirty Glorious aren’t that glorious (at the very least, they’re overestimated). It also means that someone who could follow some of the proposed corrections to national income accounts (generally, the best source for this is the Review of Income and Wealth) for every year since 1929 (starting date of the US national accounts which could be extended by using Kuznets’s national income measures from 1913 to 1929) could propose the “actual output” of the country and see how glorious the 1945-1975 period was. That is the work of economic historians to do!

A Common Conservative Fallacy

I believe folly serves liberals better than it serves conservatives. Our way is the rational way while liberals tend to rely on their gut-feelings and on their sensitive hearts which make them comparatively indifferent to hard facts. That’s why they voted for  Pres. Obama. That’s why they voted for Mrs Bill Clinton against all strong evidence (known evidence, verifiable, not just suppositions) of her moral and intellectual unsuitability. That’s why many of them still can’t face emotionally the possibility of buyer’s remorse with respect to Mr Obama. That’s why they can’t collectively face the results of the 2016 election. So, conservatives have a special duty to wash out their brains of fallacy often.

It’s the task of every conservative to correct important errors that have found their way into fellow conservatives’ mind. Here is one I hear several times a week, especially from Rush Limbaugh (whom I otherwise like and admire). What’s below is a paraphrase, a distillation of many different but similar statements, from Limbaugh and from others I listen to and read, and from Internet comments, including many on my own Facebook:

“Government does not create jobs,”

and

“Government does not create wealth (it just seizes the wealth created by business and transfers it to others).”

Both statements are important and both statements are just false. It’s not difficult to show why.

First, some government actions make jobs possible that would not exist, absent those actions. Bear with me.

Suppose I have a large field of good bottom land. From this land I can easily grow a crop of corn sufficient to feed my family, and our poultry, and our pig, Gaspard. I grow a little more to make pretty good whiskey. I have no reason to grow more corn than this. I forgot to tell you: This is 1820 in eastern Ohio. Now, the government uses taxes (money taken from me and from others under threat of violence, to be sure) to dig and build  a canal that links me and others to the growing urban centers of New York and Pennsylvania. I decide to plant more corn, for sale back East. This growth in my total production works so well that I expand again. Soon, I have to hire a field hand to help me out. After a while, I have two employees.

In the  historically realistic situation I describe, would it not be absurd to declare that the government gets no credit, zero credit for the two new jobs? Sure, absent government tax-supported initiative, canals may have been built as private endeavors and with private funds. In the meantime, denying that the government contributed to the creation of two new jobs in the story above is not true to fact.

Second, it should be obvious that government provides many services, beginning with mail delivery. Also, some of the services private companies supply in this country are provided elsewhere by a branch of government. They are comparable. This fact allows for an estimation of the economic value of the relevant government services. Emergency services, ambulance service, is a case in point. Most ambulances are privately owned and operated in the US while most ambulances are government-owned and operated in France. If you have a serious car accident in the US, you or someone calls a certain number and an ambulance arrives to administer first aid and to carry you to a hospital if needed. Exactly the same thing happens in France under similar circumstances. (The only difference is that, in France, the EM guy immediately hands you a shot of good cognac. OK, it’s not true; I am kidding.)

In both countries, the value of the service so rendered is entered into the national accounting and it does in fact appear in the American Gross Domestic Product for the year (GDP) and in the French GDP, respectively. The GDP of each country thus increases by something like $500 each time an ambulance is used. Incidentally, the much decried GDP is important because it’s the most common measure of the value of our collective production. One version of GDP (“PPP”) is roughly comparable between countries. When the GDP is up by 3,5 % for a year, it makes every American who knows it, happy; also some who don’t know it. When the GDP shrinks by 1%, we all worry and we all feel poorer. If the GDP change shrinks below zero for two consecutive quarters, you have the conventional definition of a recession and all hell breaks lose, including usually a rise in unemployment.

Exactly the same is true in France. The government-provided French ambulance service has exactly the same effect on the French GDP.

Now think of this: Is there anyone who believes that the equivalent service supplied in France by a government agency does not have more or less the same value as the American service provided by a private company? Would anyone argue that the ambulance service supplied in France, in most ways identical to the service in America, should not be counted in the French GDP? Clearly, both propositions are absurd.

Same thing for job creation. When the French government agency in charge of ambulances hires an additional ambulance driver, it creates a new job, same as when an American company hires an ambulance driver.

By the way, don’t think my story trivial. “Services” is a poorly defined category. It’s even sometimes too heterogeneous to be useful (not “erogenous,” please pay attention). It includes such disparate things as waitressing, fortune-telling, university teaching, and doing whatever Social Security employees do. Yet it’s good enough for gross purposes. Depending on what you include, last year “services” accounted for something between 45% and 70% of US GDP. So, if you think services, such as ambulance service, should not be counted, you should know that it means that we are earning collectively about half to three quarters less than we think we do. If memory serves, that means that our standard of living today is about the same as it was in 1950 or even in 1930.

Does this all imply that we should rejoice every time the government expands? The answer is “No,” for three reasons. These three reasons however should only show up after we have resolved the issue described above, after we have convinced ourselves that government does provide service and that it and does create real jobs, directly and indirectly. Below are the three questions that correspond to the three reasons why conservatives should still not rejoice when government enlarges its scope. Conservatives should ask these three questions over and over again:

1 Is this service a real service to regular people or is it created only, or largely, to serve the needs of those who provide it, or for frivolous reasons? Some government services fall into this area, not many, I think. Look in the direction of government control, inspection, verification functions. Don’t forget your local government.

Often, the answer to this question is not clear or it is changing. Public primary and secondary education looks more and more like a service provided largely or even primarily to give careers to teachers and administrators protected by powerful unions. It does not mean that the real, or the expected service, “education,” is not delivered, just that it’s often done badly by people who are not the best they could be to provide that particular service; also people who are difficult or impossible to replace.

2   Is this particular service better provided by government or by the private sector? Is it better provided by government although the provision of the service requires collecting taxes and then paying out the proceeds to the actual civil servants through a government bureaucracy? That’s a very indirect way to go about anything, it would seem. That’s enough reason to be skeptical. The indirectness of the route between collecting the necessary funds and their being paid out to providers should often be enough to make government service more expensive than private, market-driven equivalent services. Note that the statement is credible even if every government employee involved is a model of efficiency.

The US Post Office remains the best example of a  situation where one would say  the private sector can do it better.

Only conservatives dare pose this question with respect to services one level of government or other has been supplying for a long time or forever. The Post Office is inefficient; if it were abolished, the paper mail would be delivered, faster or cheaper, or both. Some paper mail would not be delivered anymore. Many more of us would count it a blessing than the reverse. While there is a broad consensus across the political spectrum that children should be educated at collective expense, there is growing certitude that governments should not be in the business of education. In many parts of the country, the public schools are both expensive and bad. Last time I looked, Washington DC was spending over $20,000 per pupil per year. Give me half that amount and half the students or better will come out knowing how to read, I say. (It’s not the case now.)

3   This is the most serious question and the most difficult to answer concretely: Does the fact that this service is provided by government (any level) have any negative effect on our liberties? This is a separate question altogether. It may be that the government’s supply of a particular service is both inefficient and dangerous to freedom. It may be however that government supply is the most efficient solution possible and yet, I don’t want it because it threatens my freedom. As a conservative, I believe that my money is my money. I am free to use it to buy inefficiently, in order to preserve liberty, for example. I am not intellectually obligated to be “pragmatic” and short sighted.

To take an example at random, if someone showed me, demonstrated beyond a reasonable doubt, that Obamacare would reduce the cost of health care without impairing its quality, if that happened, I would still be against it because of the answer I would give to the third and last question above.

I don’t want a any government bureaucracy to make decisions that are ultimately decisions of life and death on my behalf. The possibility of blackmail is too real. Even thinking about it is likely to make some citizens more docile than they otherwise would be. So much power about such real issues must have a chilling effect on the many.

The rule of thumb is this: Every expansion of government reduces individual freedom. That’s true even if this expansion creates and efficient and effective government agency, say, a real good Post Office we don’t even know how to dream of. And this is not an abstract view. The well-intentioned and in other ways laudable recognition of homosexual marriage was followed in short order by threats and fines against a hapless baker who declined to bake a cake for a gay wedding. We must keep in mind at all times that, of course, the power to fine, like the power to tax, is the power to destroy.

An efficient but ethically objectionable government service is not something I worry much about, in the case of Obamacare specifically, by the way. It is inefficient, ineffective and dangerous to individual liberty all at once.

Conservatives don’t do enough to proclaim that their opposition to big government has an ethical basis, that it’s a moral position independent of the quality of big government. This silence makes if easy for liberals to caricature conservatives as just selfish grouches who don’t want to pay taxes.

Most of the time, I don’t want to pay taxes because I don’t want to be forced. I would gladly give away twice the amount of my taxes if there were a way to do it voluntarily instead of paying taxes.

I am so opposed to this kind of force that I think even the undeserving and obscenely rich should not be despoiled by the government. It’s an ethical position, not a pragmatic one. And, it sure cannot be called “selfish.” (WTF!)

Can we use tax data to measure living standards (part 2)?

Yesterday, my post on the differences in per capita income and total income per tax unit caused some friends to be puzzled by my results. To their credit, the point can be defended that tax units are not the same as households and the number of tax units may have increased faster than population (example: a father in 1920 filled one tax unit even though his household had six members, but with more single households in the 1960s onwards the number of tax units could rise faster than population for a time).

The problems regarding the use of tax units instead of households is not new. In fact, it is one of the sticking point advanced by skeptics like Alan Reynolds (see his 2006 book) and, more recently, by Richard Burkhauser of Cornell University (see his National Tax Journal article here).

Could it be that all the differences between GDP per person and income per tax unit are caused by this problem? Not really.

There is an easy to see if the problem is real. Both measures are ratios (income over a population). Either the numerator is wrong or the denominator is wrong. Those who view tax units as the problem argue that the problem is the denominator. I do not agree since I believe that the numerator is at fault. The way to see this is simply to plot total income reported by all tax units and compare this with real GDP. What’s the result?

Even with tax-reported income being deflated with the Implicit Price Deflator (IPD) instead of the consumer price index, we end up with a difference (in 2013) of roughly 3 orders of magnitude between GDP and tax-reported income relative to the 1929 base point. Basically, GDP has increased by a factor of 14.749 since 1929 while IPD-deflated tax-reported income has only increased by a factor of 11.546.

TaxData

As a result, I do not believe that the problem is the tax unit issue. The problem seems to be that tax data is not capturing the same thing as GDP is!