World inequality updates

Last month the World Inequality Lab, located at the Paris School of Economics, released their first World Inequality Report. Here is one result:

inequalitygrowth.PNG

The top 1% richest people saw their income growth skyrocket and the poorest people in the world did pretty well, but the global middle class and upper-middle class did the worst.

Oxfam also published their latest accounting of global wealth inequality and made social media go nuts when they concluded that the 26 richest people on earth in 2018 had the same net worth as the poorest half of the planet. In other words 26 people owned as much wealth as the 3.8 billion poorest people. That isn’t actually as bad as it sounds because a whole lot of the people Oxfam includes in the bottom half are net debtors in rich countries like recent college graduates with large student loans that they will easily repay. Even people like Donald Trump would have been categorized as part of the poorest half of the world during the times when The Donald went bankrupt and owed millions of dollars more than he had. It takes a fairly rich person to acquire big debts and some of Oxfam’s “poor” people are actually in that category.

But that doesn’t mean that the data is wrong.  For example, Credit Suisse also just published their latest Global Wealth Report which includes this data:

By their estimate, 63.9% of the world’s adults own 1.9% of the total world wealth and the top 0.8% own 44.8% of the world’s wealth. If we round these numbers a bit, the rule of thumb to remember is that about the top 1% richest people in the world collectively own about half of the world’s wealth. That includes anyone who has at least a million dollars of wealth and as the first graph showed, their incomes are skyrocketing.

If you want more details, Dylan Matthews wrote a nice summary.

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Posted in Inequality

Peak globalization?

The first wave of globalization happened due to technological advances in transportation and communication that dramatically reduced transactions costs in the 1800s:  Railroads, steel-hulled ships, the screw propeller, telegraph, etc.  Then politicians raised tariffs, restricted immigration, and went to war which caused trade and communication to collapse in the early 1900s.  The second wave of globalization happened mainly because of lower political barriers (like tariffs), lower communications (fiber optic cables and satellites), and lower transportation costs (due to better aviation and especially the shipping container).

Containerized shipping is worth examining in more detail because it seems utterly mundane, but probably had a bigger effect on globalization than any other technology since 1950.

thebox

The Economist magazine explains containerization:

[C]ontainers—uniform boxes that can be easily moved between lorry, train and ship—have reshaped global trade over the past few decades. Why…?

Uniform metal containers were invented by Malcom McLean …in 1956. Before then goods were shipped as they had been for centuries. Crammed in to the hold of a ship, loose cargo in wooden crates would be loaded and unloaded by vast crews of dockworkers. The process was unwieldy, unreliable and so slow that ships often spent longer docked than they did at sea. Theft of transported goods was rampant: as an old joke put it, dock workers used to earn “$20 a day and all the Scotch you could carry home.”

Containers changed this in several ways. The price of everything fell…

  • The cost of loading and unloading fell …to $0.16 per tonne to load compared with $5.83 per tonne for loose cargo. …
  • Because containers were packed and sealed at the factory, losses to theft plummeted, which in turn drastically reduced insurance costs.
  • More could also be loaded: in 1965 dock labour could move only 1.7 tonnes per hour onto a cargo ship; five years later they could load 30 tonnes in an hour.
  • As a consequence, ships could get bigger and more efficient while still spending less time in port.
  • As containers made inland distribution by train and lorry easier, ports became bigger and fewer in number. (In 1965 there were 11 loading ports in Europe; by 1970 there were three.) This, along with increased productivity, meant fewer dockworkers were needed, undermining their bargaining power and reducing the number of strikes.

The bolded phrase is wrong.  The longshoremen unions have achieved incredible wages due to containerization. Harold Meyerson says that they are “this country’s best-paid blue-collar workers; many make more than $100,000 a year.” Although there are only a tenth as many people working the docks as in 1950, their wages are incredible because they are much more productive.  Before containerization longshoremen joked that they got paid “$20 a day and all the Scotch you could carry home” because one of the big benefits of the job had been the ease with which goods like Scotch could be routinely stolen from the open piles on the docks.

New research claims that containerization is the most important reason that trade has increased over the past half century.

[The authors] find that containerisation is associated with a 320% increase in bilateral trade over the first five years and 790% over 20 years. A bilateral free-trade agreement, by contrast, boosts trade by 45% over 20 years, and membership of GATT raises it by 285%. In other words, containers have boosted globalisation more than all trade agreements in the past 50 years put together. Not bad for a simple box.

But the effect of containerization was not mainly by reducing the cost of shipping.  The improved speed and reliability was just as important in boosting trade by allowing companies to reinvent their supply chains.

Speed and reliability of shipping enabled just-in-time production, which in turn allowed firms to grow leaner and more responsive to markets as even distant suppliers could now provide wares quickly and on schedule. International supply chains also grew more intricate and inclusive. This helped accelerate industrialization in emerging economies such as China, according to Richard Baldwin, an economist at the Graduate Institute of Geneva. Trade links enabled developing economies simply to join existing supply chains rather than build an entire industry from the ground up. But for those connections, the Chinese miracle might have been much less miraculous.

Although globalization seems like it might continue growing forever, it seems to have run out of steam. Here is a measure of globalization according to the latest World Bank data.  It is the ratio of exports of goods and services as a percent of world GDP.

world gdp-export ratio

This shows that the world is less globalized in the latest data than it was back in 2005!  Is rising globalization over? Paul Krugman thinks so:

To explain a rising long-term ratio of trade to GDP, we have to turn instead to structural changes in the world economy, of which the most obvious involve declining costs of trade. My view is that rapid trade growth since World War II was driven by two great waves of trade liberalization and one major technological innovation. The first wave of trade liberalization involved industrial countries, and was largely over by 1980:

The second wave involved the great opening of developing countries:

This is still going on, but the major opening of Latin America, China, and India is already well behind us. …The point is that it’s entirely reasonable to believe that the big factors driving globalization were one-time changes that are receding in the rear-view mirror, so that we should expect the share of trade in GDP to plateau — and that this doesn’t represent any kind of problem. In fact, it’s conceivable that things like rising fuel costs and automation (which makes labor costs less central) will lead to some “reshoring” of manufacturing to advanced countries, and a corresponding decline in the trade share. Ever-growing trade relative to GDP isn’t a natural law, it’s just something that happened to result from the policies and technologies of the past few generations. We should be neither amazed nor disturbed if it stops happening.

The main technological improvements in shipping and telecommunications have long since run into diminishing marginal returns. International telecommunication is already so cheap that it can’t get much cheaper and the biggest innovation of the past half century in transportation was containerization (i.e. the “box”) which is already over half-century old and there haven’t been much additional gains.

Jessie Romero of the Richmond Fed says that as developing nations catch up technologically and as their wages rise, this could also depress trade:

there are signs of longer-term changes in the Chinese economy. “Two dimensions of the Chinese economy have changed,” says the University of Houston’s Kei-Mu Yi. “First, as they’ve become more technologically proficient, they can make a lot of the intermediate inputs themselves, and to the extent they do, their demand for imports would fall. Second, as their economy has gotten bigger, they are selling more domestically rather than exporting.” Just as China’s entry into the global market boosted trade for the world as a whole, a persistent decrease in China’s trade could depress global trade growth…

In addition, rising labor costs in developing countries could alter the calculation; hourly manufacturing wages in China, for example, have increased on average 12 percent per year since 2001. Natural disasters such as the Fukushima earthquake also could make managers nervous about having long supply chains. Anecdotally, a number of American companies have been “reshoring” manufacturing to the United States. The Reshoring Initiative, an advocacy group, estimates that about 248,000 jobs that left the United States have returned since 2010…

In addition, rising labor costs in developing countries could alter the calculation; hourly manufacturing wages in China, for example, have increased on average 12 percent per year since 2001. Natural disasters such as the Fukushima earthquake also could make managers nervous about having long supply chains. Anecdotally, a number of American companies have been “reshoring” manufacturing to the United States. The Reshoring Initiative, an advocacy group, estimates that about 248,000 jobs that left the United States have returned since 2010.In addition, rising labor costs in developing countries could alter the calculation; hourly manufacturing wages in China, for example, have increased on average 12 percent per year since 2001. Natural disasters such as the Fukushima earthquake also could make managers nervous about having long supply chains. Anecdotally, a number of American companies have been “reshoring” manufacturing to the United States. The Reshoring Initiative, an advocacy group, estimates that about 248,000 jobs that left the United States have returned since 2010…

Constantinescu and her co-authors pinpointed 2000 as the beginning of the decline in the trade elasticity, other research has found that the decline did not occur until the Great Trade Collapse [of 2008].

It is true that trade has collapsed more in places like China and India than in the US.  Here is the same data as in the first graph above, but with India, China, and the US added which shows that whereas trade in the US has changed at about the same rate as the rest of the world, trade in India and China has collapsed from where it was a few years ago.

At about the same time as international trade has started falling, immigration also fallen. Immigration to the US peaked over a decade ago in 2007. Here is Pew’s data for the total number of unauthorized immigrants in the US.

Rather than there being a “crisis” on our southern border, there have been more unauthorized immigrants leaving the US than entering for over a decade now.  It is an ironic time to want to build a big new border wall.

Posted in Globalization & International

A history of the Corporation – Wonkish

There have always been large organizations that have done the kinds of things corporations sometimes do, but for most of human history, those organizations were were organized as religious hierarchies or governments rather than as for-profit businesses. Businesses were small (which is defined as less than 500 employees today) and they were often run by families until the rise of the corporation and subsequent large businesses (trusts and partnerships) of the industrial revolution.

The earliest precursor of the corporation were the publicani of the Roman Republic. These were fairly large organizations that were similar to the modern corporation with a few differences. William N. Goetzmann and K. Geert Rouwenhorst argue that there are three distinguishing features of a modern corporation:

First, its existence is not affected by the departure of individual members. This stability enhances its ability to participate in economic transactions.

Some Roman publicani did outlive individual members/owners, but that isn’t really unique to corporations. Most organizations share this feature: Churches, cities, governments, etc. It is actually remarkable that only a very small percent of private businesses in all of history have been able to survive the death or departure of an owner. Most businesses have always been very short lived.

Second, designated members of the company can represent it, in other words, they can enter contracts without assuming rights or duties themselves. Instead, the company becomes the bearer of all obligations.

This is the idea of a corporation having legal personhood so that it can make contracts and bear responsibility for problems rather than transferring liabilities on workers or owners. Legally, only a person can be sued which has never been a problem for a businesses that is either a sole proprietorship or partnership, but it is more complicated for corporations. The legality of limited liability is a modern phenomenon (see below).  This was technically illegal under Roman law, but there was a huge loophole. A slave could be entrusted to manage a publicani and the owners could argue that they should not be held responsible for what the slave did, and then the slave could bear all the liability.

Corporations necessarily need to empower their CEO or managers to take on liabilities (and all contracts involve some sort of liability), but the practice of simply insulating shareholders from all liability didn’t become legal until the middle of the 19th century. However, before that, some corporate entities were able to shield their members from liability by structuring their shares as debts rather than shares of ownership because debts always have limited liability.  Lenders can only lose as much as their past contributions, just like modern corporate shareholders.

Third, …ownership is fungible and shareholders can react to changes in a firm’s prospects …by buying or selling shares. The separation of ownership and management makes it easier to attract human and financial capital.

This is a big difference between modern corporations and the Roman publicani. Although many authors claim that one kind of shares were bought and sold, there is no primary evidence that that is true. There was no stock exchange. And it isn’t even clear if the ‘shares’ in question were actually variable-interest-rate loans or if they were actual ownership stakes. The kind of shares that clearly had ownership control were considered a kind of membership and were not bought and sold on a secondary market.

A fourth big difference between publicani and corporations is the fact that publicani were not businesses that served the private sector at all. They were solely government leaseholders or contractors. They were most famous for managing tax collection and in many ways they functioned more like a form of government bureaucracy than today’s private corporations. It was a competitive form of bureaucracy, but it served as an arm of government, not a creature of markets.  After the Roman Republic turned into the Roman Empire, the government phased out publicani contracts and, “Without the support of the government, the societas publicanorum drifted into obscurity.”

Although the publicani disappeared, Romans had other forms of corporations that were non-profit and served religious and public functions which survived the fall of the Roman Empire such as cities, hospitals, guilds, monastic orders, and the Catholic Church itself. No for-profit corporation arose for several centuries until the Italian city-states of northern Italy redeveloped something like the publicani, and again their main purpose was tax farming. Nick Szabo:

The medieval organizations that most resembled later joint-stock corporations were the Genovese maone. … The Italian cities often sold off their tax receivables to wealthy merchants at a discount as a way to borrow funds. …The debts were divided into equal shares called loca or partes. Legally, these shares were personal property (chattels) and could be freely traded.

Technically, no organization was created when the city sold its tax receivables to merchants. However, to effectively collect the taxes, the holders of loca formed an organization called a maona or societas comperarum. This organization would then subcontract to tax farmers to collect the taxes. By the fourteenth century, Genovese maone also engaged in military conquest and colonization… Normally, maone were temporary, but some of them ended up lasting for a long time. In 1346 the Maona di Chio e di Focea … was formed. This organization’s members obtained from Genoa the exclusive right to collect taxes from Chios (an Aegean island) and Phocaea (a port on the Anatolian coast). But first the company would have to conquer them! Although technically a temporary organization, it lasted until 1566.

Rather than going to buy receivables from Genoa, subscriptions to the di Chio e di Focea’s loca shares (still legally debt, but to be paid out in dividends as taxes and trading revenues were collected) went to fund 29 galleys to conquer Chios and Phocaea. The Genovese Republic, for a fee, granted the organization exclusive rights to collect taxes from the conquered territories as well as special trading privileges. The conquests, taxes, and trading were at least partially successful, and by the 16th century more than 600 persons owned loca of the maona.

Glyn Holton recounts when private corporations first began to take their modern form:

This changed around 1600, when new business forms emerged to challenge the might of Spain and Portugal… Portugal had discovered the East Indies as the source of spices, and Spain was plundering the Americas for gold and silver. The Vatican legitimized this arrangement, ruling that lands discovered in the Eastern Hemisphere belonged to Portugal while lands discovered in the Western Hemisphere belonged to Spain. Holland and England flaunted the Vatican’s law. Not only did they practice a different religion, but they adopted different methods. While the Spanish and Portuguese sovereigns shouldered the expenses and risks of overseas ventures, English and Dutch traders formed private corporations to challenge them.

These trading corporations had their roots in guilds. During the 14th and 15th centuries, guilds were chartered primarily to enforce a monopoly in certain businesses or geographic regions. In exchange for a grant of monopoly, a guild would make ongoing fee payments to its chartering [government]. Members of a guild might compete with one another, but outsiders were excluded.

Traders also formed guilds. Their purpose was to secure from the government a grant of monopoly over trade with specific geographic regions. In England, such guilds were called regulated companies. They were often referred to by names reflecting their monopolies—the India Company, African Company, Russia Company, Turkey Company, etc.

…Regulated companies that sponsored equity-financed voyages came to be called joint-stock companies. Two early joint stock companies were Holland’s and England’s respective East India Companies, which were chartered to challenge Portugal’s dominance of the spice islands. Initially, neither company had permanent equity. Each voyage would have its own equity subscription. This proved impractical, and soon capital from one voyage was being rolled over to finance subsequent voyages. In this way, the companies evolved to become much like today’s business corporations. They had separate managers and investors…

The joint-stock corporations cultivated influence at the highest levels of government. The Queen and nobility had significant investments in the English East India Company, and they looked out for the company’s interests in the halls of government. The joint-stock companies continued the guild practice of making ongoing payments to the state. In this we may perceive the origins of corporate taxation, but the people of the day viewed it as more akin to graft…

Although today it seems inevitable that corporations would eventually rule the world, corporations were often unpopular because of numerous corporate scandals and government bailouts. Although we remember the few big successes like the East India Company and the Hudson Bay Company, corporations were not popular and most of them went bankrupt even despite often gaining a monopoly from government. Adam Smith (1776) denounced corporations in The Wealth of Nations because he thought corporate governance was so inherently flawed, it could never achieve anything beyond what you might see in Dilbert.

…The directors of [joint stock companies] being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners of a private copartnery frequently watch over their own … Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account, that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without a [monopoly]…

Adam Smith then goes on and on with examples of the foibles and crimes of his contemporary corporations that make episodes of The Office look like a well-run bureaucracy. In 1720, The British Parliament passed the Bubble Act which restricted the formation of corporations for over a century without permission from Parliament or a Royal Charter. But after the industrial revolution began transforming Britain, the government started making it easier to form corporations again. Glyn Holton again:

Incorporation by Registration

A recurring theme in the history of corporations is that they should exist to serve some public purpose, and they are granted certain privileges to facilitate this. The state would charter corporations that it deemed worthy. At first, the most important privilege was a grant of some monopoly—say a monopoly over trade with some region or an exclusive right to build a certain canal. Over time, transferability of shares and limited liability became more important. These gave corporations an enormous advantage in raising capital over sole proprietorships and partnerships. Investors with modest holdings and limited liability were comfortable letting specialists run their corporations, so the separation of investors and management became one of the great strengths—and great weaknesses—of limited liability joint-stock corporations.

The building of highways, canals and railroads was a quintessential public need, and numerous corporations were chartered for these purposes. For other businesses, the state’s monopoly on granting corporate status proved onerous. When entrepreneurs tried to form a new corporation, competitors could oppose their petition for incorporation. Inevitably, the process was marked by political intrigue. When incorporation was denied, entrepreneurs had meager options. They might buy a failing corporation as a shell and then raise capital for a business unrelated to that corporation’s original monopoly. This practice was called charter abuse. With the supply of failing corporations limited, a more common solution was to simply issue stock in unincorporated companies. This legally perilous practice became widespread in England during the late 1700s… In the early 1800s, competitors started challenging their legality in court.

The …courts and governments found themselves making increasingly arbitrary decisions about which businesses to favor. Something had to be done. The solution was a new concept: incorporation by registration. In various countries, legislation was passed [in 1844] allowing entrepreneurs to incorporate any firm they liked by simply filing paperwork. No longer would corporations be privileged associations granted monopolies by the state to pursue some public purpose. They had become a standard business form—along with sole proprietorships and partnerships—that was available to all.

However, there was still no limited liability and shareholders could still be held responsible for unlimited losses by the company. The next important development was the Limited Liability Act of 1855 which limited liability for most corporations with more than 25 members (shareholders). Then In 1892, Germany introduced the Gesellschaft mit beschränkter Haftung which limited liability for all corporations and even if one person owned the entire corporation. With each legal innovation, other Western countries often followed suit with pressure from business lobbying. New legal structures for business ownership continued to evolve and private equity companies took off in 1946, the term, special-purpose entity (SPE), was coined in 1973, and Limited Liability Companies (LLCs) were legally authorized in Wyoming in 1977 which expanded limited liability to partnerships and sole-proprietors.

 

Posted in Managerial Micro

Guns don’t kill people. Alcohol kills people.

Ok, so my title is goofy sloganeering, but it isn’t any goofier than the common slogan it is based upon. Although the US could certainly save lives by copying some of the gun restrictions that all other industrialized nations use, I don’t care that America’s gun culture is more extremist than anywhere else on earth because other issues are more important than gun violence in America and guns are politically untouchable due to the gun lobby and the passionate minority of American voters who want us to have more guns and gun freedoms, not less.

Guns simply aren’t as important as lots of other public health issues. For example,  Tyler Cowen makes the case that alcohol policy is much more important.

We take [the free availability of alcohol] for granted, but so many lives are lost each year, so many careers ruined, so much productivity lost. One of my personal crusades is, we should all be more critical of alcohol. People will pull out a drink and drink in front of their children. The same people would not dream of pulling out a submachine gun and playing with it on the table in front of their kids, but I think it’s more or less the same thing. To a lot of liberals, the drink is okay and the submachine gun is not. I think, if anything, it’s the other way around, and I encourage people to just completely, voluntarily abstain from alcohol and make it a social norm.

Alcohol control would do more for Americans than gun control because, as German Lopez says, alcohol is much more dangerous than guns:

As of 2010, the Centers for Disease Control and Prevention (CDC) estimated that excessive drinking causes 88,000 deaths each year in the US… alcohol’s annual death toll is higher than deaths due to guns, cars, drug overdoses, or HIV/AIDS ever have been in a single year in America. There’s a good chance that the CDC’s estimate is an undercount. It’s eight years old at this point, and since then, at least some kinds of alcohol-related deaths have increased too. Some experts have told me that they would not be surprised if the annual death toll linked to alcohol is now above 100,000. And the death toll only captures part of the concern with alcohol. Addiction, domestic violence, sexual assault, and other linked crime and health problems are also significant.

One reason alcohol is more dangerous than guns in America is that alcohol use causes a lot of violence. If you love guns, then you might want to get on the alcohol-restriction bandwagon because restricting alcohol could make America safe for more guns! German Lopez again:

A new study, by researchers at the Violence Prevention Research Program at the University of California Davis, found that alcohol may be a much better predictor of future crime, including violent acts, than whether you have a criminal record at all. The National Council on Alcoholism and Drug Dependence estimates that alcohol is a factor in 40 percent of violent crimes. Other research has consistently found that alcohol abuse and crime are closely linked… A 2010 study even found a strong relationship between the presence of alcohol stores and gun assaults… while the connection between mental illness and carrying out violent acts is shoddy, the research suggests that alcohol abuse is a very strong predictor of violent crimes.

Whereas Americans irrationally obsess about avoiding people with criminal records when hiring and restricting the freedoms of people with mental illness to prevent violence, alcohol abuse predicts crime better than a record of crime or mental illness. Alcohol is particularly dangerous for youths because people who begin drinking younger are more likely to develop an alcohol problem during their lives and as with any health problem, the later in life that an illness strikes, the less tragic the harm.  Furthermore, young people are far more prone to violence than people over 30.  For example, the peak rate of homicide is committed by Americans in their early 20s.  The incidence of binge drinking has a similar age profile.

homicide_age

Lauren Sausser wrote that even moderate parental alcohol use has an impact on their kids:

study published last year by the Institute of Alcohol Studies in the United Kingdom found that children may be distressed, embarrassed or otherwise negatively impacted when parents drink even a “low level” of alcohol.  “That this effect starts at the stage when parents are tipsy, rather than being drunk, is possibly a surprising finding,” the report’s authors concluded. “However, it suggests that the way in which parents and their children view episodes of ‘tipsy’ drinking is quite different.” Further research shows that parents who exhibit favorable attitudes toward drinking alcohol will more likely raise children who will begin drinking as adolescents.

There are lots of ways to reduce violence without gun control and regulating alcohol is one of them.  As German points out at the above links, there are lots of practical ways to reduce alcohol use that would save more lives than gun control. There is no need to go all the way to prohibition to be effective just like there is no need for gun regulations to go all the way to prohibition. Sensible alcohol regulations may be politically impossible due to opposition from the alcohol lobby (much like gun regulations are opposed by the gun lobby), but hardly anyone has tested the alcohol issue because most people aren’t as frightened by alcohol as they are by guns and they just don’t care.

Guns are a lot scarier looking and dramatic than alcohol, but you should be more frightened of alcohol.

Posted in Public Finance, Violence & Peace

The average Canadian became richer than the average American one decade ago.

Most people think that most Americans are richer than Canadians because that was true for most of history, but that ended a decade ago.  The Great Recession of 2008 hurt Americans more than Canadians and the median income in Canada has been higher than in America ever since 2009. The following graph shows the Global Consumption and Income Project‘s estimate of median income in both countries (using PPP):

The median American was a lot richer than the median Canadian in 1960–42% richer. By the end of this data set (2015), the median Canadian was almost 7% richer.

Most people still don’t realize this is true because most people use mean income as THE measure of economic well being. The story looks different when using mean income:

Mean income is still a bit higher in the US than in Canada due to rising inequality in the US.  America’s billionaires have been doing better than Canada’s and they pull up average income, but the average American hasn’t done so well.

Here is what happened to inequality in the US vs. Canada as measured by the ratio of mean income to median income.  The rising ratio in the US shows higher inequality whereas inequality is now lower in Canada than it was at the beginning of this data set.

inequality_canada_usa

Partly because of lower inequality in Canada, economic opportunity is higher there and Canadians are twice as likely to achieve the American Dream than Americans according to Fortune Magazine:

Stanford Economist Raj Chetty’s study, Improving Opportunities for Economic Mobility: New Evidence and Policy Lessons, published by the St. Louis Federal Reserve Bank, defines the “American Dream” as the statistical probability that a child born to parents in the bottom fifth on the income distribution scale ends up in the top fifth.

Children in the United States have a 7.5% chance of achieving that economic mobility, according to the study. By comparison, Canadian children have a 13.5% probability.

Chetty’s research shows that some areas have much higher economic opportunity (like San Jose California) than other areas (like most of the former slave states, and, sadly, my home state of Ohio).

American_dream_map.PNG

This map is also quite similar to the maps showing where Americans have low (and decreasing) life expectancy with a few exceptions such as many cities having lower than average economic opportunity even though they tend to have higher than average life expectancy nowadays.

Posted in Medianism

What are the cheapest countries to visit? See the Travel Cost Index.

I searched Google for information about what nations are the cheapest for travelers, and although there is a lot of interest about this topic on blogs and discussion forums, I found no good hard data on the internet.  This is a bizarre lesion in the world’s collective knowledge (at least as it is revealed by Google) because it is easy to predict what countries are the cheapest to travel in for Americans using a bit of economic theory and readily available data.

The basic idea is that you want to go places where a dollar buys a lot of goods.  The following map gives you an approximate value of how expensive each nation was in 2017 (Click on the link for an interactive version of the map):

ppp_travel_cost_index

The following table gives the numerical data underlying the map and the cheapest country in the world in 2017 was Egypt which is right next-door one of the most expensive, Israel.  In Egypt, it only took 21 cents to buy a dollar’s worth of goods and services on average.  That is like the whole country being on sale, almost 80% off!  The very most expensive was Iceland where it took $1.32 to buy what normally costs only $1 in the US.  The index says that 49 cents in Mexico buys as much as a dollar in the US which means that Mexico was approximately half price compared to travel in the US.

Note: The following table is very long, so you can click here to scroll to the end to read more.

Country Name 2017 Travel Cost Index (World Bank Data) 2018 Travel Cost Index (October OECD Data)
Egypt, Arab Rep. 0.21
Uzbekistan 0.22
Azerbaijan 0.24
Tajikistan 0.25
Iran, Islamic Rep. 0.26
Algeria 0.27
India 0.27
Pakistan 0.28
Malawi 0.28
Gambia, The 0.28
Mongolia 0.29
Mauritania 0.29
Madagascar 0.29
Tunisia 0.29
Afghanistan 0.30
Iraq 0.30
Belarus 0.30
Ukraine 0.30
Congo, Rep. 0.31
Nepal 0.31
Indonesia 0.31
Timor-Leste 0.32
Sri Lanka 0.32
Tanzania 0.32
Uganda 0.32
Bhutan 0.33
Sierra Leone 0.33
Kyrgyz Republic 0.33
Mozambique 0.33
Kazakhstan 0.33
Nigeria 0.34
Malaysia 0.34
Chad 0.35
Vietnam 0.35
Cambodia 0.35
Lao PDR 0.35
Ghana 0.35
Macedonia, FYR 0.36
Philippines 0.36
Burkina Faso 0.36
Brunei Darussalam 0.36
Kosovo 0.36
Morocco 0.37
Benin 0.37
Rwanda 0.37
Thailand 0.37
Niger 0.37
Zambia 0.37
Mali 0.37
Oman 0.38
Guinea 0.38
Albania 0.38
Lesotho 0.38
Eswatini 0.38
Nicaragua 0.38
Senegal 0.38
Georgia 0.38
Saudi Arabia 0.39
Suriname 0.39
Serbia 0.39
Cameroon 0.39
Bangladesh 0.39
Togo 0.39
Bulgaria 0.40
Equatorial Guinea 0.40
Gabon 0.40
Turkey 0.40 0.37
Moldova 0.40
Bosnia and Herzegovina 0.40
Kuwait 0.40
Ethiopia 0.40
Libya 0.41
Armenia 0.41
Montenegro 0.41
Turkmenistan 0.41
Russian Federation 0.41
Burundi 0.42
Romania 0.42
Cote d’Ivoire 0.42
Haiti 0.42
Guinea-Bissau 0.43
Colombia 0.43
Botswana 0.44
Dominican Republic 0.44
Bolivia 0.45
Paraguay 0.45
Jordan 0.45
South Africa 0.46
Kenya 0.46
Cabo Verde 0.47
Mauritius 0.47
Poland 0.48 0.5
El Salvador 0.49
Mexico 0.49 0.57
Peru 0.49
Qatar 0.49
Honduras 0.50
Bahrain 0.50
Namibia 0.50
Hungary 0.51 0.54
Trinidad and Tobago 0.51
Comoros 0.51
Congo, Dem. Rep. 0.52
Zimbabwe 0.52
Lithuania 0.52 0.59
China 0.53
Croatia 0.53
Ecuador 0.53
Seychelles 0.54
Guatemala 0.55
United Arab Emirates 0.55
Liberia 0.55
Slovak Republic 0.56 0.62
Czech Republic 0.56 0.63
Latvia 0.57 0.67
Jamaica 0.57
Sao Tome and Principe 0.57
Belize 0.57
Central African Republic 0.58
Guyana 0.58
Lebanon 0.58
Fiji 0.58
Nauru 0.59
Sudan 0.59
Papua New Guinea 0.61
St. Vincent and the Grenadines 0.61
Singapore 0.61
Panama 0.62
Estonia 0.62 0.72
Chile 0.62 0.67
St. Kitts and Nevis 0.63
Maldives 0.63
West Bank and Gaza 0.63
Brazil 0.63
Antigua and Barbuda 0.64
Angola 0.65
Samoa 0.66
Tonga 0.66
Portugal 0.67 0.76
St. Lucia 0.67
Greece 0.67 0.76
Slovenia 0.68 0.76
Malta 0.68
Costa Rica 0.68
Argentina 0.69
Grenada 0.70
Macao SAR, China 0.70
Dominica 0.72
Uruguay 0.72
Cyprus 0.73
Spain 0.74 0.84
Hong Kong SAR, China 0.75
Kiribati 0.77
Korea, Rep. 0.78
San Marino 0.80
Italy 0.81 0.91
Germany 0.88 0.95
Micronesia, Fed. Sts. 0.88
Solomon Islands 0.88
Japan 0.89 0.92
Marshall Islands 0.90
France 0.90 0.98
Barbados 0.90
Austria 0.90 0.98
Tuvalu 0.90
Belgium 0.91 1.01
Ireland 0.92 1.1
United Kingdom 0.92 1.05
Netherlands 0.92 1.01
Palau 0.92
Canada 0.96 1.03
Vanuatu 0.97
United States 1.00 1
Luxembourg 1.00 1.15
Bahamas, The 1.01
Finland 1.02 1.09
New Zealand 1.04 1.06
Israel 1.05 1.17
Sweden 1.06 1.05
Denmark 1.10 1.26
Australia 1.11 1.13
Norway 1.23 1.27
Switzerland 1.24 1.38
Iceland 1.32 1.38

What is the Purchasing Power Parity (PPP) exchange rate and how is the Travel Cost Index calculated?

The purchasing power parity (PPP) exchange rate is simply what you get when you divide the prices of goods in one currency by the prices of the exact same goods in another currency.  For example, suppose the only good that matters is the price of a hamburger (which is actually used to create the Big Mac PPP index).  If a hamburger costs $2 in the US and €4 in Paris, then a dollar is worth €4/$2 = 2€/$.  That means the purchasing power parity of a dollar is two euros.  By itself, this tells us nothing about how expensive it is to visit Paris because it doesn’t tell how many euros you can actually buy with one dollar.  That is the market exchange rate which is usually not the same as the PPP exchange rate.  If the market exchange rate equals the PPP exchange rate, then the cost of travelling in Paris is exactly the same as the cost of travel in the US. When the two exchange rates differ, that tells you how much cheaper (or more expensive) another country will be.

The Travel Cost Index is the PPP exchange rate divided by the market exchange rate.  For example, if the two exchange rates are equal, as in the above example, then 2€/$/2€/$=1 and both countries are equally expensive.

However, if the market exchange rate value of the dollar is more than the PPP exchange rate value, then Paris will be less expensive than America.  For example, if one dollar buys 2.22 euros, then 2€/$/2.22€/$=0.9.  This means that France is about 10% cheaper than the US and the above data happens to show that that is how much cheaper France was than the US in 2017.

What are flaws in the Travel Cost Index?

The Travel Cost Index is only an approximate estimate of relative price levels because, first of all, PPP  doesn’t just focus on the kinds of things that tourists buy. It measures a much broader ‘basket’ of all goods and services, some of which, like “200 types of equipment goods and about 15 construction projects” are completely irrelevant to tourists whereas a lot of the things that are important to tourists like tour packages are probably not measured in the PPP index at all.  The PPP index only includes 3,000 consumer goods and services are included, so it leaves out a lot of things, and the kinds of things tourists buy are poorly represented.

Some countries are going to be cheaper than the Travel Cost Index indicates because some places like Thailand have an extremely efficient tourism infrastructure which brings down prices for tourism-related purchases and other countries like Iraq (probably) have not developed efficient infrastructure and achieved economies of scale for handling visitors from around the world. Similarly, some regions in every country have cheaper prices for travelers than others and if you are in an expensive region, like New York City in the US, you’ll need a very different budget than you would need in a cheap region, like West Virginia. Because the PPP index shows average prices, that means that the prices in rural areas is going to typically be lower than the PPP index (at least for the kind of purchases that rural people routinely buy), and costs in large cities are typically going to be higher.

Secondly, no traveler can get the published market exchange rate because of foreign exchange transactions costs that usually average about 3% , so every country should be about 3% more expensive on average than the Travel Cost Index shows.

Thirdly, the World Bank data doesn’t agree with the OECD data and I’m not sure why.  Obviously the OECD data is more up-to-date whereas the World Bank data is almost a year out of date, but that is easy to adjust for and the adjustments don’t eliminate the discrepancies.  PPP data is always a bit out of date, and it is important to update the index with new price information as explained below.

PPP update formula

To update old PPP data, just get the increase in inflation, and the change in exchange rates since the old PPP data was calculated.

Just calculate how much any foreign exchange rate has changed (in percentage) and subtract it from how much higher their inflation rate has been compared to the US rate over the same time period. For example, if the foreign inflation rate has averaged 10% over the past year and the US inflation rate has been 2%, that means that their prices have gone up 8 percentage points more than in the US. Then if their exchange rate (the value of their currency per dollar) has gone up 5%, the net change in prices is 3%, meaning that their country is 3% more expensive than it was a year ago.

10% – 2% – 5%  = 3%

10% = How much their prices rose

2% = How much American prices rose

5% = How much the exchange rate value of the dollar rose

In fact, this is how PPP is updated by professional economists most of the time.  Because it is expensive to gather actual PPP prices in every nation in the world, and because we have inflation data which gives similar information, the baseline PPP data is ordinarily just updated with this formula.

Vox created a “Vacation Index” which merely used this calculation instead of using the overall PPP measurement shown in the above map and table data.  Vox’s index showed how much cheaper a nation is now than it had been a year ago.  That produces an interesting index as shown for May 2016 (below), but any change in the past twelve months is usually going to be very small relative to the Travel Cost Index shown above, although it is somewhat significant in rare examples like when countries suffer a major currency devaluation such as in Argentina and Russia at the top of the graph.

The Vox index in the graph just shows how much the Travel Cost Index changed over the past year in different countries.  This is a poor measure of overall travel costs because it ignores the PPP baseline.  For example, it shows the United Kingdom as being particularly cheap and Turkey as being quite expensive when the reality is just the opposite.  This chart merely shows that the UK had gotten 3% cheaper than it had been the previous year and Turkey had just gotten 4% more expensive than it had been the previous year, but the UK started out a lot more expensive than Turkey (and has been for about a century) so the relatively small changes over the prior year weren’t significant relative to the baseline PPP.  Despite falling prices in the UK and rising prices in Turkey, the UK still remained almost twice as expensive as Turkey overall according to World Bank data in the map and table above.

Of course, the index in my table is also imperfect for the reasons mentioned above, but it is the most comprehensive there is and the editors at VOX must have determined that their index isn’t very useful because they abandoned it and haven’t continued to update it with new data.

If you want to get even more wonkish…

Another interesting way to present this kind of data graphically can be seen on the following Gapminder graph. Again, you have to click on the link to make it really useful, but here is what you will see:

PPP-vs-exchange-rate.PNG

The nations that are lower than the 45-degree line like Saudi Arabia and most of the oil exporters are relatively cheap relative to the other countries that are nearby on the graph and the nations that are above the trend line like the red island nations are relatively expensive compared with other circles nearby on the graph although what is more difficult to see on this particular graph is the fact that poorer nations tend to be cheaper overall than richer nations mainly because labor is so much cheaper in poor nations.

In fact, developing countries usually have costs between 1/4 to 1/2 the rate in developed countries mainly because most production is non-tradeable.  The biggest part of every economy are things that are too expensive to be shipped abroad like real estate and services like hair cuts and taxi rides so they are completely non-tradeable.  Goods and services that are not tradeable are not subject to arbitrage and so the law of one price does not apply.

Generally tourists buy a lot of labor in hotels, restaurants, taxis, etc., and because wages are way lower in poor countries, services tend to be much cheaper because these are not tradeable goods.

For tradeable goods, the law of one price should apply in the long run in theory, but that theory doesn’t work very well in practice mainly due to the massive scale of financial flows which largely determine exchange rates and which have little to do with the spot price differentials of tradable goods.

According to the Bank for International Settlements, the foreign exchange market is by far the biggest market in the world in volume.  It many times bigger than GDP or than turnover in equity markets.

bis-fx

The massive flows in foreign exchange speculation results in market exchange rates that can fluctuate much more wildly than any changes in the prices of tradeable goods, GDP, or anything else in the real economy. Large speculative deviations in market exchange rates from the long-run averages of fundamental measures can persist for years.

Other issues affect different prices too and that is how even tradeable goods like Ipads can sell for radically different prices around the world.  According to the Ipad index, the price varied in 2013 from $473 in Malaysia, to over $1,000 in Argentina.

Posted in Globalization & International

Census updates median income data

There is a new Census Bureau map showing the median annual household income (averaged over the past five years) shows where America is richer and what areas are poorer.  Median Household Income for Counties in the United States: 2013-2017[Source: U.S. Census Bureau]

It is particularly interesting to see the suburban ring counties that are richer than the core urban areas of most American cities like Dallas, Minneapolis, Chicago, Detroit, etc.  You can see a similar map on GEOFred where you can zoom in on particular areas to see more detail, but it isn’t kept as up-to-date with the most recent data from the Census Bureau.

Posted in Medianism

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