Monday, March 17, 2014

A puzzle on St. Patrick's day

First, a link to the greatest St. Patrick’s day video of them all:  go here to elevate your vision and salute the true meaning of the day, as I do every year.  Well, every year since 2011.  Go ahead, I’ll wait.  When you get back I have a puzzle I want to discuss.

Ok…the puzzle is this: why is everyone so dismal?  And by “everyone”, of course, I mean economists.  Oh, I know economics is called the dismal science, but that was just Carlyle’s response to Malthus, and more generally everyone’s response to the iron law of wages and all of that.  But for the last century or so the iron law of wages hasn’t seemed quite so relentless.  Economics has moved on.  Hasn’t it?  Most of us, at least in the more advanced economies, live at well over subsistence level these days.

So I was going to write something about the CBOs dismal outlook for the next few decades, which I think is premature at the very least.  They are forecasting continuing deficits as far as the eye can see---that’s ok, we almost always run deficits so that’s a pretty safe forecast---but they’re expecting large deficits, weak economic growth, and high (or what they would call “normal”) interest rates, all of which mean that the national debt as a fraction of GDP will grow.  A recent post by Robert Barbera pointed out that weak economic growth and high interest rates are an odd combination in a forecast; usually high interest rates occur (and the Fed allows them to occur) because of robust demand for investments, meaning that the economy is growing at a healthy rate.

I was going to write that the CBO’s recent long-run forecast were unduly dismal.  The CBO has a pretty poor record for long-term economic forecasts.  Of course, so does everyone else.  We do ok on short term or medium term, most of the time. We’re usually (not always) ok on forecasts out six months or so, even a year or two.  But nobody gets 30 year forecasts right.  So the CBO forecast of unrelieved debt as a share of GDP seemed to me to set a special standard for cocky dedication to dismal.

But then I read this from Paul Krugman the other day.  It’s not Krugman’s view, it’s Thomas Piketty’s view in this book, as reported by Krugman, that staggers me.  The CBO’s long run expectations are a tiny forecast for a few decades out, in one country, and there are things that can be done about it if you believe the forecast and can get past Congressional gridlock.  Minor stuff compared to the Piketty vision.  Now, I haven’t read the book, so I’m reporting second hand.  But reading through Krugman’s description, it sounds like a forecast of pitiless and inevitable doom for nearly all mankind, and for nearly all time.  This recent joyful period of broad prosperity that we have experienced since the mid-nineteenth century is, in this view if I understand it, a historical anomaly, a temporary accident, and the age of Malthus, the iron law of wages, will return by the end of this century.  Few people will have any economic security in that dreary future, even fewer will have wealth.  Oh, there will be national wealth---but it will be narrowly owned. There will still be economic growth.  But the wealthiest, the rentiers, will gobble it all up, leaving the rest of us to scrabble desperately for our daily food.

You can read through the Krugman piece if you are in the mood for some mildly wonkish modeling, but here’s the gist of it in one picture:
In this graph, the line with black diamonds represents the rate of return to owned assets, and the line with the open squares is the global rate of economic growth.  If the first line is higher than the second, then the asset-owning class will get richer faster than the economy does, which means that income distribution will become more and more unequal.  It’s a long run prescription for a small aristocracy and a mass of hungry, hopeless serfs.  On the other hand if economic growth is higher than the rate of return to ownership of assets, then the asset-owners will gradually get richer, but the whole economy will provide enough so that the rest of the population rises even faster: the wealthy must continually refresh their wealth by contributing new substance to the economy, or they gradually, over generations, fade back into the general population.

It’s interesting to look at the difference between the period before about 1913 and the period between 1913 and the present.  I’m curious about the source of the data, and the criteria by which time periods to present were selected.  I mean, there was a massive change somewhere between 1820 and 1950, but it’s not clear from this graph when that change happened; we only know that 1913-1950 as a whole period was very different from the whole period from year 0-1913.  Why?  Well, we can credit technological progress, I suppose.  We can credit democracy. We can credit the emergence of merchant banking, and national banking, and the gradual abandonment of the gold (or other physical stuff) standard.  I’m not sure what Piketty’s explanation is; clearly this book needs to be on my reading list.  

But what interests me most is the final two periods depicted in the graph.  Why does Piketty forecast a return to 1.5% growth in the period from 2050 to 2100?  And if the trend line is extended, maybe he sees a return to the period before 1820 when growth was less than 1% per year, generally significantly less.  Why does he forecast that the return to asset ownership will once again soar to over 4%, and perhaps higher in later years?  And this awful trend is completely separate from other apocalyptic future events, such as global warming; this calamity would happen in addition to that.  

This matters.  Is there really a purely economic reason to believe that the future is so dismal?  Or is this forecast just one more bit of panicky pessimism, which will be forgotten when “animal spirits” rebound and new technologies arise to boost growth again?  Is this new avalanche of dismal economics real, or just evidence that we’re all tired, and discouraged?

I’m going to be interested to read Krugman’s next installment in his book review. I’m going to be interested in the book itself.  I have trouble accepting a future that bleak.   I have trouble accepting a general attitude in economics that assumes a future that bleak.  Come on guys.  It's St. Patrick's day.  Lighten up.