Category Archives: Graphs, bitches!

That about covers it

My favorite webcomic yet again makes me wonder whether it’s spying on my brain:

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The decline of the American worker

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I’ve always liked Fareed Zakaria.

In an Intelligence Squared debate I once saw, he came out in favor of the stupid argument that U.S. guns are fueling Mexican drug violence, but once he had been roundly thumped by the other side, he basically admitted he was wrong and dropped it. That’s the kind of guy he seems to be: reasonable and willing to admit when he’s wrong about something.

I was recently pointed to a fascinating article he wrote about the sort of general gloom and malaise that seems to be accompanying the unfortunate realities of unemployment and economic stagnation in America today. Go read it!

Anyway, Zakaria accurately describes the problems facing middle-class American workers, who predominately work in occupations such as skilled manual labor, managerial work, sales, and minor technical work. He begins with a very macroeconomic argument that holds water: that global competitiveness has opened markets full of workers who are as skilled and productive as Americans in these fields but whose wage requirements are lower. In a nutshell, here’s the core of the problem as he describes it:

Duh, of course a company is going to hire the foreign worker whose income expectation is half the American’s! There’s a lot of truth in his assessments, which are highlighted with striking personal experiences and a light dash of humor.

But sadly, Zakaria’s proposed solutions seem bizarrely unrelated to the issues themselves. While his ideas under the headings “Fiscal sanity” and “Benchmark, benchmark, benchmark” are sensible, and he’s absolutely right that the U.S. tax code is a monster that needs to be nuked from orbit and remade from scratch, there are two big stinkers in his plans.

First is his peculiar fondness for job training. The fact of the matter is that there are basically two types of companies: those that are actively looking for workers, and those that aren’t. The former are willing to train the under-qualified, while the latter may refuse to hire even the perfectly qualified.

Any company that’s looking to hire is a company that’s willing to train new hires to do their jobs. I’ve lived this: I was woefully under-qualified for my current job in terms of concrete skills, but I was hired because of the perception that I would take to on-the-job training quickly.

Obviously there has to be at least a reasonable match between skills and work; a psychologist stands no chance of hired as an aerospace engineer, for example. But there’s no evidence that American higher education is not producing the kinds of skilled workers who earn high wages. As Zakaria himself admits,

[America] has managed to invest in human capital by taking smart, motivated people from around the globe, educating them in the planet’s best higher-education system and then unleashing them in a dynamic economy.

His second idea is even weirder.

Fundamentally, America needs to move from consumption to investment. Everyone agrees that the best way to create good jobs in the U.S. is to create new industries and companies and to innovate within old ones. This means large investments in research, technology and development. As a society, this needs to become our strongest focus.

This paragraph doesn’t seem to follow his focus on workers. Zakaria has spent the whole article talking about how American labor is now at a competitive disadvantage due to above-average wages and more competitive global workers, yet here he goes off on some tangent about consumption and investment. I’m in agreement that consumption is too high, but it’s not clear how this substantially relates to his thesis about the American worker’s wages and competitiveness.

The same challenge can be made to his claim of the necessity for more investment, which he seems to be using as a synonym for “Research and Development”, whatever that actually means. But Zakaria earlier described how operational and technological efficiencies have hurt rather than helped the American worker:

First, technology has produced massive efficiencies over the past decade. Jack Welch explained the process succinctly on CNBC last September. […] Welch gave as an example a company owned by the private-equity firm with which he is affiliated. In 2007 the business had 26,000 employees and generated $12 billion in revenue. It will return to those revenue numbers by 2013 but with only 14,000 employees. “Companies have learned to do more with less,” Welch said.

Moreover, his source of revenue for this perhaps even counterproductive R&D infusion is downright ghastly: a 5% national sales tax. It seems particularly out of place to propose new taxes in an article about how the middle class is screwed. Furthermore, should this tax be allowed to exist, it will surely rise to beyond 5% in subsequent years just as all previous taxes have.

For example, in 1913 when the 16th amendment (which permits congress to tax income) was passed, the lowest tax bracket was 1%, and the top bracket was 7% on incomes over $500,000 (about $10 million in today’s dollars). Today of course the lowest bracket is 10%, and the highest one is three and a half times that.

As another example, the social security payroll tax started as 6%; now it’s 12.4%. And so on and so forth. If Zakaria believes that higher tax burdens will provide the shot in the arm that the middle class needs, he’s nuts.

Furthermore, what would this tax actually fund? Is there a government agency that is so wise and knowledgeable that it accurately knows which companies to subsidize, what industries to promote, and what products to support in the pursuit of this dream? In addition, what’s to prevent the money from being hijacked by the political process and simply used to dole out cash to powerful committee chairs’ favored corporations? In any event, this whole scheme of Zakaria’s contradicts two of his earlier statements:

Ultimately American jobs are created from the bottom up by companies, not from the top down by government fiat.

[…]

[There is an] institutionalized corruption at the heart of the American political process, in which it is now considered routine to buy a member of Congress’s support for a particular, narrow provision that will be advantageous for your business.

Moreover, he later talks about punitive Indian taxes in the 70s, how businesses were driven underground by them, and explains that they are now lower in several ways than they are in the U.S.! Zakaria can’t seem to make up his mind whether or not taxes destroy business.

A REAL solution

Let’s return to that original graph showing the core problem:

Unfortunately, none of Zakaria’s ideas really address the actual issue: American workers’ declining wage-competitiveness with skilled foreign workers.

Since we can’t control the rest of the world, we obviously need to focus on ourselves. In order for American workers to be considered, their wages need to drop:

But of course, this would be disastrous, because Americans need to spend a lot! We’re paying for rent, mortgages, cars, insurance, groceries, and all kinds of stuff. Our expenses are high:

Now at this point, some of you are probably looking at me like I’m trying to eat a grizzly bear. In order for this wage drop not to cause massive pain and suffering, the prices of things we need to buy must fall as well:

It’s important to realize that a diminished standard of living is only caused when prices rise faster than wages: Declining wages DO NOT produce a declining standard of living as long as prices fall as well.

For years, we’ve all been focused on increasing our wages, taking for granted that prices in general will rise and that we need more income to maintain our purchasing power in the face of these rising prices; we’ve all been raised with inflation as a virtual constant so that it’s the most natural thing in the world for us to expect that prices will generally rise forever. So if it’s assumed that prices will constantly rise, then it makes perfect sense that wages should correspondingly always rise to keep pace.

But what if prices could remain the same or in fact even fall? Here’s the shocking truth: from 1774 to 1912, prices remained very stable, never deviating too far from what they would have been in 1774:

Let that graph sink in: a product that cost $1 at America’s founding would cost almost the same amount a few years before the first world war, 138 years later. Now THAT’S price stability! And the trendline is even negative, meaning that over time, prices were in fact generally falling.

With such a bedrock of price stability, it was not necessary for each successive generation of workers to focus on earning dramatically more than their parents. In other words, because prices were stable, wages did not have to continually rise to keep pace with them.

Let’s put that graph in perspective, since it only goes up to 1912, which was deliberate on my part. Let me show you the full graph, which continues onwards to 2010:

Gulp. Those pre-1913 spikes look a lot smaller in comparison, don’t they? For the better part of a century, prices have been constantly rising for most consumer goods. The result is that workers’ wages must constantly be rising to even keep pace so they don’t lose their purchasing power. Wage increases are now basically mandatory to keep the cost of living of the American worker from falling, whereas from 1774 to 1912, that wasn’t the case.

Even worse, there are two products that have historically been especially important to the middle class: housing and college education. Unfortunately, for the last 40 or 50 years, these have increased in price even faster than the general rate of inflation:

Middle-class inflation.png

The terrible truth is that high U.S. wages, debt, and spending have been caused by tremendous inflation in the price of all goods and services, with truly astounding inflation occurring in the prices of housing and college. In order to keep up, we’ve been forced to constantly increase our wages, spend more for what we need and want, and take on debt when we couldn’t manage to.

As long as deflation is not allowed to counterbalance inflation and the prices of essential goods and services are constantly rising, the American worker is going to be stuck on the treadmill of trying to make his income keep up with his rising expenses and using debt to plug holes. Even if what Zakaria wanted came to pass and new industries magically sprung into existence that employed everyone and gave them high wages, the cycle would still continue, and it would only be a matter of time before inflation made a mockery of even those wage levels.

Better we should all be police officers than our country become a prison

I think I finally figured out what’s going on inside the heads of anti-gun people. Let’s say it’s discovered that this is the distribution of weapons used to commit murder:

homicide_weapons.png

The anti-gun person thinks, “The biggest category there is guns. If we pass gun control and get rid of guns, then that whole chunk can be diminished or eliminated!” Their end goal is that the pie chart look like this:

homicide_weapons_minus_guns.png

In other words, they are assuming no substitution. Getting rid of guns should in their minds get rid of the 43% of murder that’s committed using guns; it is never considered that those murderers will instead gravitate towards knives or bludgeons. Their next target will then be knives, to eliminate that slice. Then bludgeons, and so on. All in the name of eliminating as many slices as possible of that pie chart of murder. And this is all of course assuming that weapons control is even possible.

This line of reasoning makes no sense to pro-gun people.

Let’s look not at actions, but intentions. The guy who commits murder with a gun is not primarily trying to use a gun; he’s trying to commit murder. The gun is just a means to an end for him. If he doesn’t want to commit murder then he’s a normal person with a gun, whereas if he doesn’t have access to a gun, his heart is still full of murder. Without a gun, he may be forced to make do with a less lethal weapon or change his tactics to employ the element of surprise more, but nothing has been changed vis-à-vis the fact that you still have a person who wants to destroy a human life. Even if all the weapons in the world were eliminated, the ugly urge to commit murder itself cannot be snuffed out, and people are still easily capable of killing each other with nothing more than their bare hands.

The Brady Campaign likes to say that we need to “keep guns out of the wrong hands” which implies that there must be some people who can be trusted with guns—there must be “the right hands” somewhere.

I think that they would agree that a police station is such a place. In police stations everyone is armed with a handgun and there literally are closets full of fully automatic assault rifles. These people undoubtedly have the “right hands”.

Contrast this with a prison; basically a big house full of people with the “wrong hands”. The guards keep prisons as bereft of weapons as possible, and not just guns, but knives and even objects that could be used to create knives. And yet prisons are still incredibly dangerous places, full of assault, rape, murder, and a palpable atmosphere of terror and despair.

It seems to me that a much more realistic goal in doing away with violence would not be to attempt vainly to decrease the stock of weapons, but to instead increase the number of people with the right hands. As we can see, when everyone has the wrong hands, no amount of weapons control is capable of ensuring true safety, while if everyone has the right hands, no quantity of weaponry can banish it.

Wouldn’t it be more effective to work towards making everyone more safe and responsible around guns than try to prevent them from getting them?

BradyWatch: moar graphs!

There is a long and fascinating debate taking place on the blog of a Brady Campaign board member who has actually decided to engage us in a debate. I love graphs, so I decided to make one, complete with trendlines for the crime stats:

Brady score vs crime by state, 2007.png

What we see is quite interesting. First of all, it is indeed true that states with lower Brady scores have more “gun deaths”. And that’s where the Brady board member wants to stop.

However, the truth is a bit more complicated than this. “Gun deaths” actually includes both murder committed with a firearm and also justifiable shootings by police and private citizens—something very bad and something very good, respectively. Many “gun deaths” could be telling us that these states have more gun murders, or more justifiable killings by police officers—they’re all included in such a vague and nebulous figure as “gun deaths.”

Therefore, it makes more sense to look instead at homicide specifically, which is the killing that’s criminal in nature. I have included both homicide committed with a firearm and also homicide in general. What we see is that both types of homicide have no correlation whatsoever with a state’s Brady score. The trendline is essentially flat; you are no more likely to be murdered—with or without a firearm—in states with high Brady scores as you are in states with low Brady scores.

But the Brady Campaign doesn’t always talk about its rating, it likes to say things like “more guns equals more death!” So instead of comparing states by their Brady scores, let’s compare them on their rates of gun ownership:

Gun ownership vs crime by state, 2007.png

Again, you see the same trend: states with more gun ownership have higher rates of gun deaths, but nearly identical rates of firearm homicide and homicide in general. So again, you are no more likely to be murdered—with or without a firearm—in states with high gun ownership as you are in states with low gun ownership.

Conclusions:

Greater firearms ownership and lower Brady scores ARE correlated with more gun deaths.

Greater firearms ownership and lower Brady scores ARE NOT correlated more higher gun homicides.

Greater firearms ownership and lower Brady scores ARE NOT correlated with more homicides in general.

In other words, the amount of gun control and gun ownership doesn’t tell you anything about your likelihood of being a victim of homicide, with or without a gun involved.

A “safe, flexible, and stable monetary and financial system” huh?

And now for another economic interlude. For some time now I’ve been fascinated with the seemingly unending upward trend of prices for things like health care, housing, and college. In my last post on the topic, I concluded that higher education’s problem was that it was tracking the ups and downs of the general rate of inflation, but higher. However, I realize now that I took it for granted that there was inflation. We all do. It’s viewed as a force of nature, simply there no matter what anyone does.

But how natural is inflation really? Most people living today have spent the majority or entirety of their lives during periods of sustained positive inflation, so they know little else, but has it always been this way? I set out discover the truth.

I first tried the Bureau of Labor Statistics, but they only track this stuff from 1913 onwards — the year the Federal Reserve was founded. I wanted data going all the way back. I found an academic paper that lists the historical rates of inflation and consumer price indices for 1774-2010, which was just what the doctor ordered. What time is is? That’s right, it’s GRAPH TIME!

Yearly inflation 1774-2010.png

Okay… well this must certainly tell us something, but it’s a bit hard to make out just what. I see a lot of inflationary spikes in the past but a lot of deflation too. The modern period seems to be marked by much more inflation and no deflation to speak of. Let’s see if I can find a way to visualize this data more effectively.

CPI 1774-2010.png

Gulp. That kinda brings it home a bit, doesn’t it? What astounds me the most is that a single dollar purchased roughly the same amount of goods pretty consistently from 1774 to 1913. That’s 140 years of fairly stable currency value. Wow. But after 1913 things started to change, and inflation really took off.

I blame the Federal Reserve. This is a topic for another post, but since its creation, the Fed has systematically devalued the dollar and ushered in an era of outrageous inflation. Don’t believe me? Just wait for these next two graphs. First, let me show you a graph of the purchasing power of a dollar prior to the creation of the Federal Reserve:

Price of a $1 1774 good pre-fed.png

…Now after the creation of the Federal Reserve:

Price of a $1 1774 good post-Fed.png

Now you begin to understand why the BLS only tracks post-Federal Reserve inflation figures: because of they showed the data from before the Fed was around, it would clearly demonstrate the utter failure of the agency!

Even more ironic is that the stated mission of the Federal Reserve is to provide a “safe, flexible and stable monetary and financial system”. After looking at that last graph, one can’t help but feel that the system was worlds more stable before the Fed started meddling.

Let’s talk a little bit about college tuition inflation

One subject that I’ve wondered about for a long time is the rapid rate at which college tuition is increasing. I myself just recently graduated from college with tens of thousands of dollars in debt. My mother attended the same school I did several decades ago, and her mother was able to pay for the entire tuition out of pocket on a single stenographer’s income, while she and my father were not able to pay for mine after saving for 20 years on two substantially higher salaries. It just didn’t add up.

We all hear that the rate of “tuition inflation” is higher than the rate of “normal” inflation. This is very true:

college tuition inflation vs. general inflation.png

Tuition inflation appears to roughly track the national rate of inflation but it’s almost always higher. so college tuition increases in cost just like everything else, but faster. Here’s exactly how much faster:

Rate of college tuition inflation to general inflation.png

(Ideally, the average ratio should be 1 or lower)

As we can see, in the 1950s, and early 1960s, college tuition costs were increasing as much as seven times faster than the national average! In the last 40 years, though, the rate of tuition inflation has been brought down to only about twice the national average (!!!), but that’s where it’s stubbornly stayed.

Let that sink in a bit: for at the last 50 years, the price of college has been increasing more than twice as fast as the price of everything else, and sometimes faster! Even that last graph doesn’t really do a very good job of expressing just how wildly college prices have diverged from the price of everything else because of this higher rate of inflation:

total cost of college vs. other goods.png

(This graph was created by starting with average 2007 tuition and going backwards to compute the rest of the prices through the value of previous years’ tuition inflation. Figures are not inflation adjusted, as inflation is shown as its own line)

If college tuition had been increasing at the “normal” rate of inflation, then four years in a private college should cost a little under 30 grand. But instead it costs four times that amount.

I’ve included the median family income for the years that it’s available from the U.S. Census Bureau. In 1994, the total price of 4-year college exceeded the average family’s entire yearly pre-tax income. That’s before 7% for Social security, 3% for medicare, federal income taxes, state income taxes, state sales taxes, property taxes, capital gains taxes…

Does graph look familiar? It very closely resembles graphs of the effects of compound interest at different levels. Just like how 40 years later, a financial account at 10% interest will be worth far and away more than twice an account with only 5%, college tuition today costs far more than twice that other products do, despite only having an inflation rate that’s about twice as high.

It’s the miracle of compound interest, and not only does it work in reverse for your debts, but it apparently affects college tuition as well. These things increase faster and faster over time, raising prices to unbelievable levels if left unchecked.

But it gets worse. Here’s how the average family sees it:

total college costs as a percentage of household income.png

Glup. Today, an average family would have to spend almost twice its entire pre-tax income to be able to afford four years in a private college for one child. That’s about 45% of the average household income for each year. Compare that to 1967 when it took less than 4% of the average household income per year. That’s a tenfold increase in 40 years, with not even a doubling of income. Yowzers.

So there’s no sinister plot to destroy American education. There’s no marxist takeover, no corporate collusion that explains the skyrocketing price over the last 40 years; it’s just the ordinary effect of inflation compounded year after year, writ large due to a much higher rate than that of most products and services. So the real question is then why is the rate of inflation for college tuition so much higher than the national average?

That’s the subject for another post. Expect more soon.

Bush’s tax cuts caused huge government debts… right?

I was reading a post over at Doctor Zero talking about an article written by Arthur Laffer regarding the 2003 Bush tax cuts, claiming that they caused government revenue to rise, not fall. I was suspicious. Everyone knows that the tax cuts were a disaster, that they imploded the federal budget and caused massive debt!

Right?

I was about to post a comment to this effect when I realized that I didn’t actually have any evidence to back up my claim. So I decided to engage in one of my favorite activities: gathering some data and making a graph.

Now, when most people talk about the “Bush tax cuts” they’re typically talking about the 2003 law, JGTRRA, which immediately lowered tax rates. Bush also passed a tax cut in 2001 that would have lowered tax rates in 2006, but apparently five years was too long to wait, so 2003’s JGTRRA basically enacted those future cuts immediately. Thus, the cuts were first experienced in 2003 rather than 2006, as originally intended, and that’s why my graph only shows the 2003 law.

Here’s the graph:

Effect of Bush Tax Cuts.png

Holy cats, it’s true! I’m going to admit that until I compiled this graph, I was a skeptic. I mean, after all, everyone knows that Bush racked up huge deficits, and it’s just so darn counter-intuitive that tax cuts could increase revenue. Yet there it is. The data don’t lie.

Some will surely say that the recession was over by 2003, and that revenues were bound to increase around that time anyway. While this is true, it’s also as true that revenues didn’t fall precipitously as many liberals (including myself, at the time) predicted and believed. One thing is clear: the Bush tax cuts did not cause revenues to fall. The worst you can say is that they caused revenues to rise more slowly then they otherwise would have.

Yet it’s also equally clear from this graph that Bush’s presidency ushered in colossal deficits. So if not the tax cuts, then where did they come from?

The real culprit is just as evident: spending. To what extent the Bush tax cuts increased revenue is debatable, but the degree to which Bush spent money the federal government lacked is not. Bush consistently spent more than the government received in revenue, and he demonstrated no interest whatsoever in belt-tightening when the money dried up like most sensible people do; you can see that the spending curve is constantly positive regardless of revenue.

And let’s not even get started with the titanic gulf between spending and revenues in the 2009 and 2010 budgets. And Obama wonders why people are freaked out about the deficit — just look at this graph!