How much has Cuban productivity increased since 1960?

Is it possible for two equally rich countries (on a per capita basis) to have different level of output per worker? The answer is obviously yes, and it matters in the case of measuring growth in Cuba since the revolution.

A country with a very young population will tend to have fewer workers than one with an older (but not too old) population. Let’s say that countries A and B have a median age of 22.5 in year one.  However, in year ten, country A has a median age of 35 but country B has seen a more modest increase to a median age of 25. This will bias any estimates of growth comparison between both country. The increase in the median age suggests that there are more and more workers in country A (people of prime age) than in country B. As a result of that, output per capita will increase faster in country A than in country B even if both countries have equal rates of growth in output per worker.

Well, countries A and B are basically Cuba and most of the rest of Latin America. Since the 1950s, Cuba’s population has aged rapidly but birth rates have plummeted so fast that families shrunk. With fewer kids in the population, it means that the share of the Cuban population that are of prime working age increased rapidly. This is what biases the comparison of Cuban living standards with other Latin American countries.

In the figure below, I took the GDP (the Maddison data) of Cuba since 1950 (indexed at 1960 to see the arrival of Castro) and divided it by the total population, the population above 15 years of age and the population between 15 and 64.

cubagdp

As one can see, with the GDP per capita series, Cubans saw a 50% increase in their incomes between 1960 and 2005 (the Maddison data stops at 2008). However, when you look at GDP per working age adult in order to capture the growth in productive capacity, you get moderately different results whereby the cumulative increase is three-fifths to half as small.

In light of this, it seems like Cuba’s living standards are less and less impressive.

The Chinese Get Richer, I Become Poorer. Right? Dreaded Percentages!

Elections season is on us again. On the talk shows, I hear more and more callers, and often hosts, grossly misusing percentages in the service of fallacious claims. Politicians won’t be far behind. Here we go again, I am thinking; I have been here before. Got to explain again.

This time, I am taking names. And there will be a quiz, and it will count toward the final grade.

Pay attention; slow down.

It’s 2000, I, JD, earn $60 as a machinist. My wife K earns $40 keeping accounts for others with the help of some sophisticate software. I am earning what percentage of our joint income?

60/60+40 = 60%

It’s 2010, I, JD, now earn $90 as a machinist, My wife K’s business has taken flight. She uses more sophisticated software. She has more customers than she can handle. She earns $120.

My share of our new joint income is now:

90/90+120 = 42%

The percentage of our joint income that I produce has declined. It has declined a lot; it has declined by almost 1/3.

Has the value of my production declined? Slow down!

The answer is clearly “no.” The value of my production has increased by half (from 60 to 90). That’s not bad at all. At any rate, it ‘s obviously an increase.

Think it through. Do the arithmetic yourself. There is no trick. It’s the simple math you did not learn in third grade because you hated the teacher.

In the simple example above, my income represents the value of American manufacturing. My wife’s income represents the value of the mysterious and illogical category “services.”

The percentage of the value of manufacturing relative to the total GDP of this country has been going down steadily because the value of US services has gone up even faster.

The absolute value of American manufacturing has only gone up and up, and going up. America has not become “de-industrialized,” contrary to a common but false perception.

The misperception has two main sources:

  1. Many media commentators and perhaps even more politicians don’t understand simple percentages. See above.
  2. The number of manufacturing jobs has declined even as the value of that which they manufacture has gone up.

Here is a solution to the drying up of manufacturing jobs: Take away machine tools from one metal worker in three; give him a hammer instead. You want even more manufacturing jobs, lots of them? Remove the software from textile weaving plants. Program their machines by hand as they did in 1910.

You don’t like the idea? Time for a serious discussion.

Now let’s go back up a little.

The quite good rise in the value of manufactures and the even greater rise in the value of whatever services produce, these two things are related. Better and better, more and more efficient manufacturing provides the resources for more services. We can afford more waiters, more surgeons, more teachers, more acupuncturists, more therapists, more life coaches, more “color advisers” (I live in Santa Cruz, California) because, collectively, we produce more hard necessities much more cheaply than our close ancestors did. Hard necessities include cars, soap, oatmeal, shovels, bricks and nails. Why, nails used to be forged by hand! I own some hand-forged nails from making repairs on my 1906 house.

When you hear, for example, that manufacturing now contributes only 30% of US GDP, it does not mean that there is less manufacturing being done in this country. To figure out the reality, you have to get out of percentages completely. Period!

If my income used to be $60 and it’s now $50 then, yes, it has declined. If it’s now $65, my income has risen. Period! That’s true irrespective of percentage contribution to anything.

Tech note: Don’t get tripped by the separate issue of the changing value of money. There are inflation/deflation calculators on the Internet that do a good enough job of dealing with this issue. I recommend that you consider one train of thought at a time.

Nearly everyone is overestimating himself. That’s the problem.

Speaking of GDP (Gross Domestic Product), a National Public Radio chickie announced breathlessly a couple of weeks ago that China would soon pass the US in GDP. I could hear fearful emotion in her voice, as if some bastard had threatened to cut up her credit card.

Here is the truth: We may soon see the day when 1,400 million Chinese produce as much together as…..314 million Americans.

Personally, I can’t wait for the Chinese to do better, to make their percentage of global joint production much higher.

Question: When the Chinese GDP reaches 60% of world joint GDP, will I be poorer?

National Economic Systems: an Introduction for Intelligent Beginners

Part One: Stimulation.

This essay does not require any specialized or advanced knowledge of economics. It does require an open mind and moderate alertness.

It’s must be difficult for the average working stiff with a job or school attendance, or both, a mortgage, and a family, to make sense of the daily economic news. It’s not because you are ill-informed, it’s because the media gives economic news in bits and pieces without tying them together, and usually without context. I suspect few of the big media commentators understand the context or try to link the fragments, anyway. Those who do understand tend to assume that everyone is aboard the same train they are riding. They don’t have much to say to those who are still at the station.

Major exceptions are the Financial Times, which has a strong pro-Obama bias, and the Wall Street Journal, which does not. Even with those, you have to read them every other day to get the big picture. So here, is the straight dope. (If you are concerned about my qualifications, a valid point, you will find a link to a fairly up-to-date version of my vita on the front of this blog.)

We are not facing one economic crisis but two. One is more or less routine, the other is almost unprecedented. The mildly re-assuring noises the media are currently making are about the first crisis, the almost-routine crisis only.

The first crisis is a conventional recession. Recessions are historically a normal part of capitalism. Healthy capitalist economies are on a growth path most of the time. There are several measures of economic growth and contraction. The easiest to understand is Gross Domestic Product, “GDP.” There are criticisms of this measure but we don’t care right now, for our narrow purpose.

GDPs grow at varying rate at different times and in different countries. A US GDP growth of 3.5 % per year makes nearly everyone happy. Countries that are at an early stage of development, such as India, and have a long way to go, often experience annual growth of 6% or 7%. China’s GDP growth has often topped 10% .Western European countries have been pleased with annual rates of growth of 2% for many years. There is a lesson here; don’t lose track of it.

National economies don’t always expand, sometimes, they contract. That’s a lot like the income of someone on an hourly wage instead of a straight salary. The prodigious economic growth of western countries under capitalism in the past 150 years is made up of series of expansions followed by contractions. We had overall growth because the contractions were both less in magnitude and shorter in duration than the periods of expansion.

The word “recession” means either two consecutive quarters of contraction of the national economy or it means any damn thing you want. Serious people only use the term in connection with the definition above. That’s what I do because I try to be a serious person.

Recessions are tricky because you only know about them after the fact, when the national statistics come out. Anyone who says, “We are in a recession” is either speculating or making propaganda. Economic commentators try to read the existence of a recession, and the waning of a recession, by studying other economic events. Those are events believed to be associated with recessions and to which numbers are attached that are collected frequently.

Here are two main ones: Unemployment figures and stock market indexes. There are others you can learn about if you become interested. When national unemployment goes down and the main stock market indexes go up for a while, commentators tend to announce the end of a recession. I think that liberal commentators give those a lot of weight under Democrat administrations, and conservative commentators under Republican administrations.

The reading of these signals is not an exact science, by a long shot. I just believe those readings are better than nothing if you take care to follow several. That’s a big “if,” of course.

Incidentally, there are very good scholarly, academic studies regarding the connections between various indicators and economic growth/contraction. I suspect few commentators keep abreast of those. I wouldn’t be surprised if it were none. I would be pleasantly surprised if some did.

Now, on to the current situation. When President Obama took office, it’s pretty clear the US was in a recession, or entering one. The President had nothing to do with it. There was much discussion everywhere about whether his buddies in Congress caused it. Fact is that there have been recessions with Republican as well as with Democratic administrations, and with Congressional domination of one or of the other major party.

The political elites of most countries, including many American Republicans believe in something called “Keynesian economics.” You don’t need to read Keynes to know as much as they do. Here is the gist: In modern developed societies, the government is such a large economic actor that it can influence decisively the path of the national economy. Thus, Keynesians believe that government has the power to stop or to improve on recessions. Governments may do this by engaging in spending, public spending, spending tax money, or borrowed money. (Keep I mind that, with the interesting exception of a few oil rich countries, governments have no money except what they can take in taxes and what they can borrow.)

Real conservatives, and libertarians who are not especially conservative, think that Keynesian economics is a dangerous hoax. They argue that government spending aggravated and deepened past recessions including the one associated with the Great Depression of the nineteen thirties. Fortunately, we don’t have to consider here who is right. (Full disclosure: I am one of them.)

A point that’s not in dispute is that government spending usually entails bigger government debt. More on this later.

Keynesian public spending is forthrightly intended to stem the spread of unemployment. The reasoning is simple: When people lose their job, or fear losing their job, they, and often, their neighbors, spend less. This lowered spending in turn slows down the national economy. This induces more unemployment: If I stop buying my daily latte because I am unemployed, or I fear I might soon be, and if others do the same, the barrista at my local coffee shop will lose her job. And so forth.

The fewer people earn a living, the smaller the national economy. If I merely forgo buying a car for the time being, the indirect effects on the national economy are even worse.

Hence, good Keynesian government spending should have very quick effects. It should stem the spread of unemployment rapidly and durably. It used to be the case that government had the ability to spend money quickly through public works. Hitler, for example, reduced quickly very high German unemployment by hiring the unemployed, and many underemployed, essentially to dig holes: Go to work in the morning; get a government check in the evening; spend the next day.

This approach has become difficult to employ for a variety of reasons, including permitting processes related to safety and to environmentalist zeal. Thus, if my city of Santa Cruz decides to build another breakwater for its harbor today, it’s unlikely anyone will get a paycheck for handling a tool for eighteen months, or more. Most past recessions lasted less than eighteen months.

As I write, only 10% or 15 % of the stimulus package money decreed by the President has been spent. Either, that’s not enough to stem the spread of unemployment, or, it’s not really a spending spree intended to stimulate. If the latter, what’s the purpose?

There is a beginning of an answer if you look at parts of the package that have a well-known name attached. One such is financing for a train from Disneyland to Las Vegas. It was put in by Harry Reid, the Senate Democratic Leader. There is no way the bulk of the corresponding money will be spent until five or even six years from now, except for studies employing a handful of specialists. Those specialists are not suffering from high unemployment, by the way. This part of the package does nothing to put to work Tom, Dick and Harry. The money won’t be spent for a long time because such a project needs a lot of planning, including for permitting to satisfy environmentalists.

What is the real purpose of this part of the stimulus package, then? At least, it makes Harry Reid look good with his voters. At worst, Harry Reed is using his muscle in Congress to satisfy special interests. I don’t know if the latter is true. I have not researched it. It’s plausible.

My conclusion: Even if you subscribe to Keynesian views on how to jump-start a national economy in recession, the measures taken by the administration six months ago do not work and cannot work.

Those who say, “Give it time” don’t know what they are talking about. The essence of government spending for stimulus purposes is speed. If you don’t stop and reverse unemployment quickly, the recessionary spiral worsens. If you did nothing at all, it would stop on its own, in good time, anyway.

Why do I care about the stimulus package’s lack of effectiveness?

Two reasons. First its part of a mass of unprecedented government spending. I mean unprecedented in the absence of a major war, like WWII. It increases public, government indebtedness to a worrying extent. Public debt has consequences, in the long run and in the not- so-long-run. More on this in the next episode of this posting.

The second reason, I care is that I detect a social and political project markedly different from the one announced by the administration in the current oversize government spending. I have not become a conspiracy theorist. I am relying on public information, including the President’s own past statements, those of his close advisers and, above all, my knowledge of what went on in Western Europe between about 1980 and 2000. I will address this alternative project in a subsequent posting also.

You have been good but there will be a quiz!

Current events update:

The Wall Street Journal has a good discussion of the Maine public health plan in today’s issue. It’s on p. A12, in the editorial section. It’s a fiasco. We care because it has important features in common with what we know of Obamacare.

Cool people tend to dismiss Rush Limbaugh, even conservatives. Limbaugh is bombastic and he exaggerates. That’s vulgar. However, he must have an army of good researchers because he comes up within a short time with hard evidence of allegations against his political adversaries. One of the wildest allegations from the right is that Obamacare entails “death boards.” Well, what do you know: Today, on-air, he reads excerpts from a Veterans Administration practitioner guidebook that sounds for all the world to me like a “death book.”

The convicted mass murderer of 270 people  in the air over Lockerbie, Scotland receives a hero’s welcome in his home-country of Libya. He had been freed on compassionate grounds by the gutless Scottish Minister of Justice. (Yes, there is such a thing.) I saw it on television. This is not hearsay.

I think the enthusiasm greeting him in Libya should be written in the accounts book. It should enter into any calculus, side-by-side with collateral damage, next time this country has reason to consider bombing anything in Libya. It should not be long.

It’s unreasonable to treat in exactly the same way those who hate us and those who harbor sheer evil in their hearts, and our old friends. The stupid  Scots should get a pass. The evil  Libyans shouldn’t. There is no ethical system in the world that requires that this country do otherwise, not even Christianity. You are supposed to forgive your enemies after they have stopped harming you, not while they are cutting your throat, not even when they are impotently clamoring  their wish to do it.

By the way, I am told by those who should know that Arabs respect this kind of thinking.

Shipping Jobs Overseas: The Export of American Manufacturing Jobs and Lousy Education

I had a troubling encounter in the past few days. It was on Facebook and it was with a stranger. Here is how it went: I patronize several organizations’ and people’s Facebook pages, to stay informed and also to learn from them. There is a man, X, who is my Facebook “friend” and whose page I like because he is a libertarian, or a libertarian conservative like me, who knows useful things I don’t know. X has a talent for firing up debates on Facebook. In one debate a propos of I don’t remember what, one person, followed by several others, kept referring to the de-industrialization of America, its putative loss of manufacturing industries specifically.

I intervened calmly and politely to point out that there was no such thing. I remarked that the height of American industrial production was either 2008 or 2007, or maybe even 2006, not 1950 as they seemed to believe. I directed the debate participants to a couple of government sources. One woman responded almost insultingly, alleging that I was trying to send her on a wild goose chase. She appeared to think that I was referring her to the whole Census with its thousands of pages of documents. I took the trouble – obligingly, if I say so myself – to direct her through Facebook to a source I though was easy to read, NationMaster. In addition I summarized what NationMaster had to say on the topic.

Here is the summary: Continue reading