28 February 2018

The Terribly Boring Headline That Won't Generate Any Outrage or Clicks: Income Mobility in the US is Not So Bad

The economist Raj Chetty of Stanford was in San Diego 27 February talking about income mobility. He's exploring a really important topic with fascinating data.

He used two measures of income mobility. The first measured what percentage of children made more than their parents had at the same age. The other was a measure of what percentage of children born in the bottom 20% made it to the top 20%. Those seem to me like very different measures.

Doing Better Than Your Parents

 90% of the people born in 1940 were making more at age 30 than their parents had at age 30. That is a really clear measure of progress: the next generation is more affluent than the last. But as you can see in this graph, that percentage drops sharply until about 1960 and then continued to drop, albeit more slowly, up to the point of people born in the 1980s. Roughly 90% of 30 year olds in 1970 were doing better than their parents had at 30, but by 2010 only about 50% were. That seems alarming but I don't think it's as bad as this first graph looks.

First, there are adjustments that Chetty himself makes. 

Adjusting for inflation across generations is not trivial. How do you properly adjust for the price of a mid-sized sedan in 1970 and 2018? The first might reach 100,000 miles and the second might reach 200,000; the first has seat belts and the second has air bags. A TV in 1970 might have been 15" and offered 3 channels; a TV in 2018 might be 50" and offer 300 channels. We could contrast a list of products like this, nearly all of them showing a similar uptick in quality that makes price adjustments tough.

Even assuming that inflation adjustments let you accurately compare incomes from 1970 and 2010, families are smaller. If you make $28,000 with a family of four in 1970 or $27,000 with a family of three in 2010, is your family income really lower? In this example, family income has dropped by $1,000 but income per family member has actually gone up from $7,000 to $9,000.

If you adjust for inflation and family size, the downward trend is less severe. About 95% of 30 year olds in 1970 were making more than their parents at the same age and that dropped to roughly 70% by the 1980s (not a mere 50% as suggested before making these adjustments). 

A drop from 95% to 70% of the next generation doing better is not great but even that is arguable. The average person in 2010 had a library of on-demand articles, books, songs, movies and TV shows that dwarfed the choices of even the richest people of 1970. House prices have gone up but so has the average square footage of homes and the quality of appliances within them. We have a wealth of choices at the grocery store and in 1970 not only did you have just a couple of tomato sauces to choose from in the store but it was tough to find good sushi, ramen or falafales in most of the country. People in 2010 had more choices about how to live their lives than people in 1970 and not all of that can be properly captured in income statistics.

One last thing? The Great Recession was awful. Between 2000 and 2009, the economy destroyed a million jobs. In the 1980s (and 1990s and probably 2010s), the economy created roughly 20 million jobs. Any comparison of how people in 2010 are doing with people in 1990 has to account for the terrible shock that was the Great Recession. All else being equal, we would expect to see a downturn in the percentage of people in 2010 who are doing better than their parents did at 30. Millennials - like the rest of us - had to learn how to swim. Unlike us older folks, they had to learn how to swim in a tsunami and because of that careers were slower to take off and that could not help but be reflected in these numbers. I suspect that as we get further from the recession, this measure of what percentage of 30 or 40 year olds are doing better than their parents will rise.

Doing Better Than Your Peers

What about Chetty's other - very different - measure of income mobility? What percentage of people born in the bottom 20% make it to the top 20%? 

Let's explore this number a little. If parents made zero difference, we would expect that any kid born in any part of the distribution could land in any other part of the distribution by the time she's an adult. Maximum mobility means that there is no correlation between where you start and where you land. 20% of the kids born in the bottom 20% would make it to the top 20%. 20% of the kids born in the bottom would land in the middle. And 20% of the kids born in the bottom 20% would end in the bottom 20%.

This measure is zero sum, though. Every one percent of the kids who move out of the bottom 20% displace someone else. No matter how much your economy grows or stagnates, there will never be more (or less) than 20% in the top (or bottom) 20%. 

It is true that perfect income mobility by this measure means that a kid born in the bottom 20% is just as likely to end up in the top 20% (or middle 20%) as she is the bottom 20%. It is also true that any kid born in the top 20% of income distribution is just as likely to end up in the top (or middle) 20% as he is to end up in the bottom 20%. Perfect mobility means that parents make no difference. That's certainly not the case now. Chetty shared a remarkable statistic: kids born into the top 1% of households (those with incomes of $650,000 or more), were 80X more likely to be admitted to Stanford than kids born into median income households. 

What I find curious about this measure of income mobility is that if Chetty could convince CEOs, mayors, senators and tenured professors to pursue policies that would lead to perfect mobility, it means that the children of those policy makers would be just as likely to end up in the bottom 20% as in the top 20% where they started. I find it hard to imagine many of these leaders willing to adopt policies that allow for perfect income mobility by this measure. By both absolute and relative measures, affluent parents like the idea of their children doing well.

That said, it does seem like a healthy community would allow for children born in poverty to rise to the top and for children born rich to fall into the middle or bottom based on their own - and not their parents' - merit.

There are very real differences in a communities' ability to raise a child born in the bottom 20% up to the top 20%, from poor to affluent. Segregation is one big reason for this. Atlanta and Sacramento have the same percentage of blacks, whites, and Hispanics but Atlanta is much more segregated. (Whites live in one part of town, blacks another, etc.) A kid born in the bottom 20% has a 10% chance of reaching the top 20% in Sacramento; in Atlanta that kid's chances are just 4% and this seems illustrative of what Chetty sees across cities in the US. Segregating people by any grouping - education, race, income - seems to result in less income mobility. (And, as seen in other research, this ability of a community to expose its kids to a variety of other people seems to raise income and wealth for everyone.)

Entrepreneurship and innovation also seems to matter. If your community is creating new jobs and wealth, your kids have a better chance to rise. San Jose, San Francisco and Seattle are among the best communities for giving kids a chance to rise to the top; Cleveland, Detroit and Atlanta among the worst. (See one comparison of communities here.)

Finally, one of the most fascinating points Chetty made was merely implied. Some communities do a much better job of creating opportunities than others. A poor kid growing up in such an area has double or triple the odds of becoming affluent. I don't know enough about the data to conclude this but the impression I was left with is that spending money to get your kid into an innovative, integrated, affluent neighborhood will do more for her prospects than using those same dollars to get her into a better university. Geography is culture, and culture matters.

I'd be fascinated to know more about the differences in communities that are more effective at letting you do better than your parents but curiously, most of Chetty's research focused instead on the differences in communities that raised the probability of poor kids becoming rich. Given there will only ever be 20% of the population in the top 20% but 100% of us could be doing better than our parents, the latter seems like a goal that is easier to align around and more effective.

18 February 2018

A Failure of Empathy and the Preposterous Notion of 197 Shootings in Legislatures in the First 18 Years of This Century

- Robert Ebert, film critic

There have been 197 school shootings in the first 206 months of this century. Congress has not passed a single piece of legislation in response to the fact that more than 3 people are being shot in schools - more than one of them killed - each month. 

It is true that this problem of shootings in America is complicated. It is also true that high school students feel that trigonometry is complicated and yet we - rightfully - force them to work on trig problems. Shootings are complicated but not more than any of thousands of problems that are given out each day to millions of students. We ask them to solve these problems because it will make them better. 

A failure of empathy is the root of Congress's lack of response to this carnage. Let's do a simple thought experiment, changing out schools for legislatures.

There have been 197 shootings in legislative bodies in the first 206 months of this century. Congress has not passed a single piece of legislation in response to the fact that more than 3 people are being shot in congress - more than one of them killed - each month.

Does anyone believe that the above paragraph could ever exist in the real world? After just 19 shootings in legislatures - 19 stories about congresspeople rather than students or legislative aides rather than teachers - does anyone believe that new laws would not quickly be passed?

Maybe the most essential feature of any leaders is empathy. What help would you need if your mom were single and poor and you had no access to mentors? What help would you need if you were an aspiring entrepreneur without access to mentors? What would it be like to be faced with the prospect of 30 years of commuting an hour each way to work? What would it be like to be on your third military deployment in two years? Leaders who make communities happier places are leaders who can empathize with people they are not and understand what would help.

In no small part because our legislators cannot understand what it would be like to go to work each week wondering if theirs will be the legislative body where the one congressperson will go berserk and begin shooting, or where some madman with an AR-15 will walk into the deliberative chambers to begin systematically shooting helpless, frightened congresspeople, they will not do a thing for our students and teachers. "Women and children first," is not a phrase heard on this ship of state.

A terribly conservative friend who loves Trump told me that what he likes best about him is that "Trump's a fighter." I guess one emphasis for leadership would be to find someone who fights, even though most of the people he fights with are fellow Americans. For me, I like the idea of empathetic leaders.

16 February 2018

The Switch That Triggered the Rise of the West (Can Also Be Switched Off)


From the time of Homer (roughly 1,000 BC)  until Marco Polo (about 1300 AD), incomes were stagnant.

Starting about 1300, productivity began to rise and with it came a remarkable transformation in life. In the 18th century, life expectancy in England was about 35 to 40 years and now it's about 80.  Incomes are up about 30X from when Shakespeare was buying ink. What happened in England was fairly representative of what happened in the US, Canada, Germany, France and the rest of what we now call the West.

Change in income from century earlier
Since the 1700s the median income for each century has steadily gone up. From 1700 to 1900, per capita GDP tended to be about 62% higher than it was a century earlier. That was the reward for creating more capital and making it more productive. From 1900 to 2000, per capita GDP tended to be about 158% higher than it was a century earlier. That was the reward for creating more knowledge workers and making them more productive. So far this century, per capita GDP tends to be about 250% higher than it was a century earlier. This is the result of continued gains in capital, knowledge workers and their IT, and - most importantly for this century - the increasing power of entrepreneurship.

The West started this parade but it no longer leads it. Singapore has higher per capita GDP than the US, England, or Germany. There is nothing uniquely British about industrial economies or uniquely American about entrepreneurial economies. Anyone can lead this parade but why did the West start it? I think it's because of a unique approach the West took to its defining institutions.

Social invention is an overlooked component of progress. Banks, corporations, and nation-states matter as much in this story of progress since 1300 as trans-Atlantic ships, steam engines, and computers. The very notion, though, that these institutions are merely tools - no different than engines or electronics - is what has made the West different.

People within the the West have taken three distinct approaches to institutions.

Social Conservatives and Social Inventions as Sacred
The first approach is the most obvious. You come to awareness as a small child, growing up with the wonder of a church, the splendor of a king, the wealth of a bank and when you become an adult you accept that this is the way things are. Realizing how instrumental are these institutions to your world, you fight to defend them as they are.

Social conservatives treat social inventions as sacred. These are the loyal Catholics who see in the Protestant Revolution a route to hell and social chaos. These are the royalists who see in challenges to the crown a tumult of conflicting claims for authority, a challenge to all that is sacred. These are the capitalists who see conspiracies in the Central Bank that "runs" things, feeling instead that the banker should be left inviolate and unregulated.

They are quite right that these institutions keep us from chaos. I personally feel like institutions - social inventions - are the simplest reason that we have more control over our lives than do the great apes.

Radicals and Social Inventions as Disposable
Radicals go to the other extreme. They are well aware of how awful the church or state or bank has been. The French Revolutionaries outlawed religion at one point. The Enlightenment was about science and rationality and religion was all about superstition and dogma; it had to go. Radicals knew the church was merely an obstacle to progress and had to go.

Whether it is atheists who want to eradicate the churches, communists who want to shut down financial markets, or anarchists who want to outlaw laws, the radicals quite accurately see all that is awful about these social inventions and want them gone.

They also don't have a clue about how important are these flawed institutions to civilization, to modern life.

The radicals and social conservatives are an important part of the conversation and should always be heard; left in charge, though, they'll only ruin things. They're important voices who should never actually be given power to change anything but instead should only have power to point out problems and make suggestions.

Power over these social inventions should instead be given to people who are not naive enough to believe we can live without them or naive enough to believe that they should be defended in some current or (more often) idealized past form.

Social Inventions as Tools
Progress has been made by the folks who see social inventions as tools. Not sacred things that need protection. Certainly not as disposable. Progress has followed from people who realize how important the church is to how people construct meaning and gain empathy and compassion, become more loving and happy even when life hits one with the inevitable tragedies of illness, death, financial setbacks or even wars and pandemics.

The ones who see church, state and bank as mere tools realize that - just as with cars or can openers - these tools are more valuable as more people are able to use and define them. "We are all priests," as Martin Luther claimed, or "All men are created equal," as Jefferson wrote express the sentiment of those who don't think that popes or kings should have a unique right to define the institutions that so define us.

And the social inventions as tools people are the ones who are unafraid to change these institutions to make them work better for who we really are and aspire to be than who we imagine our ancestors once were. A church is not sacred but it is precious. What does this mean? Everything about it should be challenged except for what it does for people; a church is more important than a juicer only because of what it makes. Fresh orange juice is lovely but meaning and compassion can make the difference between whether or not you even feel like it's worth it to get out of bed to make that orange juice.

The West has led the great parade of progress in no small part because it has treated its vital institutions as mere tools and subject them to challenge and redesign as if they were products no different than cars or radios. They're not sacred. They're not disposable. We've made progress by changing our relationship to church, state, and bank, making them tools for anyone rather than just popes, kings, and bankers. We will make progress again in this generation by making a similar shift in how we treat corporations, turning them into tools for employees to create wealth and jobs and not just tools reserved for CEOs (who, by the way, are also employees).  Freedom of religion, the spread of democracy, the American Dream and the popularization of entrepreneurship have treated - and will treat - our big institutions as mere tools. That orientation is essential to progress.

So why mention all this? Because in the wake of the Great Depression, extremists seized governments everywhere; fascists and communists took control and progress halted or reversed everywhere they did. Now, in the wake of the Great Recession, extremists are again gaining power.

On the left we have activists who see banks as evil. And on the right we have activists who see banks as sacred. The first group doesn't understand the importance of banks, the second group doesn't understand the importance of regulating them and subjecting them to a central bank. Those on the left aren't numerous enough in the states to spoil capital markets but those on the right actually are in Trump's government. Trump is moving to deregulate banks so that banks are tools for bankers and not the community, not for everyone. The social conservatives don't believe in Keynesian economics (most recent evidence of that is the fact that they protested deficits when unemployment was high and now want larger deficits now that unemployment is low) or monetary policy.

Social conservatives are also working to reverse democracy. In 1789, only white, property-owning Protestant men could vote. About every 50 years, another group gained voting rights until, by the end of the 20th century even minority women who rented could vote. Courts have repeatedly ruled that Republican efforts to reverse voting rights are actually targeted at reversing that, taking power from minorities and the poor to vote.

Finally the continued effort to impose a religious definition of when life starts (at the instant of conception) and dismissing any other reasonable definition is an attempt to encroach on freedom of religion, the freedom of women to follow their own conscience and belief about when sperm and egg become a baby.

Social conservatives are wonderful to have in a community. They remind us that family as an institution really does matter, that churches make lives better for so many, that banks and the state create order we would not have without them. We should listen to them. But social conservatives are better reminders than managers; put in power, they treat as sacred what any forward moving community treat merely as as tools that are best used by many rather than a few.

Prosperous and happy communities will continue to construct institutions that are tools that help people to create meaning and be compassionate. They may not even call these institutions churches - and that is part of the genius of lumping freedom of religion under the first amendment along with freedom of assembly, speech, and press, the realization that it is the freedom to form thoughts and express them that is at the heart of religious freedom.

Prosperous and happy communities will continue to construct institutions that are tools to allocate and create capital that helps to fuel progress in productivity and profits. Again, they may not even call these banks but they will be tools that make people richer and able to afford now what they cannot pay for until later.

Prosperous and happy communities will continue to construct institutions that are tools for governing, for creating policies that make their world safer, easier to navigate, and more likely to offer them lucrative options and freedom to live a life as they please - whether in the form of neighborhood planning boards or the UN or any level of government between.

Prosperous and happy communities will continue to construct and revise institutions that are tools for creating wealth and jobs, new technologies and new products and services and in the process of creating value for customers, suppliers, stockholders and the community.

And the communities that prosper the most will never pretend that these tools should be reserved for the elite. They will never pretend that they are not necessary. They will never pretend that they are anything but tools.

What has fueled progress for the West is treating these great institutions as tools. Every time we've instead treated them as disposable or sacred, progress stalls or even reverses.

06 February 2018

Shout it - Yellen was Flawless at the Fed (Hopefully It Won't Be Another Century Before Another Woman is Fed Chair)

This Monday was our first day with Janet Yellen as Fed Chair in four years. The market marked her departure with the biggest ever one day drop in the Dow. Now that's a send off.

The job of Federal Reserve Chair has become more important since Congress has become more dysfunctional. In an ideal world, the government has a mix of fiscal and monetary tools to use to help to smooth out the inevitable bubble and busts of an economy. Now we really have just monetary policy, the tool of the Fed. In the recovery from the Great Recession, when unemployment was still above 8%, the media and Republicans made a great deal of noise about deficits. Now that unemployment is only 4.1%, the Republicans have decided to add another trillion to the debt this year with no noise from Republicans (they're the ones creating this) and very little noise from the media. This is backwards and the Fed has had to work against Congress in their efforts to keep the economy from extremes during the recovery. Yellen has done that flawlessly.

For 100 years we had Fed Chairmen. Then, four years ago, Obama appointed Janet Yellen to succeed Ben Bernanke as Fed Chair. Here is how the economy has performed during her four-year term.

The uninterrupted streak - a new record
When Yellen took over as Fed Chair, the American economy had been creating jobs every month for 40 months. That's great but on two different occasions, the streak had lasted longer: 46 months in the mid-2000s and 48 months in the late 1980s.

Not once did the jobs report come in negative during her time as Fed Chair. The streak is now 88 months and counting; she set a new record each month for the last 40 months of her tenure, shattering the old record and bringing the unemployment rate down from 6.7% to 4.1%. No other Fed Chair presided over a time in which every single monthly jobs reports was positive.

Second best annual job growth
Uninterrupted job creation makes it easier to create a lot of jobs. During her four years the economy did. Only one Fed Chair - Miller who served for only 17 months during the 1970s - presided over a higher annual average job growth.  (And wasn't it curious how the media continued to whine about so-so job creation rates, as if they had any instances of it being better during a four year or longer Fed term?)

Second best annual rate of stock market return
The market returns during her tenure were also second to only one other Fed Chair - Volcker. It seems fitting that the market began falling spectacularly after her last meeting Wednesday and before Powell's first day of work Monday. (Speaking of which, Powell did have a miserable start in his first two days. After Monday's huge sell off, the market return for his first day worked out to a 99.9% annual return which would have made him the first Fed Chair to have lost the entire stock market in his first year on the job. "Where are the returns Jerome?" "I don't know. Yellen seems to have taken them when she cleared out her desk.")

Lowest Inflation
The Federal Reserve has two goals: keep unemployment and inflation low. No one presided over lower inflation rates than Yellen. The goal is 2%. Her highest year was 2.1%. Only Bernanke - who was dealing with horrendous unemployment rates - was close to her and most Chairs were more than double that.

Trump, unsurprisingly, decided that Yellen's performance wasn't good enough to warrant a second term and thus hers will be the shortest term of any Fed Chair since 1979 when Carter decided that inflation was too high and he needed to truncate G. William Miller's term and replace him with Volcker.*

Of course it was unsurprising that Trump would replace Yellen. In Trump's final campaign ad, he lumped Yellen with Clinton, Soros and other world leaders as "globalist" financiers "who don't have your good in mind."

As it turns out, for a woman who didn't have our good in mind, she did pretty good. I'd go so far as to say that her performance was flawless. Let's hope it's not another century before a president has the good sense to appoint the second woman to head the Fed.

*(It's worth noting that when Carter interviewed Volcker for the job as Fed Chair, Volcker warned him that his approach to squeezing out inflation would hurt the economy short-term and about the time Carter was running for reelection the economy would be in bad shape. Carter said, But this is what we need to do. And sure enough, in November of 1980 when Americans elected Ronald Reagan to take Carter's place, unemployment was at 7.5% and continuing to rise.)

01 February 2018

General Intelligence and General Stupidity - Smart People Know the Difference

As an old guy I've given up on the notion of meeting someone who is brilliant. So, if I'm told that someone is brilliant, I want to know in what. Because while I know that the most we can hope for is having one thing that we're really good at - if we're lucky, even great at. That's what we can hope for , being pretty good or even great at at least one thing. But the only guarantee we have is that there will be at least half a dozen tasks and activities that make us look like complete idiots when we try them.

So it is too simple to say of someone, "He's brilliant," or "He's an idiot." You have to be more specific and clarify on what task is he brilliant or an idiot.

The ideal politician would be brilliant at two things: politics and policy. Politics makes you successful at the ballot box, it gets you elected. Policy makes your community successful - your average person able to make more money and live longer. Ideally a politician would be great at getting elected and enacting effective policy. I think FDR is an example of this. FDR got elected president four times. He helped the country navigate its way out of the Great Depression and through World War II. He wasn't ideological but was open to experimentation, trying whatever he thought would work to lower unemployment from the 25% it was when his presidency started. And he knew that the Nazis were not just "their" problem but were ours. He had press conferences twice a week and his willingness to answer questions on the host of issues the country faced gradually won over even hardened journalists. He also gave a weekly radio address; years after he'd died, his wife Eleanor said that people would approach her to say how much they missed having him explain "their government" to them. By the end of his presidency the country - indeed - the world was a better place. That's the simplest measure of effective policy.

You haven't heard of the worst politician. Not only can this guy not get elected or get any media coverage, but he has truly bad ideas. He might be ranting to some long-suffering friends in a coffee shop diner somewhere but he's not winning any elections. Bad at politics and bad at policy.

View from Adlai Stevenson College at UC Santa Cruz
My college was named after Adlai Stevenson, who ran for president in 1952 and 1956. I don't pretend to know much about him but by all reports his policy solutions were thoughtful and ahead of his time but he ended up running against Eisenhower, the man who led the Allied troops against Hitler. Stevenson was seemingly gifted at policy but not terribly effective at politics - at least at the national level.

Which brings us to Trump. He might understand the media better than anyone in my lifetime. He continues to dominate news coverage of every cycle, regardless of what seems to be going on anywhere else. He was so good at politics that he was able to get elected without having held any office before and having been caught on tape bragging about grabbing women by the pussy. It seems highly probable that he had help from Putin but the punchline is that he won the election. He won by offering to make the country more like the former Confederacy, his base. The states whose lifestyles, decisions and policies put them at the bottom of every meaningful list - from household income to life expectancy - all thought he had the best ideas (well, 8 of the 10 poorest states) and the states at the top of every meaningful list (well, 9 of the 10 richest states) all voted against him. He wants to renege on trade deals, lower immigration, and build walls in a time when the most prosperous counties, states, and countries are more tightly integrating with the rest of the world rather than sealing themselves off from it. Trump is an idiot savant, a man brilliant at politics and an idiot at policy.

For my nickle, this makes him the most dangerous man in politics. If he were this bad at policy but just as bad at politics, he might have a talk radio show but he wouldn't have the White House. If he were as naturally gifted at policy as he is at media coverage and politics, it would be a joy to have him in the White House.

Which brings me back to the claim that no one is generally intelligent at everything. We all have our weaknesses, our areas of absurd inadequacy and stupidity. There is, though, one way to not make this evident. People who are aware of their areas of weakness and don't do that thing they do so poorly - whether it be choose their own clothes or tell jokes or dance or calculate equations or analyze data - are people who seem really with it. A person who knows his limits is a person who can leave a great impression; you don't see him look foolish.

And this is might be Trump's biggest weakness of all. He understands policy and governance so poorly that he doesn't even understand how poorly he understands it. The final thing that makes him so dangerous? He doesn't even know that he's bad at what he's bad at. Sadly, Trump won't be the guy who leaves you with such a favorable impression because he only does what he's great at; instead, he insists on showing you how badly he does what he thinks he does so well.

The closest thing to general intelligence is the ability to discern what we are intelligent at and what we're stupid at and focus on the first and avoid the second. Sadly, we're led by a guy who doesn't even have enough intelligence to know the difference between what he's brilliant at and what he's stupid at.