The Return of Overconfidence

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Labor Share follow-up

Recently, I got a copy of Alberto Cairo's The Truthful Art, subtitled Data, charts, and maps for communication. According to the first blurb on the first page -- the first thing you come to --

The Truthful Art is both a manifesto and a manual for how to use data to accurately, clearly, engagingly, imaginatively, beautifully, and reliably inform the public.

This isn't a book report. I'm gonna skip the first 120 pages. Cairo tells a great story about Richard Thaler. Thaler is the guy responsible for "behavioral" economics. He invented the "nudge". Because of him, when you're filling in a form, the answers they want you to pick are preselected and set as defaults. Because of him, when you're looking for something to watch on Netflix, if you pause long enough to read the episode blurb, the damn thing starts to play. Thanks, Dick.

Alberto Cairo:

In his book Misbehaving: The Making of Behavioral Economics (2015), University of Chicago's Richard H. Thaler recounts an anecdote that may be useful for any teacher. At the beginning of his career as a professor, Thaler made many of his students mad by designing a midterm exam that was deemed too hard. The average score, on a scale from 0 to 100, was 72. He got a lot of complaints about it.

Thaler decided to run an experiment. In the next exam, he set the maximum score to 137 points. The average ended up being 96 points. His students were thrilled.

Thaler kept the 137 mark in subsequent exams and also added this line to his syllabus: "Exams will have a total of 137 points rather than the usual 100. This scoring system has no effect on the grade you get in the course, but it seems to make you happier." It certainly did. After he made this change, Thaler never got any pushback from students again -- even if he told them beforehand that they were going to be tricked!

"It's hard to picture 96 in comparison to 137 in your head", Cairo says. But "72 versus 100 ... is easy." I suppose his point is that to use data effectively, you need to make it easy for people to understand. Good tip.

Alberto Cairo concludes that section with these words:

It turns out that Thaler's second exam was harder than the first one. A score of 96 out of a maximum of 137 is a 70 percent score, in comparison to the 72 percent average of the first exam. But even if you're aware of that -- because you know how to transform a raw score into a percentage -- 96 over 137 still feels higher than 72 over 100...

(Emphasis in the original.)

In a book titled The Truthful Art, Alberto Cairo points out that 96/137 "feels" like it is more than 72/100, even though it isn't. He wants me to be truthful, but he's showing me a scam that worked. I don't know what to do with that.

My impulse would be to say no, 96/137 is not more than 72/100, and how you "feel" about your 96 is mathematically incorrect. You and I might get stuck in that disagreement until we quit talking for good, and that would be the end of that.

Okay. Suppose I'm trying to lay out my ideas on the economy. If you can't see my first point, how can I expect you to follow my logic to the end to see if it makes sense? The first point is the simplest one. If we can't agree on the first point, it's over.

You're not helping me, Cairo.


When you look at Labor Share, you're finding an answer to questions like "How much did our side get?" and "How much did the other side get?" The other side, apparently, is measured by something called Capital Share. (I read that somewhere.)

So I dunno, does it make sense to say we got 100 in 2012? Doesn't that mean the other side got zero? And how about back in 1947 at the start of those graphs, where Labor Share was around 110% or 115%? Wow! We were bleeding them dry in those days!...

No. Obviously not. The 100 on the Labor Share graphs is not 100 percent. It's not percent. I know we're talking about "shares" here. And I know that "shares" is percent. If I get half of something and you get the other half, then we each got 50%. I know how it works. But for Labor Share, no. It's not percent. It's an index.

Hey, I didn't make it up.

At BLS they offer the Monthly Labor Review. And in the February 2017 issue they look at Estimating the U.S. labor share. In that article there is a footnote that says

See “LPC databases,” Labor productivity and costs (U.S. Bureau of Labor Statistics), https://www.bls.gov/lpc/data.htm. Click the link that says, “Download the complete Major Sector Productivity and Costs dataset.” A zip file that contains the annual and quarterly datasets will open. This is the sole location on the BLS website where data on labor share levels can be found...

This is the sole location on the BLS website where data on labor share levels can be found. Percentages.

If you go there and get that, you get a large, well-organized file of quarterly data (and another, with annual data). Here's quarterly Labor Share for NonFarm Business:

Graph #1

And now (because these numbers show percent) I can subtract the values from 100, and get the other guys' share:

Graph #2

I'm not real comfortable calling it "capital share". I've seen it called that, but only a couple times, and nothing technical. But here it is.

Labor Share at bottom?

Did you notice? Labor Share is no longer going downhill:

Graph #1: Labor Share for the Business Sector and Non-Farm Business

It has been at the 100 level since 2010 and, since 2015, generally above the 100 level. So we might say labor share is on the rise, though at this rate of increase getting back to the 115 level could take a million years.

Two other measures of Labor Share also show recent increase:

Graph #2: Labor Share for Nonfinancial Corporations and the Manufacturing Sector

For Nonfinancial Corporations (blue) the values are comparable to those shown on the first graph. Here the line runs generally flat before 2000, rather than generally downhill. It runs generally below the Graph #1 values before 1970, and generally above them after 1970. It is important to note that the blue line looks low on this graph, not because the numbers are lower, but because the red line (Labor Share in the Manufacturing Sector) starts out at the 150 level.

Manufacturing shows strong increase since 2013, but also sharp decline before 2011.

The two lines on the second graph meet at the 100 level in 2012. The two lines on the first graph run near each other from one end of the graph to the other, but also find themselves at the 100 level in 2012. All four lines are at the 100 level in 2012. This is no coincidence.

All four lines are "indexed" (the numbers are tweaked) to put the 2012 values at the 100 level. The general shape of each line is not changed by the indexing, but the locations of the lines change so that they all end up at 100 in (in this case) 2012. To my eye, the indexing suggests that the manufacturing decline wasn't really so bad because it fell to the same level as the other measures of Labor Share, not below it.

That's bullshit of course, because to see it that way you have to start in 2012 and work backwards. If you really want to see how things change, you "index" them at the starting point, rather than near the end. If you were to print out Graph #2 and cut out the red line, and then slide it down the page until the start of the red line just touches the blue line, you'd get a better feel for the decline of Labor Share in manufacturing. Or do it this way:

Graph #3: Labor Share for Nonfinancial Corporations & relocated Manufacturing Sector
(Each Mfg value divided by the Mfg value for 1987 & multiplied by the NFC value for 1987Q1)

Here, things look much worse for manufacturing. This is a more honest picture, I think.

Oh: The Manufacturing line ends in 2017, in case you were wondering.

Some say regulation, some say debt

I say debt.

I don't say much about regulation, so there needn't be much animosity aroused. But it does seem to me that deregulating finance is part of the reason debt became a problem. There are other reasons, like all of our policies that encourage credit use and discourage repayment of debt. Those are the real problem.

"accumulation"

JW Mason's recent post links to his 8-page PDF on "how Marxists think about capital and capitalism". This part got my attention right away:

The answer is, capital is an ongoing process where:

• Money is used to acquire tools and raw materials – the “means of production”
• ... and to hire wage labor.
• The hired labor works with the tools and materials
• ... under the direction of the capitalist
• ... to make more goods for sale
• ... with the goal of acquiring more money.

People sometimes think of capital as money, or as machinery, buildings, etc.; but in this perspective it isn’t either of those things.

First reaction: I like it. Mason also writes:

From the list above, we can see that a number of conditions have to come together for capital to exist. First, we need private property and markets. Second, we need wage labor. Third, we need an employer who controls the production process. Fourth, we need goods produced for sale, rather than for the use of the producer. And finally, we need accumulation – the endless pursuit of more money – to be a goal in itself.

And finally, we need accumulation to be a goal in itslf. Yes. That reminded me of something I said:

Job creation was never more than a method which enabled accumulation to proceed.

For Mason, the idea comes from Marx; for me it comes from Adam Smith:

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work...

As the cycle of civilization brings us ever closer to the end of the capitalist era, it is important to remember how that era began.

The key to a good economy lies in maintaining the affordability of debt

Originally posted 20 Feb 2013 on my old blog. Streamlined, updated, and re-titled. And this time, I finish the thought.

Ours is a world that relies on credit to grow the economy, yet somehow we think private debt can never be a problem.

What's that? "Not we," you say? Good. I'm with you.

The good economic growth of the 1950s and '60s was fostered by the growth of private debt. In the early 1960s, private debt was still relatively low, and not much of a problem. But by 1970, debt had accumulated enough that the rising cost of debt service engendered a great inflation.

Despite the inflation -- or because of it, maybe -- economic growth was vigorous in the 1970s. But the inflation was unacceptable. The fight against inflation created a series of recessions and reduced the decade average growth rate. Today, people think growth was slow in the 1970s.

In the 1980s, monetary accommodation by the Federal Reserve went out the window. In its place we saw increased Federal spending and bigger deficits. The economic growth of the 1980s was fostered by rapid increase of the Federal debt. Then we had two decades of growth fostered by excessive private debt, and a day of reckoning in 2008.

Because we use credit for growth, the key to a good economy lies in maintaining the affordability of debt. When debt was relatively low it was affordable. While inflation was high, erosion of debt kept the growing debt relatively low and affordable. When Federal debt growth was rapid, the Federal spending provided funds to make the growing private debt affordable. But when it came down to depending on private debt growth to make private debt affordable, it was a suicide mission.

Today debt is high, inflation is low, and Federal debt growth is seen as a problem. No method remains to make private debt affordable. And our economy cannot grow.


We use credit for growth. I think we have to use credit for growth. But using credit creates debt, and debt eventually becomes a problem. What's the solution? Obviously the solution is not to pretend that the accumulation of debt can never be a problem!

The solution is to pay debt down faster than we do: Pay down private debt faster, so that it doesn't accumulate enough to hinder economic growth in the private sector.

To accelerate debt repayment, we could change the tax code to make the tax rate go up for someone with a lot of debt, with a provision that the tax rate comes back down for people who make extra payments on their debt during the tax year. Also, since debt is already at a problem level for the economy, we should have tax credits that are equal in value to the extra payments we make. Just until debt gets down to a workable level and the economy starts humming.

One other thing: Money should come more from government and less from the banks -- and let's be sure it is money, not credit. You can tell the difference, because if you have to pay it back with interest, it's credit. If you have to pay it back at all, it's credit.

The alternative to borrowing money, of course, is earning it. So what I'm saying, really, is that we need less borrowing, and higher wages. Higher wages raise business costs and push prices up. But they don't have to. We got into this problem in the first place because growing financial costs crowded out wages:

Corporate compensation of employees fell by 5 percentage points between 1948 and 1975
while corporate interest costs increased by nearly the same amount.
Source: The New Arthurian Economics

The solution is to reverse the 1948-1981 trend, and let wages crowd out financial cost.

The goal behind these thoughts is to keep financial cost down in the private sector, so that the private sector is able to grow with vigor. That's really what we want, isn't it? Some people badmouth the idea of better growth. But "economic growth" means "income growth", and everybody wants more income.

Tyrants

Victor Ehrenberg: From Solon to Socrates:

From Hesiod onward oppression and injustice were causes of growing complaint.

The community needed a stronger supreme authority, a unified domestic and foreign policy, and above all social peace and economic prosperity. In various cities the opportunity was seized by individual leaders, strong personalities who gained power by usurpation. The Greeks called them 'tyrants'....

Hesiod - Wikipedia:

Hesiod was a Greek poet generally thought by scholars to have been active between 750 and 650 BC, around the same time as Homer.

Encyclopædia Britannica

In the 10th and 9th centuries bce, monarchy was the usual form of government in the Greek states. The aristocratic regimes that replaced monarchy were by the 7th century bce themselves unpopular. Thus, the opportunity arose for ambitious men to seize power in the name of the oppressed.

The tyrants often sprang from the fringe of the aristocracy; for example, the mother of Cypselus belonged to the ruling clan of the Bacchiads, but his father did not. The nature of the public discontent that provided them with a following may have varied from place to place.

The great tyrants were notable patrons of the arts and conspicuous builders. They often aided in the transition from narrow aristocracy to more-democratic constitutions, but the Greeks in principle chafed under their illegal autocracy. Tyranny thus early acquired a bad name...

That was then.

Steve LeVine at Axios, 2018:

Unforced by coup or war, one developed country after another has chosen an authoritarian style of democracy over the last two years, an all-but unforeseen shift that has left more mainstream leaders scrambling to understand it and turn back time.

The big picture: Economics ultimately underpins the turmoil...

If we fix the economic problem, our political problems will evaporate.