Unequal representation caused problems for Britain in 1776, & will for us soon

Summary: Conservatives belittle concerns about America’s increasingly unrepresentative government. Citizens in these big states have 29% the voting weight of small states in the Federal government (even slaves were weighted at 60%). Citizens in cities have less representation than those in rural areas (just as in Britain’s 18th century rotten boroughs). Unequal political representation has caused serious problems in other societies, eroding away their legitimacy and increasing social tensions. As shown in a new study, it was a major cause of the American Revolution (despite the colonies’ low taxes). It will cause problems for us unless fixed.

Why the American Revolution?
It wasn’t about taxes. From Empire: The Rise and Demise of the British World Order and the Lessons for Global Power (2004) by Niall Ferguson.

1776 Was More About Representation than Taxation

By Jen Deaderick in the NBER Digest, December 2016.

“Monarchists resisting an incipient democracy movement in Britain prevented a compromise that could have placated the American colonists.”

“No taxation without representation” — the rallying cry of the American Revolution — gives the impression that taxation was the principal irritant between Britain and its American colonies. But, in fact, taxes in the colonies were much lower than taxes in Britain. The central grievance of the colonists was their lack of a voice in the government that ruled them.

“The political underpinnings of the American Revolution have been discussed and debated for more than two hundred years, and there are multiple explanations of the causes and multiple analyses of the revolutionary dynamic. One question about the revolution that has remained difficult to answer is why, if a little representation in Parliament could have prevented a war for independence, did King George III not grant it?

“This question is the motivation for Sebastian Galiani and Gustavo Torrens’ study “Why Not Taxation and Representation? A Note on the American Revolution”. They note, in drawing attention to the role of representation as a spark for revolution, that the average British citizen who resided in Britain paid 26 shillings per year in taxes, compared with only one shilling per year in New England, even though the living standard of the colonists was arguably higher than that of the British.

“Most accounts of the events that led to the American Revolution depict a conflict between the colonies and a unified British government. In fact, the researchers argue, the reality was more subtle. They draw on a variety of historical accounts to describe the tension between two rival British interest groups, the landed gentry and the democratically inclined opposition, and to explain the failure to reach a compromise that would have granted representation to the colonies. In particular, they focus on how extending representation would have affected the relative influence of these two groups.

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Warning: the income gap between races is widening in America

Summary: We begin the Trump years with generations of progress unraveling in the healing of America’s racial divide, with the likelihood of further deterioration quite high. We should understand what’s happening to better prepare for what’s next. A new study looks at the causes of the widening income gap between black and white Americans. It makes for enlightening but depressing reading.

"Nevermore" says the Raven.

Divergent Paths:
Structural Change, Economic Rank, and the Evolution of Black-White Earnings Differences, 1940-2014

By Patrick Bayer and Kerwin Kofi Charles.
National Bureau of Economic Research (NBER), November 2016.

“The economic fortunes of black Americans relative to those of whites have improved greatly since the end of the Civil War, but convergence has been both glacial and imperfect. Substantial racial differences in wealth, income, and numerous other economic markers remain and there are signs that the closing of some of these gaps has significantly slowed or even reversed in recent decades. In this paper, we study the evolution of black-white earnings differences among prime-aged men from 1940 through the Great Recession.”

Their findings are disturbing. Many Americans considered the progress of black Americans since WWII, and especially since the 1960’s Civil Rights bills to be among our finest accomplishments — belated recovery from the eras of slavery and Jim Crow. This adds to the research showing that progress has stalled. More specifically, the racial income gap for upper income black Americans has narrowed while the gap for those in lower income brackets has widened.

The reasons for this have been obscure. The racial gap in educational attainment and school quality have narrowed since WWII. Why have black men in the middle and lower income groups done so poorly? Their analysis concludes that the gains went to black men that managed to gain the education credentials that our society uses as the gateway to prosperity.

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A new study explains why people join ISIS (with unexpected answers)

Summary: Insurgencies can’t be fought like conventional wars. Patton’s Third Army didn’t need to know what motivated the NAZIs. The nations of the Middle East cannot defeat ISIS without understanding it, while America’s ignorant efforts (invading, occupying, bombing, and assassinations) have helped destabilize the region. But academics have begun to provide answers, puzzling though they are. Here is one useful new paper.

ISIS spreading the word
Beheading of James Foley on 19 August 2014.

What Explains the Flow of Foreign Fighters to ISIS?

A paper by Efraim Benmelech (Prof Finance, Northwestern U)
and Esteban F. Klor (Prof of Economics, Hebrew U).
National Bureau of Economic Research (NBER), April 2016.

Les Picker describes the paper in the June 16 NBER Digest.

“As of December 2015, approximately 30,000 fighters from at least 85 countries had joined the Islamic State of Iraq and Syria (ISIS). Although the great majority of ISIS recruits come from the Middle East and the Arab world, there are also many from Western nations, including most member-states of the European Union, as well as the United States, Canada, Australia, and New Zealand. Thousands of fighters from Russia and hundreds from Indonesia and Tajikistan also have joined. ISIS’s recruitment of foreign fighters is a global phenomenon that provides the organization with the human capital needed to operate outside the Middle East.

“{The paper explores} how country characteristics are associated with ISIS recruit flows. They discover more about what does not motivate the foreign fighters than what does.

“They find that poor economic conditions do not drive participation in ISIS. Rather, the number of ISIS fighters from a given country is positively correlated with that country’s per capita gross domestic product and its place on the Human Development Index. Many foreign fighters originate from countries with high levels of economic development, low income inequality, and highly developed political institutions.

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Hard data from Harvard about police violence & race

Summary: At last in the long debate about police violence we have an actual analysis (rather than the amateur tallies). Professor Fryer Jr. (economics, Harvard) looks at a sample of the data and discovers some surprising news. He gives some innovative suggests for practical police reforms (i.e., possible to implement). His conclusions are essential reading for anyone concerned about this vital issue.

Protect and Serve

An Empirical Analysis of Racial Differences in Police Use of Force
By Roland G. Fryer, Jr.
National Bureau of Economic Research, July 2016

“This paper explores racial differences in police use of force. On non-lethal uses of force, blacks and Hispanics are more than 50% more likely to experience some form of force in interactions with police. Adding controls that account for important context and civilian behavior reduces, but cannot fully explain, these disparities.

“On the most extreme use of force – officer-involved shootings – we find no racial differences in either the raw data or when contextual factors are taken into account. We argue that the patterns in the data are consistent with a model in which police officers are utility maximizers, a fraction of which have a preference for discrimination, who incur relatively high expected costs of officer-involved shootings.”

Fryer evaluates seven levels of force short of shooting by police: hands, pushing to wall, handcuffs, drawing a weapon, pushing to ground, pointing a weapon, using a spray/baton. The following graph shows the data by race and hour of day, from a sample of New York Police Department stop and frisks from 2003-2013.

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See America’s income inequality grow during 1979-2011, a driver of Campaign 2016

Summary: To understand this election we must see the accumulated stresses which produced the insurgencies in both parties. Rising income inequality — “the hollowing out” of the middle class and rise of the 1% — is probably the biggest, yet still poorly understood (until recently conservatives denied it). This great study by one of our top economists describes the dismal picture, essential for us to understand if we are to begin the reform of America.

Income growth by quintile — and by percentile for the top quintile

Income Growth 1979 - 2011

Growth of income and welfare in the U.S, 1979-2011

By John Komlos. Published by the NBER, April 2016
Excerpts. Red emphasis added.

Conclusions

{These} estimates have to be considered preliminary. Nonetheless, there are a few consistent patterns in which we have confidence that they will survive successive improvements.

These include most vividly what in the colloquial is referred to as the “hollowing out” of the middle class. The lower-middle class 2nd quintile and the middle class 3rd quintile fared the worst in all specifications: their income increased at a rate of between 0.1% and 0.7% per annum (Figure 1). In contrast, the only group whose income grew remarkably was the 5th quintile and especially the top 1% whose income registered an astonishing growth rate of between 3.4% and 3.9% per annum, reaching an average value of $918,000 by the end of the period under consideration.

Somewhat surprising is the consistently positive growth of the income of the lowest quintile. The poorest group registered an income growth estimated to be between 0.5% and 1%, i.e., consistently above that of the 2nd and 3rd quintiles, and equaling that of the 4th quintile (Figure 1). This is all the more surprising insofar as their net transfers decreased over time while those of the three middle class quintiles increased by as much as $9,000 per annum (Table 4).

… However, it is astounding that the relative income of the rest of the 5th quintile besides the top 1% did not experience such humongous growth. Only the top 1% increased enormously from a factor of 21 to a factor of 51, a surge of no less than 144%.

… Another recurring pattern is that the income of the 2nd and 3rd quintiles consistently lagged behind the other quintiles. This is referred to in conventional parlance as the “hollowing out of the middle class”. … According to the low estimates, it would take about 600 years for incomes in the 2nd quintile to double and on the order of a millennium for welfare to double. These are growth rates that are reminiscent of those that prevailed prior to the Industrial Revolution.

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Fewer new superstar firms: another step towards secular stagnation for America

Summary: Economists are studying the mysterious multi-decade slowing of the US economy. One bright spot was rapid job growth in a few rapidly-growing young firms. A new study shows that since 2000 both the number of start-up firms and the number of those with very rapid growth has been declining. It’s another step on the path to secular stagnation, an economic illness which could reshape America in a bad way. When we take this problem seriously our political leaders will do so. This election season shows some signs that has begun.

Deflated balloon

The Number of High-Growth, Job-Creating Young Firms is Declining

By Jay Fitzgerald from the NBER Digest, February 2016
Red emphasis added.

The number of start-up firms in the United States has been declining in recent decades. Prior to 2000, the employment effects of this decline were partly offset by the presence of a small number of high-growth young companies. That pattern seems to have changed.

In “Where Has All the Skewness Gone? The Decline in High-Growth (Young) Firms in the U.S.“, Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda show that the general decline in new firms has been accompanied, since around 2000, by a corresponding decline in the number of high-growth start-ups.

New firms accounted for about 13% of all companies in the late 1980s, but only about 8% two decades later. In the 1980s and 1990s, however, a small number of young, innovative, and dynamic companies grew at very high rates. This “skewness” in the rate of job creation among young firms increased the contribution of young firms to overall job creation.

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NBER: rapidly rising household debt predicts recessions. See America’s future.

Summary: Perhaps the most important frontier in microeconomics is the effect of debt on growth, especially private sector debt (government debt has different dynamics). Many economists have attempted to integrate debt levels into mainstream theory (e.g., Hyman Minsky). While so far unsuccessful, research has produced many useful insights. Here is a new study with a powerful conclusion: “An analysis of business cycles in 30 mostly advanced economies finds that burgeoning household debt is a strong indicator of an impending economic downturn.”  {1st of 2 posts today.}

This is a follow-up to Fact & myth about the debt supercycle, a story of modern America.

Household debt vs GDP Growth

Look at the end of this article to see America’s ratio of household debt to GDP.

“Household Debt and Business Cycles Worldwide”

By Matt Nesvisky in the January 2016 Digest
of the National Bureau of Economic Research. Reposted with permission.

An increase in household debt in relation to a country’s GDP is, at least in the short to medium term, a strong predictor of a weakening economy, according to an analysis of data from 30 nations by Atif R. Mian, Amir Sufi, and Emil Verner. The researchers use slowing growth and rising unemployment as key indicators of weakening. They find that the household debt factor is a better predictor of downturns than the debt of non-financial firms.

In “Household Debt and Business Cycles Worldwide“, the researchers analyze databases from the Bank for International Settlements, the World Bank, the Organization for Economic Cooperation and Development (OECD), and the International Monetary Fund (IMF) over the last half-century. They find that a rise in household debt, largely produced by more readily available credit, is a valuable forecaster of a contracting economy, citing as a prime example the growth of household debt in the early to mid-2000s and the slowing of global growth in the latter part of that decade.

The researchers see lower credit spreads and increases in risky debt as primary factors driving the rise in household debt. The availability of cheap credit spurs borrowing to finance higher consumption. In particular, household spending as a share of income rises during household debt booms, as do total imports and the share of consumption goods in total imports.

The expansion in household debt is followed by a sharp slowdown in GDP, consumption, and investment growth. This slowdown is not anticipated by professional forecasters at the IMF and OECD, giving household debt the ability to predict growth forecast errors.

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