Fantasies about fives
Students are sometimes told to increment the least significant digit by 1 if it is odd, and to leave it unchanged if it is even. One wonders if this reflects some idea that even numbers are somehow “better” than odd ones! (The ancient superstition is just the opposite, that only the odd numbers are "lucky".)
In fact, you could do it equally the other way around, incrementing only the even numbers. If you are only rounding a single number, it doesn’t really matter what you do. However, when you are rounding a series of numbers that will be used in a calculation, if you treated each first-nonsignificant 5 in the same way, you would be over- or underestimating the value of the rounded number, thus accumulating round-off error. Since there are equal numbers of even and odd digits, incrementing only the one kind will keep this kind of error from building up.
You could do just as well, of course, by flipping a coin!
Over at MR, Alex Tabarrok highlighted a chart made by Razib Khan about a Wordsum test (a test given in the GSS survey that correlates with IQ) and those who drink alcohol. In the comments, Razib pointed us towards the GSS browser to test a commenter’s theory that drinking alcohol matters less among those that have completed college.
Didn’t attend college:
After looking at this post, one of my friends wanted to see an actual Wordsum test. Here is one illustrative example that I found in a paper:
When discussing China's economic convergence with the rest of the world, where it will end up is a very important issue. It is a very difficult question; even China's different provinces are converging to different steady states. The parts of the country that still have bad institutions and infrastructure, mainly in inland China, are converging to a lower steady state than the outlying regions in special economic zones. Internal convergence is restricted by rules that discourage capital and labor mobility.
Looking at the G20, China’s PPP GDP per capita is pretty close to where it is expected. This is a somewhat biased sample since countries that are not significant economic players in the world financial system are not included in this sample. Including all of the countries would show that the index’s correlation to economic success is very noisy within the 50’s and 60’s. This is particularly true for China, where the methodology gives China a score that would penalize it for the poor economic institutions in its poorer regions without getting a boost for having areas with significantly better institutions.
2. IQ vs. GDP per capita: One measure of a country’s potential output level is the measured IQ of its current workforce. As previously mentioned, IQ’s correlation with variables other than intelligence makes it particularly significant for economic growth.
Source: IQ and Global Inequality, calculated IQ for 113 countries
A simple linear regression done on countries with IQ measurements and the natural log of GNI per capita suggests that if all other things were equal China would be converging towards a PPP GNI per capita of about 25,000 dollars (the number is closer to 18,000 if the regression includes 79 countries with IQ estimates).
3. China’s large advantage over other countries with similar economic freedom scores lies in its human capital. Human capital can also be measured by years of schooling or life expectancy, both of which China excels at relative to its current level of income. The textbook estimate of Barro and Sala-i-Martin is that the income gap between two countries with the same human capital endowment has traditionally narrowed by about 2 percent a year. Of course, this doesn’t show us where the steady state will be unless the answer is “at the same level as similar countries”, which suggests that the economically free parts of China are converging to an income level comparable to Korea’s.
While trying to track these different factors, keeping tabs on any reverse liberalization is important. To the extent China is copying Korea or Japan instead of the US China is still on a path where its eventual steady state is so much higher than its current value that it is insignificant, but downturns are politically volatile times and that will be where the biggest risk to China’s growth lies. If China starts replacing private businesses with SOEs, it won’t matter that they have good human capital.
Lane Kenworthy has a presentation on The Politics of Helping the Poor. In this PowerPoint, he looks at the differences between countries where households at the 10th income percentile have earnings growth along with GDP growth and in countries where the 10th percentile hasn’t had an income increase despite significant GDP growth.
Countries with income growth in the 10th percentile of households: Denmark, Sweden, Finland, Norway, Austria, Belgium, France, Netherlands, Spain, Ireland, United Kingdom
Countries with no income growth in the 10th percentile of households: Australia, Canada, Germany, Italy, Switzerland, United States (except for the late 1990s)
Afterwards, the sources of income for bottom-income-decile households were analyzed. The explanatory factor of income growth was that in countries where the bottom decile have kept up, it has been due to an increase in government transfers and not an increase in earnings or other market income. The exceptions to this are Norway, where everyone benefited from an oil boom, and the Netherlands which had increased government transfers and an increase in income in the late 1990s.
The PowerPoint concludes that in order to help the bottom decile of households, strong social programs are the only way and that if these social programs are pushed through, the population will come to support them even if they don’t want them right now. It should be noted that focusing on increasing the average income of the bottom decile shouldn’t be confused with the actual goal of humanitarian policies, since a generous immigration policy would help far more people even if it generated a decrease in income for households at the bottom decile in the statistics. The approach of only looking at the income of those in the bottom decile each year also ignores that some of the bottom decile households are households with large amounts of human capital such as graduate students, and many people in the bottom decile in one year won’t be there 10 years from now.
Overall, this is a very bearish perspective on the bottom decile of workers. This presentation highlights that there is almost nowhere in the world where workers in bottom decile are increasing their private sector earnings, so the conclusion takes for granted that the only way to help these people is to encourage them to be economic parasites. It certainly seems like the globalized world is leaving this group behind, but it might be better to not treat them as a group and focus on upwards income mobility than to focus on raising average levels.
While the paper highlights a potential bubble, What is more interesting to me is from the chart the FT takes from the paper. They find that the market is being taken over by Central State Owned Enterprises (SOEs). These SOE developers have been driving up the price of the housing market, paying on average 27% more for similar properties.
It is worrisome to see SOEs start to dominate an economy that was growing precisely because they had reduced the impact of SOEs in their economy. A large part of their convergence growth can be attributed to their switch from a communist towards a neoliberal system. A good rule of thumb is that the smaller the impact of SOEs, the richer the area. The trend of decreasing SOE employment has been a positive driver of China’s economy since the Asian crisis in 1998*.
In China’s response to the crisis, workers at state owned enterprises have stabilized and even increased slightly from its bottom in 2008.
During an economic downturn, it makes sense that the transition from SOEs towards the private sector would slow down. However, if there is a crisis and a resurgence of SOEs, then that could be one more reason to be worried about China’s long term future.
*The causation can also be said to go the other way, as decrease in SOEs is also due to China’s liberalization of the economy which allowed private companies to force SOE’s to privatize or be uncompetitive.
Yes, the huge increase in the top MTR under Hoover and Roosevelt didn’t raise much revenue, but that was because it “just so happened” that America’s income distribution got much more equal after 1930. No supply-side effects there. And yes, the Reagan tax cuts on the rich were actually associated with more revenue, but that’s because it “just so happened” that the income distribution got much less equal after 1980. And yes the Europeans don’t actually raise much more revenue than we do, despite higher tax rates, but that’s because it “just so happens” that Europeans work less. You say they work less for tax reasons? Don’t be silly—it “just so happens” the Germans and French have lazy, happy-go-lucky cultures. You say the French worked as hard as Americans in the 1960s? It “just so happens” this distinctive French culture developed only in the past few decades, when their tax rates rose far above American levels.
In a July 15th New York Times piece, Jeremy Siegel emphasizes that investors should remain bullish. He makes his classic bullish argument based on stock returns from 1802 forward (which is based on potentially flawed index data), and then makes another argument relying on more recent data:
“If post-World War II patterns hold for the future, he calculated last week, prospects for stock investments are excellent: there would be a 96.6 percent probability of a positive return for the next 5 years, going up to 100 percent for 10- and 20-year periods. Average real returns would be stellar — about 11 percent annually in holding periods from 1 to 20 years.”
So basically, he is saying that “If stocks are in a favorable environment, they are going to go up.” Considering the current economic environment is one in which the very capital unfriendly sector of health care looks to be the biggest driver of GDP growth in the developed world, the long term outlook on stocks should not be so sanguine. The bearish response included in the article wasn't much better, as even one of the people responding to Siegel, Lubas Pastor, takes the equity premium that is necessary for Siege's argument as a given.
“It’s important to realize that stocks should produce higher returns, because they’re riskier.”
As Eric Falkenstein shows, the argument for an equity premium is not as straightforward as many finance professors like to think. Too bad this more accurate point of view was nowhere to be found in this article.
I decided to apply the Robin Hanson theory of health care spending, that on the margin it is wasted, to compare the United States GDP to that of other countries. Luckily, there is easy access to data on PPP adjusted per capita health care dollars from the OECD on Wikipedia. I compared the US 2007 GDP to the twenty richest OECD countries*, adjusted and unadjusted for healthcare spending.
So on this measure, the United States is not as far ahead of other countries as people think. Using 2009 IMF data, Switzerland actually has a higher PPP adjusted GDP assuming that each country’s health care expenditure is of similar utility. Singapore does far better than most countries at holding down expenses and is already richer on a PPP per capita basis, so it looks even better by this comparison. If the CBO forecasts about the nature of GDP growth are right, the US’s semi-wasteful spending on health care is only going to be more significant going forward.
*I excluded Luxembourg and for Japan health care spending I used the 2006 WHO numbers.