Tuesday, August 10, 2010

It's the Toilets

Not finding current data regarding global trade sufficiently depressing, a number of commentators on my weekend post sought discouragement closer to home. One impassioned observer noted that unemployment in the U.S. is now 20%; another got a bit closer to the truth by noting that the most recent broad-based unemployment number (U-6) is 16.5%. All of which seems like U.S. unemployment is getting in the vicinity of The Great Depression peak of 25%.

Well, it's not. The reason is that the 25% number is most closely comparable to today's U-3 unemployment number, which is 10%. If you apply U-6 methods to historical data, you will get an unemployment figure for the peak of The Great Depression much higher than 25%. (One attempt from the blogosphere here.) The conclusion being that...
But the picture for the present--as opposed to 1930s--is even better than would be suggested by looking at the above chart. Recapping earlier blog posts of mine, I added in a comment to my own post:
In the 1930s 1/3 of Americans didn't have a toilet, unemployment peaked at 25% (not 10%, where we are today), and the average life expectancy was about the same as it is in Ghana today. The current recession is not comparable to The Great Depression. Period.
One well-informed reader (thank you dwg) offered this response:
And your statement as regards toilets... I'm not quite sure how to address it. An apples-to-apples comparison is evaluating the drop in real standard of living; no one is saying we've moved back to the income levels of the Great Depression; your argument there would appear either a gross misunderstanding of the terms of the debate or a straw man. Even those of the Great Depression era were better off than a peasant in the Middle Ages by many terms of reference. The issue here is: how many people are suffering a diminishing of their quality of life, proportional to their baseline expectation prior to the downturn?
So to be very clear, the toilet comment isn't a straw man, it's actually a core point here. And that point is that absolute levels do matter.

Look at it this way: Is (evil, Greenwich-CT-dwelling, CDO-trading) hedge fund manager whose income drops from $2 mil/year to $200K really in the same position as the owner of a shuttered auto dealership who was making $200K/year and now is bringing home $20K? I'm sure you'd agree--No. Well, you know what fraction of the world's population makes over $20K/year? In terms of individual-wage earners, about 2%. That's us. We are to the rest of the world what hedge-fund-guy is to us.

These absolutes may not have mattered much in the 20th century but in the 21th century, they do. All those poor schmucks out there in the "developing world" who are still pissing into open sewers are--surprise!--the people who are going to be driving global growth for the next 50 years. That because growth happens where there are unrealized gains to productivity. And those people--people who matter a lot both to America's future and to its recent past (ref. Greenspan's "conundrum")--aren't taking toilets for granted.

So the really big thing Krugman's missing isn't the trend in the global trade data after all. It's the toilets.


  1. Its great to do verbal battle with someone who sets themselves up so nicely. You cannot get around the flood of evidence that the common American person should expect the "Coming Poverty". Our "leaders", I agree, will have a "Coming Prosperity".

    Here is part of the flood: (*) US health care is last (www.commonwealthfund.org 6/23/10); (*) An alarming education deficit: once a leader we are now near last of the industrialized w/ needed education (www.collegeboard.com 7/22/10) ; (*) Middle class collapse - let Elizabeth Warren walk you through the meaning of this: http://www.youtube.com/watch?v=akVL7QY0S8A&feature=player_embedded
    (*) Infrastructure abysmal (rated mostly D for every item by American Society of Civil Engineers for 2009. Etc, etc, etc....

    Good luck with the uphill climb. We know of course that you will be successful ... which bank do you work for again?

  2. I appreciate the cordial response, and I do feel it clarifies. A few notes:

    I do believe you're simply operating with a different purpose than Krugman. Krugman's project is to be an advocate in the public discourse for optimal US economic policy (defined rather conventionally as maximizing long-term material prosperity for Americans, admitting the aggregation/inequality issues of such a measure). Now, taking that as the end, U.S.-domestic material conditions are what matter, almost definitionally. In this case, unless you believe US fiscal/monetary policy should primarily be directed toward the goal of global "catch-up" development, your aim is quite simply different.

    I do not believe either to be intellectually dishonest: Krugman's purpose in referencing the Great Depression is to make clear that the US employment picture (using U-3 even) is the worst SINCE the Great Depression. Your posted graph shows only 2 recessions worse: 1920 and 1929 (the GD). Combining that with this,
    http://calculatedriskimages.blogspot.com/2010/08/employment-recessions-july-2010.html ,
    we can see that while the postwar period saw a categorically different norm in both the length and magnitude of employment effects from recessions. The fact that today's employment trend is closest to the *INTERWAR* average trend is actually quite humbling; and pointing this out (that this is not a "normal" job market as we've known it in our lifetimes) is quite accurate.

    To your broader point about material conditions: you can apply your same logic to the Great Depression and say that our grandparents were all whiners compared to Sudanese today. But that's silly. And I'm fairly sure you agree with that.

    So I suppose my general point is this: given his focus on the US worker (which is where, I think, you disagree), his argument is both empirically sound and congruent with the focus of his values.

  3. Blog Master: Hey Man!: Where above did I suggest an inevitability in the betterment of the outcomes for the average *American*? (Keep in mind this exchange began with a post on *global* trade.) In fact not only do I agree with you, but I have spoken on and written on the topics to which you refer (particularly infrastructure, though the others are equally critical for the future of this country). I also address them specifically in The Coming Prosperity--a title which you've by now figured out refers to prospects for most *people*...not most current citizens of the United States.

    No, I have no real disagreement with you there. But I'd suggest that if you follow your line of reasoning forward, you'll ultimately agree with me that the path to resolving the concerns you raise is *not* hyping trends in macro data in a way that is not only politically polarizing but, as it turns out, wrong. Rather the path forward is in proposing practical, attainable policy and business solutions conceived with the global trends that really matter really mind.

    Bottom line: Hear you on problems. What are the solutions?

    (... http://mitpress.mit.edu/innovations/ )

  4. dwg: Yikes, I mostly agree with you too. This is getting boring.

    You state: "Krugman's project is to be an advocate in the public discourse for optimal US economic policy (defined rather conventionally as maximizing long-term material prosperity for Americans, admitting the aggregation/inequality issues of such a measure)."

    I don't really take issue with his project, as you describe it. Just that in my view he's been doing as much looking after himself as "the American worker" ever since that Newsweek cover story (...remember..."Obama is Wrong"?) He started in with the Great Depression rhetoric in the course of arguing that the stimulus *must* be larger...when what really mattered was the *composition* of the spending. More here: http://bit.ly/13ugYu

  5. Again, from the employment picture perspective, no, stimulus composition is not as important as timing and size. AD multipliers are
    what matter for employment.

    And, truthfully, your line about him "doing as much looking after
    himself" is more than a tad farcical when you are (a) blogging to
    promote a book of yours [and arguing with others on the grounds that their aims/guiding focus differ from yours], and (b) are rather
    consistently linking to your own (seemingly) tangentially-related journal/articles.

    We all are driven by the psychological demand for self-importance and recognition. It is no grounds for an argument. (I understand that you need to sing for your supper, like most of us do.)

  6. dwg: Short term, sure: size + timing. Longer-term (which matters): composition.

    On self- vs./& public-interest: Touché.

  7. Phil,

    If you wrote about the coming global prosperity in 1932 and your horizon year was 1957, guess what? You would be absolutely correct.

    The trouble is that although in 25 years people without toilets will be driving global prosperity there is a more painful and a less painful way to get there.

    Paul Krugman is saying that for the GLOBE we are on a more painful path. Think about this:

    1) Absolutes do NOT matter. Growth per capita matters.
    2) You could probably argue correctly that 2010 has seen growth in global trade per capita but this trade is unsustainable because it is severely unbalanced.

    Five years from now the countries that are driving that growth will have found find that they cannot maintain their surpluses against the US because the US will have essentially nothing to offer them to meaningfully balance accounts.

    You appear willing to stipulate that trade between the US and and surplus nations is bound for continued decline in the near term (say five years?) with surplus nations. When those chickens come home to roost, in the near term, the only way that global trade can grow is if the remaining non surplus nations more than make up for that decline and then grow their economies rapidly ahead of population on top of that! Lets take a look at the back of our napkin to see how unlikely that is.

    Estimating based on GDP (PPP) the US accounts for 25% of Global trade, big surplus nations (Germany, Japan, India, and China) account for 30 percent. The rest of the EU (deficit nations with unfavorable demographics) accounts for another 15 percent. That leaves the remaining 30 percent of the global economy to drive global trade growth ahead of population growth, while the deficit 40 percent stagnates, and the surplus 30 percent are choking on worthless dollars.

    After the global trade returns to balance, demand will grow relative to exports in surplus countries, dollars will trend upward based on trade fundamentals, and employment trends upwards in (current) deficit countries. At that point there will be people to invest, purchase commodities, and vacation in the remaining 30 percent. Until then unless something checks population growth the near term looks pretty grim globally as well in the US.

    If you want to find ways to help that balance take place within the next five years and not the next 25 you could worse than take some notes from Paul Krugman.

  8. Just one quick last note, beating the dead horse into ultimate submission:

    Again, sacrificing composition (which yes matters) for quicker timing and bigger size is 100% about Krugman's focus on medium-term employment versus your focus on long-term productivity growth.

    And I, for one, think long-term growth is facilitated mostly by things that are not short-term fiscal spending regardless; so in all honesty, I'm not sure your argument holds here.