Thursday, July 14, 2011

Quote of the Day: Robert Lucas


"Is it possible that by imitating European policies on labor markets, welfare and taxes, the U.S. has chosen a new, lower GDP trend? If so, it may be that the weak recovery we have had so far is all the recovery we will get. 

If we're going to move to a European welfare state, we're going to have to pay a European price."

54 Comments:

At 7/14/2011 9:37 AM, Blogger Unknown said...

What European price?

U.S. vs Europe15 - GDP annual growth rates

1971-2000: 2.2 vs 2.2
2001-2009: 0.6 vs 0.6

Data Source: same data used by CarpeDiem at http://mjperry.blogspot.com/2011/02/media-myth-of-japans-lost-decades.html

 
At 7/14/2011 9:49 AM, Blogger Mark J. Perry said...

Sure, but there's a $10,000 difference in real GDP per capita: $32,500 in Europe vs. $42,500 in USA.

 
At 7/14/2011 10:54 AM, Blogger Unknown said...

Not sure I follow, Dr. Perry. The US has the real GDP per capita it has, and starts there. The alternatives are to (1) grow under a US model (weaker social safety net), or (2) grow under a EU15 model (stronger social safety net).

Since 1 and 2 growth rates seem to be the same, I still don't see the FUTURE price to be paid. in terms of lower future GDP growth rates.

Are you saying that moving to (2) will lower US real GDP per capita, but then grow at comparable rates?

Good coverage of all points:

- http://marginalrevolution.com/marginalrevolution/2010/01/the-chaitmanzi-debate.html

- http://www.economist.com/blogs/freeexchange/2010/01/futility_cross-country_comparisons

 
At 7/14/2011 11:21 AM, Blogger morganovich said...

steve-

part of the point is that it's easier to grow in % terms from a lower level.

2.2% of 43k is $946
2.2% of 33k is $726.

the percentage growth may be the same, but the dollar growth in the US is 30% higher.

THAT is a very big deal.

at equal growth rates, the us will keep increasing it's lead in per capita GDP.

%'s can be very misleading here.

you could be haiti and raise your per capita GDP 10% and that would still only be $120.

the % looks great, but in terms of actually new production and buying power, not much has happened.

the other "european price" is that they have far less than americans do.

they own fewer cars, tv's, washer/dryers, and live in homes half the size we do. their middle class have homes the size of americas poor.

they also have far lower class mobility and entrepreneurial activity.

that sounds like a pretty heavy price to me.

 
At 7/14/2011 12:30 PM, Blogger Unknown said...

@morganovich:

[because of a higher starting point] "at equal growth rates, the US will keep increasing it's lead in per capita GDP."

That's great (and not Lucas' point). And if can we grow at that same rate while also expanding the social safety net - i.e. expanding the social safety net comes at no growth cost - that's even better.


"the other "european price" is that they have far less than americans do."

Far less Stuff. And far more time, leisure, and happiness (according to research).

It's different decisions, not better or worse. Europe chooses more leisure, America chooses to work more to buy more stuff. Which decision has a higher marginal utility? To the person making the decision, their own answer probably seems correct for them.

And to bring this discussion back to the point of the post, Lucas is clearly focusing on GDP growth rates, not levels, and the provided data from Carpe Diem refutes the argument that the U.S. grows faster than Europe, at least since 1971. Which seems to refute Lucas' point that that there would be a FUTURE growth price to pay in the U.S. for a stronger safety net.

But as Tyler Cowen shows at the Marginal Revolution link above, it is futile to do this comparison at all, much less try to differentiate regional growth rates as due to some particular variable.

In any event, I fail to see how Lucas' point stands. It's either unanswerable to begin with (c.f. Cowen), or the data doesn't support Lucas' assertion.

 
At 7/14/2011 12:54 PM, Blogger Innovation rules said...

Why do we continue to compare economical models when most of them are not viable? It is like comparing two cars, one of which may look attractive but does not run.

The decline in Europe's standard of living in the last 20+ years is totally self-inflicted. To say that Europeans 'vote' for more leisure is a very strange way to say that they have structurally bankrupted their economies. Without serious reform, Greece represents the future for each country in the EU, including France and Germany.

Any discussion of government must begin with that unalterable fact. The ONLY question is whether the USA has now chosen to follow them over the fiscal cliff.

 
At 7/14/2011 1:17 PM, Blogger Methinks said...

Steve has obviously never lived in Europe.

"More leisure" is how we're describing high unemployment these days, are we?

And what a lovely goal it is to rob more people in the United States to provide for the comfort of those too lazy to work. We are only starting to do that here, but, as usual, Europe is way ahead of us in providing for people who are forced on the dole due to a debilitating allergy to electricity which prevents them from working. Why, I fear I might be coming down with one of those. I'll just close up shop and live off Morganovich.

It's different decisions, not better or worse. Europe chooses more leisure, America chooses to work more to buy more stuff.

What "choice" are you talking about, Steve? Americans choose more stuff and more work. For Europeans, that "choice" is made for them.

And as long as we're at it, in America you can choose to live at the low standard of living imposed on the European population if you want. Do you know what a motivated, entrepreneurial resident of most European countries, unwilling to submit to the small life imposed on him by the mighty state does to pursue his dreams? He leaves. Haven't you heard of the brain drain? I'm sure the people left behind are plenty "happy" - whatever the hell that means. I've never known "happiness" to be an objective measure, have you?

 
At 7/14/2011 1:24 PM, Anonymous Anonymous said...

Excellent points though social mobility is easier in Europe.

 
At 7/14/2011 2:25 PM, Blogger t11s said...

I believe the general theory to be true, but the problem is to identify precisely what labor regulations or taxes could be causing the problem.

In truth, I think the examination of Euro labor woes shows much greater effects from regulation (such as work contracts) than tax rates.

That said, what labor regulations or high taxes have gone into effect in the US?

I'd suggest:
1) Recent minimum wage rise
2) Rising regulation of Illegal immigrant labor (also inherently a minimum wage rise)
3) Affordable Care Act uncertainty

 
At 7/14/2011 2:37 PM, Blogger morganovich said...

"That's great (and not Lucas' point). And if can we grow at that same rate while also expanding the social safety net - i.e. expanding the social safety net comes at no growth cost - that's even better."

steeve-

if we put that net into place, we will not grow at the same rate. we'll drop to 1.7% or worse.

"It's different decisions, not better or worse. Europe chooses more leisure, America chooses to work more to buy more stuff. Which decision has a higher marginal utility?"

this is just nonsense. disposable income in europe is much, much lower than in the US.

they are not CHOOSING to live in small houses and not have dishwashers. they cannot afford to do otherwise.

"And to bring this discussion back to the point of the post, Lucas is clearly focusing on GDP growth rates, not levels, and the provided data from Carpe Diem refutes the argument that the U.S. grows faster than Europe"

no. the us grows 946/year per capita vs 726 in europe at 2.2%.

we are currently at 1.8 which is very close is dollar terms to europe at 2.2 (1.7 would be identical).

his whole argument is that we will drop in % terms as we move to a european nominal level.

 
At 7/14/2011 2:50 PM, Blogger morganovich said...

methinks-

like many immigrants to america, you embody and appreciate american virtues more than the natives.

i have actually wondered if our recent immigrations restrictions are not, at least in part, related to our shift to a more "european" stance. natives always factor less competition and more safety than immigrants.

 
At 7/14/2011 2:53 PM, Blogger Ron H. said...

""More leisure" is how we're describing high unemployment these days, are we?

And what a lovely goal it is to rob more people in the United States to provide for the comfort of those too lazy to work. We are only starting to do that here, but, as usual, Europe is way ahead of us in providing for people who are forced on the dole due to a debilitating allergy to electricity which prevents them from working. Why, I fear I might be coming down with one of those. I'll just close up shop and live off Morganovich.
"

Great comment, as usual. I love it. I'm sure morganovich won't mind. He obviously has more than his "fair share". :)

What puzzles me, is why so many who comment on this blog seem to struggle with math. Isn't it taught in schools anymore?

 
At 7/14/2011 3:00 PM, Blogger morganovich said...

ron-

math is no taught through "feelings".

i feel like 2+2 is 3.9ish...

regarding the "live off of morganovich" plan, well, that's why i bought dual citizenship.

they put that plan in place, i'll put plan "exit visa" into play as will many others.

capital and employment is more mobile than any time in history. the top 1% of taxpayers pay 40% of taxes.

if 10% leave, that's a whopping deficit.

crank taxes up and they will.

i would hate to give up us citizenship, but there's a price at which i would.

 
At 7/14/2011 3:09 PM, Blogger PeakTrader said...

GDP is a poor measure of living standards.

For example, in the E.U., the mix of GDP is different than the U.S..

In the E.U., there's more public consumption and less private consumption, some countries have trade surpluses (which add to GDP), and the entire E.U. economy is on the verge of collapse from its bureaucratic weight.

 
At 7/14/2011 3:24 PM, Blogger PeakTrader said...

When the government pays a worker $50,000 to redistribute income, that's $50,000 of GDP.

When the government pays a worker $50,000 to produce $20,000 of value to society, that's $50,000 of GDP.

 
At 7/14/2011 3:32 PM, Blogger PeakTrader said...

Why is the E.U. so far behind the U.S. in the Information and Biotech Revolutions (actually, way behind in all four major economic revolutions)?

The U.S. not only leads the world in the Information and Biotech revolutions (in both revenues and profits), it leads the rest of the world combined.

 
At 7/14/2011 5:02 PM, Blogger Mark J. Perry said...

One possible complication is that the USDA dataset uses real US Dollars to adjust for inflation in all countries to calculate real GDP per capita. A better comparison might be to use inflation-adjusted national currency units to calculate real GDP, and I'll work on that when I get a chance.

 
At 7/14/2011 5:27 PM, Blogger Ron H. said...

morganovich: "regarding the "live off of morganovich" plan, well, that's why i bought dual citizenship.

they put that plan in place, i'll put plan "exit visa" into play as will many others.
"

Darn it, you're always a step ahead of us. How can we ever get our grabby hands on your obviously undeserved wealth, so we can redistribute it to the truly needy?

 
At 7/14/2011 6:08 PM, Blogger Unknown said...

@morganovich:

"if we put that net into place, we will not grow at the same rate (2.2%). we'll drop to 1.7% or worse....[Lucas'] whole argument is that we will drop in % terms as we move to a european nominal level."

Which Lucas asserts without proof: that the US would fall to European growth rates (gasp), when the growth rates have been the same for the last 40 years.

For the US GDP per capita lead over the EU15 to decrease in the future, future US GDP growth rates must be lower that future EU15 growth rates.

The data shows that the US and Europe grew at the same % rate over the past 40 years. Why do you, and Lucas, assume the U.S. growth rate would fall because the US social safety net is stronger?

That's what I don't see evidence presented for in Lucas' piece. Did I miss it?

If Lucas' point is true (that social safety net spending is a tax on GDP growth), and the real GDP per capita growth rate for the EU15 (with strong net) has been the same as the US (lesser net), then doesn't that imply the EU15 growth rate, with a US-comparable net, would have been higher than the US?

(Tyler Cowen's arguments of the foolishness of this discussion aside)

@Ron H - "What puzzles me, is why so many who comment on this blog seem to struggle with math." Not sure if that is directed at me, but I simply don't understand how one can separate future levels and future growth rates - the are two sides of the same coin. Literally two variables in one compound-growth equation. Is that math enough?

 
At 7/14/2011 8:11 PM, Anonymous Anonymous said...

Steve, interesting stat. Peak does raise an important point though, that with the EU govts spending a much bigger chunk of their GDP, likely financed through borrowing, one has to wonder how sustainable EU growth is, particularly as we see now with Greece and the other PIIGS flaming out. There's also an argument to be made that Europe free-rides its growth off of the US, with technological and pharma discoveries made and largely paid for here. The question I have to ask you is, if not for such govt involvement: why is it that everybody else perpetually lags behind the US? If we give Europe and Japan 50 years to recover from WWII, why is it they can never seem to catch up? Japan had a nice spurt in the late '80s and early '90s, why weren't they able to surge enough to pull even? Natives of these various countries are all of roughly the same innate capability, what is it about Europe or Japan's native institutions that they simply can't hit US levels of GDP per capita or innovation? I think you will find it tough to argue that a preference for leisure explains those gaps away.

 
At 7/14/2011 8:13 PM, Blogger Methinks said...

Morganovich,

Thank you for your kind words.

I don't think that the current aversion to immigrants is necessarily based on our growing welfare state. Historically, immigrants were feared and disliked and immigration controls have existed throughout at least the 20th century here.

As I'm sure you know, racism and xenophobia is the norm in Europe. They all hate each other and everyone else. That's not a result of socialism - they've always been that way. But, I have no doubt that socialism intensifies those clan feelings.

Mr. Methinks has maintained his other citizenship and I will get one from Nevis as soon as I get a chance to fly down there and make the required investment. I've long had my eye on it.

i would hate to give up us citizenship, but there's a price at which i would.

Ditto. How sad that I even have an exit strategy. I fear that only the early movers will be able to get away. The U.S. can always change the law and there will be no push back from the public as we will be painted as treasonous bastards unwilling to pay our "fair share".

 
At 7/14/2011 8:20 PM, Blogger Methinks said...

Steve,

let me explain to you how important GDP growth rates are to your standard of living:

In the Soviet Union, or GDP growth rates were enormous - measured in tanks and ten ton nails and paper thin shoes.

Shampoo was a luxury and fruit was a novelty. Sometimes any food was a novelty.

This is how we lived:

http://englishrussia.com/2009/07/17/kommunal-apartments-in-russia/

I suggest you reconsider your reliance on GDP as an indicator of a country's prosperity - unless you take particular enjoyment from personal sacrifice to the state.

 
At 7/14/2011 8:30 PM, Anonymous Anonymous said...

Two fantastic videos on immigration, both starring Jason Riley of the WSJ. He points out, as Methinks says, that there's nothing new about current immigration fears. We just repeat the same dumb nativist arguments over and over again.

 
At 7/14/2011 9:37 PM, Blogger Ron H. said...

Steve: " Not sure if that is directed at me, but I simply don't understand how one can separate future levels and future growth rates - the are two sides of the same coin. Literally two variables in one compound-growth equation. Is that math enough?"

Yes, Steve, that was directed at you. I'm not sure what it is you don't understand, but your best bet would be to reread the comments by morganovich and Methinks, slowly and carefully. They are much better writers than I am, and I believe your questions have already been answered completely.

But, I will say this: you seem to be suggesting that a larger safety net has no cost, but surely you understand that when you take more money from people who are productive, and give it to people who are not, overall wealth and growth levels are diminished.

 
At 7/15/2011 1:14 AM, Blogger Methinks said...

But, I will say this: you seem to be suggesting that a larger safety net has no cost, but surely you understand that when you take more money from people who are productive, and give it to people who are not, overall wealth and growth levels are diminished.

Steve, just in case you're having a hard time working out why that would be, consider the incentive effect.

Everything you do has an opportunity cost. When you work, you give up valuable leisure time.

In an extreme example: if the tax rate on the next dollar you earn will be 100%, will you give up your leisure time (time with family, your kids, etc.) to work to earn it? I don't know anyone who will.

At virtually all but the lowest levels of taxation, there will be people who are unwilling to work the additional hour.

You will find more people who will work the additional hour if you drop the rate to 90%, still more if you drop it to 80% and vastly more if you drop it to 20%. With every increase, fewer people are willing to work the marginal hour. If nobody is willing produce enough wealth to tax away to pay for this robust social welfare, then how will it happen?

Thus, the promises of the social net are vastly exaggerated compared to the ability to make good on those promises.

Everyone is very motivated to take advantage of the easy living a social net provides and very much unmotivated to work to pay for it. As Bastiat said: "The state is the great fiction by which everyone attempts to live at the expense of Everyone else".

Take Germany, for example. In the late 90's I recall reading a WSJ article about the "sick man of Europe". Its social net was extremely robust, necessitating an equally robust, severely robust taxation program. The result?

Over a period of three decades, the people depending on the social net grew by 400%. The people paying into the social net grew by 4% over the same time period. Clearly, the robust social net was unsustainable.

All of the Germans lived much more poorly as a result. The average German's material wealth is about on par with the average Louisianan. Louisiana is the poorest state in the United States.

But, even with this generally impoverished life (compared to the U.S.), the social net was still unsustainable. Germany had to make changes. It did. It's still poorer than America. GDP growth and all.

Ron H.,
Thanks for the compliment, but what are you talking about? You're a wonderful writer.

 
At 7/15/2011 2:20 AM, Blogger PeakTrader said...

It should be noted, population growth tends to slow when GDP growth slows.

And a 2% rise of a quality good is not the same as a 2% rise of an inferior good.

Robert Lucas is correct that lower U.S. GDP growth is needed to become more like the E.U..

A safety net and labor standards are important. However, full employment is also important.

 
At 7/15/2011 2:48 AM, Blogger Ron H. said...

"A safety net and labor standards are important. However, full employment is also important."

Speaking of mutually exclusive...

 
At 7/15/2011 3:04 AM, Blogger Ron H. said...

"Ditto. How sad that I even have an exit strategy. I fear that only the early movers will be able to get away. The U.S. can always change the law and there will be no push back from the public as we will be painted as treasonous bastards unwilling to pay our "fair share"."

Well, I'll push back, but so far no one in Washington pays any attention to me. I frequently write to my Congress Critters these days, and they generally send me back a nice form letter that says:

"Thank you for writing. I appreciate your concerns, but I'm going to do it my way in any case."

If you ARE forced to exit, perhaps I could help: If you just liquidate all your assets and send me the cash, I'll put it in an account, and pretend it's mine, so the IRS won't suspect anything.

What do you think?

 
At 7/15/2011 3:21 AM, Blogger PeakTrader said...

Ron, reaching an optimal level is not a zero sum game, although there are trade-offs.

Why settle for a suboptimal level?

 
At 7/15/2011 7:56 AM, Blogger morganovich said...

"The data shows that the US and Europe grew at the same % rate over the past 40 years. Why do you, and Lucas, assume the U.S. growth rate would fall because the US social safety net is stronger?"

because such a net increases unemployment and takes money away from productive sectors and moves it to unproductive ones.

you are really not getting this steve. this is not some "speculation". this has been the weakest recovery from a recession since ww2.

we should be well above average, not below.

you tell em, how does taking money away from business investment and shunting into unproductive used NOT reduce growth?

you keep pretending that % growth is nominal growth.

it's easier to kick out 2.2% growth from a lower base.

if europe were trying to grow from as high a base as we have, they would have 1.7% growth, not 2.2%.

do you not understand %'?

you seem to be making the same very elementary mistake over and over.

 
At 7/15/2011 7:58 AM, Blogger morganovich said...

"Darn it, you're always a step ahead of us. How can we ever get our grabby hands on your obviously undeserved wealth, so we can redistribute it to the truly needy?"

mugging?

 
At 7/15/2011 8:04 AM, Blogger morganovich said...

methinks-

i agree that not all resistance to immigration is driven by the welfare state, but i think that for any given level of xenophobia, you get more immigration resistance as the size of the welfare state increases.

you don't want to pay benefits to outsiders.

but i was actually thinking that the causality might go the other way.

immigrants tend to be immigrant friendly. if you have fewer, the center of opinion shifts.

i think the current US immigration policy is ruinous. we have succeeded for so long by being the best place on earth to get rich. send us your best and brightest and have them start their companies here. we have badly short circuited that and it's creating both a skills gap and exporting company formation and innovation just at the time when we need it.

immigrants have been a source of strength for the US for centuries. i don't think it's a coincidence that we are struggling in the wake of shutting off that flow.

 
At 7/15/2011 8:11 AM, Blogger morganovich said...

"The July Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated for a second consecutive month. The general business conditions index remained below zero, at -3.8.

The new orders index also remained negative"

oopsie.

well, at least real retail sales were negative yesterday.

yeah, this "be like europe" thing is great.

oh, and even "core CPI" was running at a 3.6% annualized rate in june.

if this were 1975, that reading would have been north of 8%. (recall that CPI methodology changed)

welcome back carter...

 
At 7/15/2011 8:52 AM, Blogger mike k said...

Hmm...have we not already moved fully toward a European style welfare state? It seems since at least the "Great Society" programs of LBJ we look more like a European welfare state than a pre-Depression era USA. Couple that with Sprewell's comments about the rest of the world free loading on US med-pharama innovation and Europe and Japan spending comparativley little on defense it's amazing our growth rate has been as high as it has. Alas, this can't last forever, thus Lucas' point. I'm afraid the rest of Europe and eventually the US are a lot closer to Greece and Spain than anyone cares to admit.

 
At 7/15/2011 9:39 AM, Blogger morganovich said...

regarding a move to european style government, not that federal outlays as a % of gdp have soared from 19% in 2000 to 25% today.

if you are looking for a drag on the economy, there it is.

 
At 7/15/2011 9:57 AM, Blogger Methinks said...

mugging?

Ha! I bet you're armed.

 
At 7/15/2011 9:59 AM, Blogger Methinks said...

but i think that for any given level of xenophobia, you get more immigration resistance as the size of the welfare state increases.

you don't want to pay benefits to outsiders.


Agreed, Morganovich. However, I don't want to pay them to "insiders" either!

 
At 7/15/2011 10:07 AM, Blogger morganovich said...

"Agreed, Morganovich. However, I don't want to pay them to "insiders" either!"

of course not, you came as an outsider, which brings me back to my point about immigrants generally embracing american values better than americans.

you came to participate in them. being born here makes many feel entitled, like the children of rich parents.

if you've had it good for too long, it's easy to forget where the good came from.

rags to riches to rags in 3 generations...

 
At 7/15/2011 10:29 AM, Blogger Unknown said...

In general, I just want to reiterate that my point is that Lucas made a specific argument regarding US v EU gdp growth rates, that argument was unsupported, and in fact the data seems to indicate Luca's starting assertion is invalid. That's what I'm focusing on.

@METHINKS and RONH: I agree that % growth is easier from lower levels. It is easier for a small business to grow at 20% year over year than it is for Walmart to grow 20%. However, I'm not sure that argument holds true between Target and Walmart_US, even though Walmart_US is 5x as big. I would bet that 'growth on large numbers' relationship is a power law, and the effect rapidly decreases as the numbers converge.

Just the same, it is easier for real per capita GDP to growth at a high rate in China ($7,500 per capita GDP) or India ($3,300) than it is for the U.S. to growth at a high rate. I'm suggesting that the differences in starting levels between the U.S. and EU15 are not so large as to void comparisons about % GDP growth. Such comparisons are a mainstay of economic analysis, and that commentators here seem to want to torpedo such analysis is striking. Such analysis is the basis for Lucas' entire argument. And the EU15 is not Russia c.1985 - that analogy is inappropriate.

In fact, and the only thing I'm arguing, is that Lucas specifically compares growth RATES between the U.S.and Europe. I'm doing the same. He says the US will fall to European growth rates. The data shows there has been no difference in growth rates.

In a rebuttal, I merely show Lucas' point is unsupported, and it appears to be contradicted by data. Lucas' null hypothesis appears to be disproven, or at least not supported. I'm not arguing for any other conclusion, just negating Lucas'.

---

@ RON H: "you seem to be suggesting that a larger safety net has no cost," I am not making that argument - I am pointing out that Lucas refers to slower European growth rates in support of his argument, when in fact the data shows that there European growth rates are not, in fact, slower. Lucas does not seem to describe any other "cost" other than slower growth rates, but the data don't show such slower growth rates. My point is that Lucas' argument in unsupported.

---

@ SPREWELL: "what is it about Europe or Japan's native institutions that they simply can't hit US levels of GDP per capita or innovation? I think you will find it tough to argue that a preference for leisure explains those gaps away."

Totally agree. I just don't think Lucas has made any credible, evidence-based showing that the GDP difference is entirely due to social safety net spending. Which is his entire argument.

---

@ METHINKS: you sure you want to use Germany as an example of a bad economic story? 2010: 3.6% GDP growth, 6% unemployment, $44,700 GDP per capita. About the same as Wisconsin, Oregon and Rhode Island. The Horror!

---

@ MORGANIVICH: "this has been the weakest recovery from a recession since ww2." This Great Recession (or lesser depression) is unlike any other recession since ww2. It is the largest financial / balance sheet recession since 1930, which Rogoff and Reinhart show alway lead to very slow, below-normal recoveries. Are you arguing the increased unemployment comp has caused this weak recovery, and not de-leveraging from historical leverage leading to weak end demand? Really?

---

As an aside, a blog forum does not seem to be the best way to keep up a back and forth discussion. Threaded comment systems are much better.

 
At 7/15/2011 10:40 AM, Blogger Ron H. said...

Methinks: "mugging?

Ha! I bet you're armed.
"

You beat me to it. I guess I'll have to start getting up earlier.

 
At 7/15/2011 11:20 AM, Blogger Ron H. said...

Steve: "@ RON H: "you seem to be suggesting that a larger safety net has no cost," I am not making that argument - I am pointing out that Lucas refers to slower European growth rates in support of his argument, when in fact the data shows that there European growth rates are not, in fact, slower."

You're not? Allow me to quote you:

"That's great (and not Lucas' point). And if can we grow at that same rate while also expanding the social safety net - i.e. expanding the social safety net comes at no growth cost - that's even better."

How do YOU read that?


Steve:"And the EU15 is not Russia c.1985 - that analogy is inappropriate."

Although it wasn't my analogy, I think you missed the point that GDP doesn't tell you everything you need to know about people's standard of living and well being.

All that government spending counts as GDP also, although it may not improve people's lives- i.e. the Soviet Union c. 1985.

 
At 7/15/2011 11:22 AM, Blogger Ron H. said...

morganovich: "mugging?

I suspect you are already being mugged by Uncle Sam even if you don't call it that.

 
At 7/15/2011 11:33 AM, Blogger morganovich said...

"Are you arguing the increased unemployment comp has caused this weak recovery, and not de-leveraging from historical leverage leading to weak end demand? Really?"

i am arguing that increased governmental spending has crowded out private spending, and that, just as in the 30's, a more muscular regulatory environment and the restrictions and uncertainty it creates have caused underinvestment and a lack of business confidence.

and now we want to add higher taxes to the stew?

seriously, can you honestly tell me you don't think these things diminish business confidence and growth?

i suggest you read amity shlae's excellent book about the 30's "the forgotten man". it does an excellent job of cataloging the damage that big government fascist policies do.

FDR was a fascist. he even admitted as much while it was still fashionable. he was a big admirer of mousollini. obama is a big admirer of FDR.

it amazes me that we cannot, as a society, seem to learn these lessons in any durable fashion.

i note that you have dodge the "how can taking money from the productive and giving it to the unproductive not decrease growth" question.

seriously, what's your answer. until you can answer that, you argument has no underpinning at all.

 
At 7/15/2011 11:35 AM, Blogger morganovich said...

"Ha! I bet you're armed."

well, i have 14 years of several different martial arts and it's very easy to get a concealed carry permit in utah, so draw your own conclusions about the advisability of mugging me.

i don't carry a helluva lot of cash.

 
At 7/15/2011 2:36 PM, Blogger Unknown said...

@ MORGANIVICH:

"i am arguing that increased governmental spending has crowded out private spending, and that, just as in the 30's, a more muscular regulatory environment and the restrictions and uncertainty it creates have caused underinvestment and a lack of business confidence."

By far, by very far, the #1 concern of businesses is lack of end demand (see reporting on business surveys). Not regulatory uncertainty, not lack of confidence in anything other than lack of confidence that customers will come. Capital underinvestment: the US is in a output-gap environment (read: low capacity utilization), has surplus capacity and no need for new factories or much equipment, and tons of cash sitting on their balance sheet with a ROI hurdle rate that is dropping by the quarter. Business are not investing or hiring because businesses have no need to invest or hire. For most US businesses, that's not due to regulatory concerns or some unspecific "lack of confidence", it's due to concerns about selling what they make.


"i note that you have dodge the "how can taking money from the productive and giving it to the unproductive not decrease growth" question." seriously, what's your answer. until you can answer that, you argument has no underpinning at all.

Again, my argument is that the main point of Lucas' WSJ OpEd is unsupported - that the US will slow to EU growth, when data shows the US has had EU growth for 40 years.

As to Amity Schlaes book, please keep in mind that many respected experts in the Depression take a lot of exception to her research and her conclusions. It is not always and everywhere described as excellent.

---

@RON H: "How do YOU read that?" (stating that I'm not rebutting Lucas, but actually arguing in opposition). Lucas argues that a European-style safety net would decrease US growth rates to EU levels. Since data shows that the US has been at EU levels for 40 years, then the data might also show that expanding the safety net does not come at any cost. I'm not arguing that alternative must be true, I'm arguing that the data does not appear to show one way or another, but certainly doesn't support Lucas' assertion.

It is possible to *critique* an essay without virulently attacking it and simultaneously defending the opposite. There is a difference between "I don't think he proved X" and "X is always wrong, and I'm asserting Y is the one truth."

 
At 7/15/2011 2:55 PM, Blogger juandos said...

"I don't think that the current aversion to immigrants is necessarily based on our growing welfare state"...

Gee methinks I have to wonder a bit about that particular statement...

From F.A.I.R.: The Fiscal Burden of
Illegal Immigration on
United States Taxpayers


(1st paragraph of executive summary): This report estimates the annual costs of illegal immigration at the federal, state and local level to be about $113 billion; nearly $29 billion at the federal level and $84 billion at the state and local level. The study also estimates tax collections from illegal alien workers, both those in the above-ground economy and those in the underground economy. Those receipts do not come close to the level of expenditures and, in any case, are misleading as an offset because over time unemployed and underemployed U.S. workers would replace illegal alien workers...

 
At 7/15/2011 2:59 PM, Blogger juandos said...

"Again, my argument is that the main point of Lucas' WSJ OpEd is unsupported - that the US will slow to EU growth, when data shows the US has had EU growth for 40 years"...

Gee Steve two years of Obama and the Dems haven't convinced you yet that going Euro in not the way to go?!?!

 
At 7/15/2011 4:43 PM, Blogger PeakTrader said...

Steve, Lucas is correct, because you're using per capita real GDP growth and assuming the U.S. and the E.U. economies are the same.

U.S. GDP growth has to slow to be more like E.U. GDP growth.

 
At 7/15/2011 6:13 PM, Blogger Unknown said...

@PeakTrader: "U.S. GDP growth has to slow to be more like E.U. GDP growth."

Just wanted to point out: Assuming a larger social safety net is a drag on growth (and I agree, it seems like it would be, but I don't see where Lucas supports that with evidence), then since [the EU15 with that drag] has grown at the same rate as [the US without that drag], then wouldn't [the EU15 without that drag] have grown faster than the [US without that drag]?

What does THAT say about the competitiveness of the US economy? Even without the drag we only matched the EU15.

 
At 7/15/2011 6:30 PM, Blogger mike k said...

Interesting, going back to Steve's original post he uses a time horizon that begins in 1971, long after the advent of America's "Great Society" programs. Which, of course, makes us look much more like a European style welfare state. Lucas uses a 100 year time horizon, in fact starts in 1870. Cherry picking data sets proves nothing. In fact, I think Steve makes Lucas' point by picking those years.

 
At 7/15/2011 6:38 PM, Blogger PeakTrader said...

Steve, for the U.S. to be more like the E.U., taxes need to be much higher, government has to be even larger, unemployment has to stay high, with a limited workweek, real GDP growth has to slow (which will also slow population growth), limited resources into emerging industries need to almost stop, consumption has to fall (from 70% to 60% of GDP), rich Americans will flee to Australia, and those not working will choose:

1. A government job.
2. Government benefits.
3. A private job.

In that order, unless it's a union job, then a private job is fourth.

If per capita real GDP growth is unchanged, then it's an illusion.

 
At 7/15/2011 7:15 PM, Blogger PeakTrader said...

Winston Churchill:

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

 
At 7/15/2011 7:47 PM, Blogger Bobby Caygeon said...

please Steve, stop coming back for more. I feel bad for you.

 
At 7/15/2011 8:46 PM, Blogger Methinks said...

Steve,

I can help you with the facts, I can't fix your reading comprehension problems.

 

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