Winning
I’ve written extensively about the seriousness of the risks to the economy created by the current financial crisis. That said, I’ve also tried to show that with diligent management of the dangers, the foreseeable probability of catastrophe can be reduced enormously.
I think that it’s also useful to see this in a broader context. Suppose that we fail, and the worst comes. Suppose, in fact, we have a repeat of something on the order of the Great Depression. It would be terrible, but here’s something to keep in mind:
By many measures, the Great Depression is the worst economic crisis that America has ever faced, and it was really just a temporary pause in the ongoing growth of the economy.
At times of obvious economic difficulties, it’s traditional to trot out two kinds of quotes: (1) statements from whoever is in power saying that “the fundamentals of the economy are sound” in order to show foolish lack of awareness, and (2) statements by thoughtful pundits that the characteristic American, or Anglo-Saxon, approach of economic liberty has failed, and more statist economies will now become globally dominant. But at the level of decades, the fundamentals of the American economy have always been sound, and the political institutions, technical capacity and social mores that define the American system have always found a way to prevail.
None of this is cause for complacency. This growth is not some law of nature; it has taken millions of lifetimes of exacting work, risk-taking and careful management to achieve. But we shouldn’t lose our nerve.
I’m reminded of something I saw a stock market trader say on about September 12th or 13th, 2001, with the smoldering skyline of lower Manhattan behind him: “Nobody’s ever made money betting against the United States of America.”
Your argument is simultaneously true and misleading—the latter because human beings are affected by market crashes in real time, not experienced as discrete dots on a timeline. Following your logic, we ought to measure the sum total of human experience in terms of geological time—perhaps topping it off with the fact that billions of years from now, the sun will burn out—thereby rendering every human endeavor essentially meaningless.
— signsanssignified · Oct 6, 04:56 PM · #
I’d argue real income per capita is at best a highly incomplete measure for looking at how the average American is doing. The picture for median income ( http://en.wikipedia.org/wiki/Image:US_Real_Median_household_Income.PNG ) isn’t as encouraging and that’s before accounting for inflation.
Anyhow, I think you can make a case for optimism using median income, but doing so also makes much more clear what people are worried about.
— Greg Sanders · Oct 6, 05:57 PM · #
I take your point. But look at it this way. The Depression was terrible for the people who lived through it, but the vast majority could expect, and experienced, recovery and improvement within their lifetimes. Further, our experiences of what it is like to suffer personal deprivation are subjectively different based on our views of the aggregate impact of these oevents over time as long as we have an “irrational” attachment to places, institutions and societies. Being in a dark tunnel is bad; being in a dark tunnel that you can never escape is a lot worse.
— Jim Manzi · Oct 6, 05:58 PM · #
Greg Sanders:
I don’t have long-baseline data on median, only mean. That said, I’ll bet any amount of money that on a 1790 – 2007 scale, that would also show the kind of exponential gain shown in this chart.
— Jim Manzi · Oct 6, 06:00 PM · #
I have to second signsanssignified, but in slightly contorted way. Graphs like this try to give the impression that we can go nowhere but up. If I’m not mistaken I think the idea of capitalism is only some four-hundred odd years old, compared to the several thousand years of human history that didn’t have capitalism. Moreover, the approach we’ve taken to free markets has gone awry but that’s only because we keep forgetting the fundamental idea behind capitalism: you can make as much money as you want so long and you don’t prevent everyone else from doing the same. It’s the same logic behind liberal democracy. You can do anything you wish, up until the point that you prevent others from doing the same. Hence laws against murder and theft. After the debacle of Eron and other corporations doing the same everyone talked about the need to put ethics back into capitalism. Why hasn’t that happened yet? And what could happen if we keep ignoring that problem?
This crisis isn’t about losing our nerve. It’s about reminding those in the rarefied atmosphere of top corporate jobs that if you try to keep as much money as possible for yourself by any means necessary eventually you’re going to find yourself in the land of epic fail. Sure, we could let these types of people go on as they have, and have everyone suffer the consequences or we could actually do something that makes sense and have the federal government look after the welfare of the people over the individual by acting as a true referee. I see no problem in the federal government calling a foul when the system becomes unbalanced or unsustainable. And while it might seem unfair for a few it’s actually living up to our ideals in government and economics.
— Jordan Lawrence · Oct 6, 06:00 PM · #
Jordan:
Yes, this is an example of the fundamental logical problem of induction: we don’t know that if I drop this pencil it will really fall to the ground, just because, under similar conditions, this has always happened in the past. But it is where the smart money bets. (Note that I’m not claiming the rate of increase of per capita GDP in the US is as well-founded as newton’s Laws of Motion – I’m just using an extreme example to make a point).
You might be surprised that I share your conern about the growing wealth inequality in the US. Here is an article, which I wrote about six months ago in National Review – so you can guess how well it was received, on this point:http://findarticles.com/p/articles/mi_m1282/is_3_60/ai_n24264119/pg_1?tag=artBody;col1
— Jim Manzi · Oct 6, 06:06 PM · #
Your argument is simultaneously true and misleading—the latter because human beings are affected by market crashes in real time, not experienced as discrete dots on a timeline.
But this is also true and misleading, the latter because it discounts the fact that we are inheritors and stewards of the trendline — its trajectory and enabling principles — and not just severable Benthamite units demanding “Gravy in our time!”
Also, I think you’re missing the virtue of Jim’s generational perspective; when this virtue is included, your reductio argument no longer makes much sense.
— JA · Oct 6, 06:09 PM · #
True, that is Hume’s point in arguing over the problems of causal reasoning. Still, we’re talking about human history here (albeit from an almost purely economic perspective) and history has a habit of bucking expectations. The French didn’t know they were going to have a revolution in the summer of 1789. And I’ll always remember my undergrad mentor telling me the story of his announcing to a class that the Berlin Wall would never fall in their lifetimes, a week before it fell. I do think trendlines and institutional inertia give us some idea of what will probably happen in the future, but we disagree over the certainty of those trendlines. I don’t think we can predict future human events with anything more than a 60% certainty. And if history can provide us with a guide, it’s one that says eventually the top dog will fade. We are not on an inevitable progress toward some future perfect. History, even economic history, is fits and starts. Trying to look at things on a long enough time line just to smooth out the roughness is a quick way to miss the uglyin the system, the unlikely-to-rust rusting bolts and the valve that acts a little funny now and then. It’s what Kevin Kelly talks about in this post from his blog: http://www.kk.org/thetechnium/archives/2008/09/looking_for_ugl.php
— Jordan Lawrence · Oct 6, 06:59 PM · #
Not trying to derail the thread here (and my background is obviously not economics), but does anybody see something else strange about this graph? Namely, it appears to mirror the effects of exponential growth in that it generally has a steepening slope. At the end, it looks like it nears a 1-to-1 ratio. Here’s the problem with that: does anyone think we can ever achieve an 100-to-1 slope? Remember, exponential growth terminates in infinity. For our GDP-per-person to reach infinity is of course not possible, so this graph MUST flatten out, perhaps into more of an S-shape. If so, and that tiny little downtick before 1940 was the Great Depression, what might that say about our economic future?
Now it’s time for all the knowledgeable people to come smack me down. Tell me I’m a doomsayer, please.
— ike · Oct 6, 07:11 PM · #
Jordan:
Inevitably, that trendline will stop going up at some point. My only points in the post are that: (1) even the downside case of another Depression doesn’t mean that the only safe asset will be a piece of arable land and a gun, and (2)at many, many times over the past 220 years smart people have said they’re pretty sure the party’s over, and they could often marshall a lot of evidence for this, and they’ve always been wrong – so there ought to be refutable presumption of success in the current situation. But I’m certianly not going to argue with you that the future is exceedingly difficult to predict (accurately).
— Jim Manzi · Oct 6, 07:12 PM · #
I think that personal income will continue to rise even if there is a depression becasue technological advances will continue to increase productivity. History shows us that depressions are not enough to permemantly disable this cycle. But…. history also shows us that the big risk of depressions or depression type events is political upheaval. I think we will have to be very viligant about the kinds of remedies that a depression would bring. Jim Manzi has been talking abou this risk, but I think we have somewhat different visions of what is dangerous. For instance, I don’t think re-regulating the finance sector would be a bad thing. Maybe Jim doesn’t either. Jim, what are your fears in detail?
On a more general note, environmental disaster could easily and profoundly alter our economic system for decades to centuries as could overpopulation—which is also an environmental crisis.
— cw · Oct 6, 07:38 PM · #
cw:
Well, the basic fear about a Depression is that almost everybody gets a lot poorer. (That reads like a smart-aleck comment, but I don’t mean it that way.)
Virtually all bubbles are followed by regulations that are enacted hastily, and are quite problematic, but this is really secondary (IMHO) to the sheer increase in material deprivation for a decade or more. As you say, a political reaction (a part of which might be market regulation) can prolong the suffering for a very long time.
— Jim Manzi · Oct 6, 08:02 PM · #
Jim Manzi:
I certainly wouldn’t take that bet. That said, in fact I’d expect them to look roughly similar up to 1990 or so. Oh and as a correction to my earlier post, looks like the data I was pointing to did account for inflation.
Anyhow, thanks for the response.
— Greg Sanders · Oct 6, 08:45 PM · #
Jim-
you write: “But at the level of decades, the fundamentals of the American economy have always been sound.” How can a system based on exponentially accruing debt courtesy of a fiat money hoisted onto a world bullied into accepting it (until the bully falls on his ass and the little guy runs..)ever be called sound? At least, by anyone of sound mind?
Nice outfit the Emperor is wearing, isn’t it, folks?
— shannon g · Oct 6, 09:31 PM · #
Jim, I agree with your underlying argument, and would add that the starting point for most before the great depression was much lower than it is for most now (even accounting for inflation). Its worth mentioning that the government-provided safety net is part of this.
That said, if you just take the timepoints on the median income graph pointed out above and look at them on the curve you provided (GDP per capita) then you’ll find that there’s a disparity. This is because of the income gap, the growth of which no one (right or left) will dispute.
Using my eyeball statistics, I’d say that real GDP increased by a factor of 1.8 or so from 1965 to 1996, but median income only increased by a factor of 1.2….
— Joel Rosenbaum · Oct 6, 09:37 PM · #
shannon g:
Well, it’s a con game that seems to have held up pretty well for 200+ years.
Joel:
As per a prior comment, I link to an article in which I make the point that growing wealth inequality in the US starting in the 1980s is a huge problem. I also make the point that solving it will be extremely difficult (in my view) without creating even worse problems.
— Jim Manzi · Oct 6, 09:50 PM · #
Next time you use a chart that goes back several hundred years, I suggest you use a log scale. Without that, every chart looks like the one you have in this post, a flat line followed by a parabolic curve. Not helpful.
— Comrade PureGuesswork · Oct 6, 09:57 PM · #
I second the comment that this should be plotted on a log scale, or else this is visual garbage. The $5,000 change from $30K to $35K is not the same as the $5,000 change from $5K to $10K.
— scott · Oct 6, 10:12 PM · #
Jim-
Not really. We have not had fiat money for 200+ years. Off and on (say Civil War, or earlier pre-Revolution Continental dollar), maybe, but it always led to inflation. And never for this long – 37 years counting.
— shannon g · Oct 6, 10:41 PM · #
Comrade, et. al.:
Not exactly. First, exponentially growing quantities will have the issue that you described, so almost by definition the need of a log scale indicates enormous success in compounding this quantity over time, which was the key point of the post. If this were a plot of average height over the same period, for example, this would not be true. Second, and more importantly, a non-transformed display means that the visual display of the information comports far better with how humans normally process it (e.g., we are incomparably richer than people were in 1840).
— Jim Manzi · Oct 7, 12:33 AM · #
Jim, I’m sure you’ve seen it already, but Michael Clemens makes a similar point here (h/t Will Wilkinson).
The trendline strongly resembles our own natural history, in particular the ascendancy of long-leash cognitive controls and the subsequent autocatalysis of cultural depth.
What’s surprising is how fine-tuned it’s become. Entropy can dominate at the hour, day and month levels, yet it all but disappears at the decade and generational levels. Weird. Promising, but weird.
— JA · Oct 7, 12:46 AM · #
Damn, I don’t know why I didn’t include this in my last comment, but if you haven’t read Daily Stock Market Volatility: 1928–1989 by Andrew L. Turner and Eric J. Weigel, it’s a really good study.
— JA · Oct 7, 01:18 AM · #
Minor point, directed at Greg Sanders: GDP per household is an extremely imperfect measure of income growth in the past four decades, because household size has changed (fewer children, fewer two parent households).
— Justin · Oct 7, 01:20 AM · #
“Nobody’s ever made money betting against the United States of America.”
Then why has short-selling been prohibited?
— Steve J. · Oct 7, 09:56 AM · #
Steve J.:
The attempt to manage market psychology by shooting the messenger’s bicycle.
— Jim Manzi · Oct 7, 02:20 PM · #
Your chart shows that meaningful growth took place only during the “American Century” and the close run-up to it.
What if the 21st century belongs to somebody else? What would the curve look like then?
— Ghost of Christmas' Future · Oct 7, 03:09 PM · #
Justin:
Good point about household versus person. I went with the first one I found and mentally noted that it wasn’t ideal, but I didn’t think about the full extent of the problem. I’ll keep that in mind for the future.
— Greg Sanders · Oct 7, 07:17 PM · #
Ghost:
You’re making Comrade and Scott’s argument for them. The annual percentage improvement is actually almost identical (about 1.8% per year) in each century.
Your broader point, that past returns do not warrant future performance, is, as discussed above, logically certain. But this does not mean that they are not practically useful as a predictor.
— Jim Manzi · Oct 7, 07:19 PM · #
Re; Billions of years from now, the sun will burn out—thereby rendering every human endeavor essentially meaningless.
Who says that we (or more likely, our successor species) will be dumb enough to stick around here for that?
Re: The Depression was terrible for the people who lived through it, but the vast majority could expect, and experienced, recovery and improvement within their lifetimes.
Quite a few people got through those years without any major woe in their life: both my parents families had no trouble in the 30s (well, other than the fact my mother’s father died young, though that was hardly the result of the Depression).
Re: The French didn’t know they were going to have a revolution in the summer of 1789.
In the summer of 1789 they were already having one (Bastille, burning chateaux, National Assembly, renunciation of aristocratic privileges, etc). What they didn’t know is that it would lead to some very dark places, and a generation of general war would be one of the results.
Re: Well, the basic fear about a Depression is that almost everybody gets a lot poorer.
But that’s not really true. During the Great Depression people like Henry Ford, the Vanderbilts, etc. continued to be filthy rich. Anyone who kept his job (most people did) didn’t lose any ground, in fact falling prices made the cost of living cheaper— if you had income. Depressions and recessions fall very unevenly on people. Some are destroyed— and yet some people manage to make a fortune.
— JonF · Oct 7, 11:14 PM · #