Climate Change: How Do We Know and Why Do We Care

Occasionally on social media when someone posts in opposition to the notion of human caused climate change I respond. No one's mind is ever changed. I contend that, at this point, if you doubt human caused climate change you are either woefully ignorant or have a world view that simply cannot admit the possibility. You will not change your mind because you cannot change your mind.

When I was a kid I read Isaac Asimov's "The Universe" and it fascinated me because he not only gave information about what scientists think about the structure of the universe, but also gave some notion of the evidence that led us to believe these things. I'm no Asimov, but I thought I might go through some of the ways that scientists have used to peer into the climate past and to project the future. Many of the papers that discuss these things are behind paywalls, so I'm going to rely on more public links. Click on the links only if you want more information. The sources I have used tend to provide references that you can explore for even more information.

In all of this: observations are limited, observations often include only a few locations on a very large planet, there are uncertainties in measurements, over long time spans continents drift ... Despite this, there are enough measurements using a variety of techniques and theoretical underpinnings so that the general picture is quite clear and compelling.

First there are the "How do we know" questions. The "how" of what we know of climate depends on the time frame.

Recent Times (hundreds of years)

For recent times we have direct measurements of weather. This includes temperature (air and sea) and precipitation. There are also direct measurements of longer term indicators like sea level (though sea level is an inference based on statistical averages of a large number of measurements). Vegetation records and blooming information also give information. We also have counts of the number of hurricanes...

Even simple measurements like temperature have complexities. Each temperature record is taken at a single time and place using a particular technique. Over time the surroundings change as do the methods of recording the change. A measurement may have been  taken in an open field in 1903 using a mercury thermometer. The same location today may be in the middle of an urban area with the temperature taken by a thermocouple.

The longest temperature record goes back to 1659 in Central England. It shows temperature for only about 400 years and only in a single area. Sea surface temperatures have been taken since the time of the US revolutionary war. Early ocean temperatures were measured by putting a thermometer in a bucket of water drawn from the ocean. Starting in the 1960s, temperatures were automatically recorded at the intake ports of large ships. More recently, buoys have been deployed to measure temperatures, but they differ in design and sensing methods.

The scarcity of data and differing techniques mean that adjustments and inferences have to be made to convert these individual observations into a coherent and meaningful world wide data set. For example, canvas buckets cool ocean water, insulated buckets less so. Measurements near a ship engine room tend to have warmer results. Luckily, when people publish data sets, they also publish the adjustments so that other people can check the assumptions, apply different adjustments, and check to see what the results are.

Individual observations indicate "weather" (more immediate) at a single location, but we are interested in climate (longer term) over the planet. To bridge the gap, scientists have created models and simulations. Modeling complex phenomena is difficult and tricky, but models can be checked against current and know past conditions to see how well they do. To cut to the chase, the models have gotten pretty good at simulation and predictions over time spans of decades. There are many large scale computer models for the climate (in the 10s, not the 100s or 1000s). This computer modeling work has been an ongoing effort for at least four decades. During this time period several things have occurred to increase the accuracy of the modeling. First, the computers of today are literally one million times faster and can handle a million times more data. That means simulations that used to take 11 days to run can now be run in one second. A year's simulation in the 1970s can be run in half an hour. Second, techniques of modeling have improved (smaller voxels at temperature boundaries, incorporation of aerosols from volcanos into the models, better ocean heat modeling...). Third, we are measuring a lot more by deploying more weather stations, ocean buoys, weather balloons....

http://www.ocean-sci.net/12/925/2016/
https://www.technologyreview.com/s/543546/why-climate-models-arent-better/
https://phys.org/news/2017-07-framework-accounts-conflicting-global-temperature.html

By comparing different indicators over time we can see if the measurement records tell a coherent story. If they don't, it indicates something wrong with the measurements or our understanding of the climate. Over the years, we have been able to create a theoretical understanding that pretty well corresponds to the observed record.

Over the near term, the last century or so, virtually all the data points in a single direction. The earth is warming pretty quickly. We can see this in measurements of air and ocean temperature, total volume of ice, earlier spring blooming, movement of habitats and migrations of animals ... The "hockey stick" graph of temperatures is real and correct.

https://www.nature.com/nclimate/journal/vaop/ncurrent/full/nclimate3325.html
https://en.wikipedia.org/wiki/Hockey_stick_graph
https://en.wikipedia.org/wiki/List_of_large-scale_temperature_reconstructions_of_the_last_2,000_years

Thousands of Years

Each year a tree forms a new ring. The size of the ring provides an indication of temperature and moisture at the location where the tree grew. In locations where dead tree trunks are available, living trees form the initial line in a chain of trees. Patterns of thin and thick at the outer edges of a dead tree may match the inner patterns on a living tree so the tree ring timeline can be extended. There are places where we have a tree ring record up to 4000 years.

If the recent pattern of rings on a particular species of tree can be matched to the weather patterns in the local historical record, we can use this correlation to start constructing plausible past weather patterns. This gives a climate measure for the location.

https://www.ncdc.noaa.gov/data-access/paleoclimatology-data/datasets/tree-ring

Coral has some of the same attributes as tree rings. Regular patterns of growth can be detected. Oxygen isotopes in coral layers can also be used as climate indicators. Uranium/Thorium ratios can be used to date the coral samples.

http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=4467119&fileOId=4467197

We can also look at changes in the landscape to see patterns of deposition that indicate climate. This includes evidence of glaciation, ancient sea levels, pollen in sediment...

Thousands to Millions of Years

All climate measurements must rely on something that is different between warm climates and cool climates. One thing we have gotten good at in the past century is measuring the relative quantities of different isotopes of elements. The chemical properties of an element largely depend on the number of protons in the atom (its atomic number), but the weight of the atom also depends on the number of neutrons. In some circumstances the weight makes a difference. Isotopes are elements with the same atomic number but different atomic weights.

One important link between temperature and isotopes comes from the water evaporation cycle. Most oxygen is O16, but some is O18, which contains two extra neutrons. Both O16 and O18 are stable. O18 requires slightly more energy to evaporate and also tends to rain out slightly sooner than O16. These processes occur today and can be measured. As the earth cools, more water is stored in glaciers and ice caps. This water evaporated then snowed onto the land. The O18 tends to rain out earlier (at lower latitudes) so the snow tends to be depleted in O18. As O16 enriched snow enters the ice caps, it leaves the ocean. That means the oceans tend to have slightly higher O18 levels when the earth is cooler. The same process is true for deuterium, a heavier isotope of hydrogen.

http://www.iceandclimate.nbi.ku.dk/research/strat_dating/annual_layer_count/ice_core_dating/
https://en.wikipedia.org/wiki/Oxygen_isotope_ratio_cycle

This gives us two complimentary ways to measure ancient temperatures. We can look at the O18/O16 ratios in ice cap cores. We can also measure ocean O18/O16 ratios in the ocean using sediments high in calcite (CaCO3). because the calcite was formed by microorganisms that got one of the calcite oxygen atoms from the sea water in which they lived, the sediment reflects the O18/O16 ratios when the organism lived.

The ice core data goes back at least 740,000 years. Sediment data can be used for a much longer time span (at least hundreds of millions of years).

Note that we have current confirmation of the theory and two different sources of data: ice and sediment. This gives the data some real credibility, particularly since the very recent data is confirmed by other means.

https://en.wikipedia.org/wiki/Oxygen_isotope_ratio_cycle

http://cdiac.esd.ornl.gov/trends/temp/domec/domec.html

https://www.researchgate.net/profile/Hugh_Jenkyns/publication/252408787_New_oxygen_isotope_evidence_for_long-term_Cretaceous_climate_change_in_the_Southern_Hemisphere/links/571b621008ae6eb94d0d6405.pdf

Why does climate change?

Looking at the deduced climate over the past millions of years we can say pretty definitely that climate has changed drastically over time. The question of why is frightfully difficult. Moreover, small changes in one thing or another can, over time, create big changes in climate. The basic principle is that the temperature of the planet depends on its internal heat, the amount of energy entering the system (mostly from the sun) and the amount of heat leaving the planet (mostly reflected light). The earth's atmosphere acts as a blanket, keeping the earth warmer than it would be without the atmosphere.

The sun has day to day differences in output, 11 year cycles of sunspots and a long term trend (hundreds of millions of years) of increasing energy output. The earth's orbit changes as does its axis of tilt. Volcanos put large amounts of reflective particles into the atmosphere, reflecting more of the sun's energy into space. Snow and clouds reflect more light than land or ocean. Clouds block heat. In fact, water vapor and clouds are the most powerful heat trapping substances for the earth, accounting for about three quarters of all heat trapping.

https://www.giss.nasa.gov/research/briefs/schmidt_05/

The oceans have a huge thermal mass and there is large scale heat transport through the oceans and between the ocean and the air. Ocean currents carry much of this heat and transport depends on the positions of the landmass. Over eons continental drift can affect climate. The ocean circulation also depends on salt concentrations and large amounts of fresh water melting may interrupt planet wide ocean circulation. If planet wide ocean heat circulation is interrupted, there may be larger temperature differences between lower and higher latitudes. This may cause more snow to persist at higher latitudes and increase the reflectivity of the planet as a whole.

Scientists have been trying to tease the affects apart. The further back in time you go, the more difficult it becomes and the more speculative the conclusions.

Carbon Dioxide

This is the measure that has become controversial for political and monetary reasons. Despite the perceived controversy, we know a lot about the basic heat processes of the earth and there is no real controversy among the scientists who actually study climate. The physical response of CO2 to light is well known and can be easily measured. The effect of CO2 is to take infrared heading out of the planet and reflect some portion of it back in. This is not a huge effect, but part of it takes affect above the level of water vapor and provides another insulating layer for the planet.

The most immediate indicator of CO2 as a possible cause of temperature rises comes from a simple correlation over the past century.  Of course simple correlation means little to nothing, and over extremely long periods of time (hundreds of millions of years) the relationship between CO2 levels and temperature are tenuous at best. That said, in an extremely complex system it is difficult to find causes and effects. Our best hope is to look at recent conditions where we have more measurements and the ability to test hypotheses directly. For the recent past, CO2 as a driver is quite well established.

The affects of CO2 have been directly measured. On the land, direct measurements of the wavelengths captured by CO2 have been measured and found to be increasing in conjunction with the increasing concentrations of CO2 in the atmosphere. The corresponding measurements from space show the opposite affect. As CO2 increases, the amount of light radiated by the planet in the range that CO2 absorbs goes down. That is, we have directly measured the greenhouse imbalance caused by increasing CO2.

https://www.skepticalscience.com/co2-temperature-correlation-intermediate.htm

http://newscenter.lbl.gov/2015/02/25/co2-greenhouse-effect-increase/

https://www.eumetsat.int/cs/idcplg?IdcService=GET_FILE&dDocName=pdf_conf_p50_s9_01_harries_v&allowInterrupt=1&noSaveAs=1&RevisionSelectionMethod=LatestReleasedhttp://science.sciencemag.org/content/289/5477/270

https://ams.confex.com/ams/pdfpapers/100737.pdf

https://www.nature.com/articles/srep21691

Theoretical attempts to assign quantitative amounts to different drivers of temperature are rapidly maturing. These point to the same conclusion, in the current situation CO2 is the main driver of increasing global temperature.

https://www.ipcc.ch/publications_and_data/ar4/wg1/en/spmsspm-human-and.html

Why do We Care?

This section is a little different. Even if the climate is changing, why should we care? After all, climate has changed drastically in the past and life on earth has survived. Even faced with mass extinctions, life has recovered. Devastating changes in climate have set the stage for new types of life to thrive and become dominant.

The earth and life on earth will survive climate change. Technological human society may not. In any number of areas, we are currently engaged in unsustainable practices. As Herbert Stein pointed out "If something cannot go on forever, it will stop." Our human life spans are relatively short and it is easy perceive the world we live in now as not much different than the world we were born in. Over spans of centuries it is easy to see the drastic changes.

Because the world is large and has been around a long time, we can unsustainably use some resources for a very long time. We probably have centuries of fossil fuels left. A few centuries is a very short time when we consider the millions of years it took to accumulate these reserves, but for humans it means we don't have to worry about having enough fossil fuels for many generations of human life.

When agriculture emerged there were probably fewer than twenty million people on earth. We hit the one billion mark around 1800. It took 123 years to get to two billion. Currently we are adding a billion each couple decades. This population increase requires a concomitant increase in resource use. When the European settlers first reached North America cod were so numerous that it was joked you could walk across the ocean on the backs of cod. In 1992 the cod fishery collapsed and it was estimated that it's biomass was one percent of its earlier levels.

When European settlers got to the U.S. Pacific Northwest the size and expanse of the forests were breathtaking. It seemed a resource that could not be exhausted. The forest is still vast, but satellite images show the incredible level of human exploitation.

There is good reason to say that we have entered a new geologic era, the anthropocene, where the dominant force shaping the planet is humans. Humans now move more earth than natural geologic processes. All of the worlds great aquifers are being emptied for agriculture. Many of them will cease to be productive within a couple of generations. Biologists tell us we are on the brink of a sixth great extinction of species. That is, an event on the scale of the extinction of the dinosaurs. This time it is being caused by human intervention in the environment.

Humans are an extremely adaptable species, but we rely on the web of life around us as well as incredibly complex and fragile systems of technology and trade. Rapid changes in either ecology or collapse of technological webs may exceed our ability to respond while maintaining our technological society. We are already seeing large scale human misery, but many people refuse to acknowledge there is even a problem. We are headed toward a world wide failure of systems that is unprecedented in human existence.

For me, the terrible part is that, collectively, we understand what is happening and if we take action we can enter a golden age of human existence and restored ecological health. We know many of the problems and we know some of the solutions. For example, E.O. Wilson has made the excellent suggestion that we set aside roughly half the earth as a preserve outside of human intervention. The preserve must be connected and contain many of the most biologically productive areas. This seems like a large and undoable task but, surprisingly, his analysis shows that it is not. The simple act of making contraception readily available to everyone (with no coercion) is probably sufficient to keep human population in check. Movement away from burning carbon is not only do-able it is probably inevitable for cost reasons, yet the fossil fuel industries fight tooth and nail to keep the burning going. World wide, democracy and concern for the average citizen is diminishing while power is being concentrated in the hands of people and institutions whose main concern is preserving and expanding their wealth and control.


https://www.amazon.com/Half-Earth-Our-Planets-Fight-Life/dp/1631492527/ref=sr_1_1?ie=UTF8&qid=1499277232&sr=8-1&keywords=half+earth+e.o.+wilson

http://nymag.com/daily/intelligencer/2017/07/climate-change-earth-too-hot-for-humans.html

https://www.youtube.com/watch?v=Kxryv2XrnqM

https://qz.com/871907/2016-was-the-year-solar-panels-finally-became-cheaper-than-fossil-fuels-just-wait-for-2017/

http://www.npr.org/sections/thetwo-way/2017/07/05/535596277/all-new-volvo-models-will-be-electric-or-hybrid-starting-in-2019

https://www.equalitytrust.org.uk/about-inequality/impacts

Conspiracies Without Cabals

Todays topic is human organization and the analysis of power. In particular, how we can have actions that look concerted, but which do not necessarily require collaboration between individual actors. That is we have things that may appear to be conspiracies, but without any organizing cabal of plotters.

We analyze situations at a level that is practical and with the tools that produce results. We cannot analyze complex physical phenomena in terms of wave functions because the mathematics are intractable. At the level of atoms and molecules we look at electron shells and bonding strength. At the level of materials we talk about stress and strain...

An analogous situation occurs when talking about human behavior. We have to decide which types of analysis are most productive for describing particular aspects of human society. Sometimes the appropriate level is examining individuals, their motivations and actions. At other times it may be more productive to look at larger scale organizations.

In the animal world, an example is a flock of geese. The flock travels long distances without a leader and without conclaves. At any given instant, the goose who is most certain about the proper direction influences the flock to move in that direction. No single goose knows the route, but at any instant one or another goose has a pretty good idea. The flock finds its way where the individuals might not. For analyzing travel, the flock is the correct unit.

We can view the political system as a means to resolve contention between individuals who have differing notions of man and society. Some people value loyalty and the preservation of known successful structures. Other people value fairness and adaptation to a changing world.

At a level up, we can view the US political system as a competition between two major groups, the political parties. The names and values of the parties change over time, but the structure of the US electoral system seems to ensure that there are only two parties (with the occasional splinter party). For analysis, we can look at the party itself, not the people in the party. That is, look at the machine. The parties have evolved over time, but for the US system, the important qualities seem to be: that there are two major parties, that the populace is partitioned into people who largely support one or the other, and that real consequences - power, money, and favor - flow to the inner circle of the party in power. At this level, the modern targeted marketing favored by both parties make sense. Elections are held. A party only gets power if its representatives get the votes in their district. Separating the electorate into very fine segments and appealing to a single issue that is important to a particular individual will sway votes and get the party into power. For the party, being in power is more important than any particular issue or group. The individual parties have expressed beliefs, the party platform. The platform is not any kind of coherent philosophy or reality tested approach. It is merely a collection of issues the core constituency cares about and that can be used to polarize the population and get votes. The party in power uses the apparatus of government to reward those who keep it in power. The favors generally flow to large contributors, often organizations not individuals. The base currency of reward is access. The result of access is most commonly legislation that favors financial interests (a group level result), but it can be personal (e.g. ambassadorships or other government jobs).

In this analysis the characteristics of the groups (parties, lobbying groups ...) rather than individuals is important. To my mind, this fits the facts pretty well. At an individual level, any participant may be internally persuaded that they are working toward future personal rewards, but sometimes the odds don't seem very good. During the presidential primaries of 2008 Andrew Young, an aid to candidate John Edwards, tried to protect the candidate by claiming to be the father of Edwards' illegitimate child. The notion that this lie would somehow advance Young's future personal prospects seems delusional. It looks more like a subsumption of personal interests to the aims of the campaign (the group).

Analysis of group behavior is difficult because groups are constantly appearing and disappearing and they form and break alliances. For example, there is a firearms industry that sells weapons to individuals. At one level we can examine each company as an organization promoting its own aims and competing with other firearm manufacturers. In the political sphere they have banded together and sponsor the National Rifle Association (NRA). The NRA is beholden to the manufacturers for much of its funding, but it also has a large number of individual contributors. The demands of the rank and file may move the organization away from the aims of the manufacturers. The NRA also gets direction from the specific individuals who lead the organization. The leaders of the organization have some autonomy, but they must operate within a range that is acceptable to the funding constituency.

The difficulty of analysis is increased by the natural human tendency to anthropomorphize the world around us. Every day on the news there is a story talking about the stock market rising or falling, and the reasons behind the movement. The "reasons" are invariably nonsense based on the feelings of "Investors". "Investors" or "The Market" is everyone who bought and sold stock that day. This is anthropomorphized into a thinking, feeling uber-being. On the news you will hear comments like "Investors were frightened by the newly released jobs figures, causing the market to go down". These comments reflect the personal feelings of news commentator and are not based on any rigorous polling of people making trades. If we did poll, we would undoubtedly find a huge range of reasons for buying and selling (the fund needed cash, rebalancing a portfolio away from stocks ...). Even rigorous polling would give us no sensible reason because most trades are not made by humans. Most trades are made algorithmically by computer programs so complex that no individual can, without extreme effort, determine why any particular trade was made. In the "flash crash" of May 2006 the stock market lost, then regained, 10% of its value in less than hour. After five months of analysis the SEC released a report trying to explain why the market fell on that particular day. The answer had nothing to do with the magical "Investors" or "The Market". The SEC explanation included a lot interaction between algorithmic trades (including high frequency traders). Almost a decade later, the reasons are still debated. If you hear a discussion about the stock market that includes human motivations for movement, it is almost certainly fantasy, often in service to the biases and aims of the organization that pays the commentator. That does not mean the commentator is deliberately lying. They are reflecting the views of those in their circle of "experts". Those experts in turn are employed by an organization with an organizational world view tuned to support the aims of the organization.

Analysis at the group level is not hopeless though. There are common strands that allow us to discover some rules and explain actions. Unfortunately, as in many complex systems, often we can only explain in hindsight. It is only in hindsight that we can see how the various forces actually played out. In hindsight, things that were uncertain when they unfolded appear to be more inevitable. This feeling of inevitability can, in turn, lead to the notion that there was deliberate intent by some small set of individual actors (the cabal). All of us have the intent trying to shape the future, but our individual intent is usually tempered by our position within society, which shapes what we think and believe, and by the organizations through which we act.

Partly because of our stated value of respecting individuals, US society is structured to support organizations rather than individuals . In the political sphere, we do not vote for a party, we vote for an individual in a winner takes all system. To get the resources necessary to win an election, individuals almost always have to join a party. The party has a ready place on the ballot for its candidates, the party has a pool of money and a network of people who can be mobilized to work for the candidate. To get this support, the individual must align him/herself with the aims of the party.

In national office, officials "represent" millions of people. They use "public opinion" to help shape their message (but perhaps not their votes). Public opinion can be gauged by polling, and by analyzing comments and requests from constituents. If you have ever written to a national elected official you can see how your feedback is handled. The "personalized" response from the official is a set of canned paragraphs on topics you mentioned. It is clear from this response, that you letter has been analyzed at the level of "concerned about issue X" or, at the most specific, "supports position Y". Based on that, the paragraphs are chosen. These days, the analysis of your letter and the response may be automatically generated without human intervention. I have asked my elected officials to let me talk to someone about this process, and been ignored. The input to the official is presumably equally coarse, basically a count in a spreadsheet that indicates how many constituent wrote in "support of position Y". That is, the responses are aggregated in a very simplistic way. In such a world, organizations have oversized influence because they can mobilize people to affect the count in the spreadsheet of public opinion.

This makes political life a competition of organizations. Powerful individuals can increase their power by creating "grass roots" organizations capable of generating pressure on elected officials by changing the counts in the spreadsheets. Thirty second ads are used to mobilize additional letters and calls. The smartest powerful people go one step further by controlling media to affect the way issues are framed. But, whenever an organization is created, even the most powerful individuals cannot force the organization to completely reflect personal beliefs. Inevitably, other individuals in the organization influence the direction as well.

When we see the results of this process, we may assume there is a conspiracy of individuals (the Trilateral commission, Davos participants ...). It is demonstrably true that actual public opinion has no effect on the legislative process in the US. But this does not mean there is a conspiracy with secret meetings, it is the result of the wars between competing, powerful, moneyed organizations. These organizations form alliances and work together when it is convenient. As alliances are created, individuals will meet, but I believe an appropriate level of analysis is the organization. Individuals create and manipulate organizations for personal gain. I contend individuals strongly influence organizations, but only occasionally control the outcome of the balance between organizations. Individuals generally ride the larger organization trends for individual advantage.

A Comparison of Sweden and the US

The other day someone pointed out that if Sweden were a U.S. state it would not rank very high on per capita GDP. This was a Facebook conversation and the tone of the post was "see you socialist left wing fanatics, even in the best case your socialist state is worse off than almost all of the U.S.". This, of course, created a small firestorm of posts, which I think was the object of the provocation. The comparison is interesting though.
There are cases where the differences in governance, national attitude and results are stark. For example, Haiti and the Dominican republic share an island, but the contrast between the two is stark. The same can be said of Costa Rica and Nicaragua. Sweden is not, of course, a socialist state. The U.S. and Sweden are both industrialized nations with relatively educated populations. The U.S. has a leg up because of its vast natural resources.
Given the general similarity of status of Sweden and the U.S. as industrialized nations, a comparison of social policy and the results for the average citizen is worthwhile. I think the differences between Sweden and the U.S. are largely a reflection of basic philosophical differences in national attitude. As a nation the U.S. attitude is: social darwinist, each man for himself, pull yourself up by your bootstraps, if you cannot make it here don't blame anyone but yourself, government always does a worse job than the private sector. I have never been to Sweden so I cannot report firsthand on conditions there. From the outside its social policy seems more: we are all in this together, each does better when all do better, we are all people and things happen so let us support each other, government programs work well at providing the basis for us to build strong lives.
The Swedish GDP for 2010 is about 458,000 (millions). With a 2011 estimated population of 9,415,300 the per capita GDP is about $48,640. This is roughly the same as North Dakota at 47,714 which ranks as the 20th highest state GDP per capita. There is some disagreement about these numbers. For example the wikipedia article on the Swedish economy gives a per capita GDP of about $37,775, which would make it closer to Michigan, the 42nd poorest state. Sweden cannot prop up its social welfare system with natural resources like North Sea oil (Norway, Britain). It must pay through basic productivity.
In the World Economic Forum (the Davos folks) Global Competitiveness Report, Sweden ranks above the US (because of the recession)
Sweden is not going bankrupt. Its overall national debt is 40% of GDP compared to 60% - 90% for the United States (depending on whose number you use). Sweden went through a real estate and financial crisis in the early 1990s and had to re-adjust its social spending to accomodate lower GDP. Sweden is now used as a model for how a nation should handle financial crises. Sweden can afford its social programs. Because it is somewhat poorer pre capita than United States, we could afford similar programs if our national philosophy allowed it. The difference is choice, not money.
Sweden ranks high in taxation about 48% of GDP (2007). In the developed world, Sweden is on the high end of taxation exceeded only by Denmark. In the U.S. taxes are about 27% of GDP (2006). The U.S. tax rate is one of the lowest in the developed world. Only Mexico, Turkey, Korea, and Japan have lower taxes as a percent of GDP.
So, which resident gets the better deal: someone living in Sweden with its not-outstanding per capita GDP and high taxes or a resident of Michigan/North Dakota.
Health care in Sweden requires patients to pay a fee per visit/prescription, but total costs to the patient is limited to about $360 per year. In comparison to the US Sweden has more doctors and nurses per capita. Life expectancy is higher, and infant mortality is lower. Over 80% of all medical costs are paid by the government (vs. 45% in the US) but the total cost spent on health care is so much lower that the US government pays more as a percentage of revenue than Sweden does. So, in Sweden everyone is guaranteed health care, the cost is lower both to the individual and the government than in the U.S.. The outcomes of health care are generally better, and citizens do not need to fear medical bankruptcy.
In education, Sweden works hard to make sure that opportunity is equalized for children. Grants from the national government take into account the economic conditions of the particular region. Poorer regions are subsidized and richer regions bear an extra cost. Rural regions are compensated for transportation costs and smaller class sizes. There are independent schools, roughly equivalent to charter schools in the U.S. Parents may have to pay a fee for preschool and childcare, but there is a ceiling to those costs which takes household income into account. Higher education is essentially free to the students. Students must pay for text books, and equipment needed for personal use. This means that students enter the workforce essentially debt free.
This contrasts with the United States which has limited pre-school support and where higher education is increasingly unaffordable. Two thirds of students leave higher education with an average debt of $23,000 dollars. We have created a generation of young adults who, instead of leaving college and becoming entrepreneurs, are forced by debt to ender the labor force as employees. In the United States, public dollars going to higher education have decreased and tuition costs have increased. The United States of America is the only OECD country where 25-34 year-olds are not better educated than 55-64 year-olds. This may be in part because other countries had more room to improve over the past 25 years.
In Sweden, taxpayers spend about 6.6% of GDP on education. In the U.S. about 5.5% of GDP is spent by the government on education.
We all know how skewed incomes are in the United States where the top 400 wealthiest people have more than the bottom 150 million.
About 80% of the Swedish workforce is unionized. As might be expected in a place where people tend to feel part of a single society and look after each other, the unions make the society more equal, but do not eliminate inequality or reward laziness. In hard times, looking after each other may mean unions accepting pay cuts to save jobs. The Swedish unemployment system looks much like the US unemployment system.
If we honestly compare industrialized societies, the US doesn't look so good. We have a national mythology that we are a nation of rugged individualists in a country that provides the opportunity for everyone with drive and determination to make whatever they want of their lives. While we do pretty well on the individualist side, shunning all non-business forms of collective action. We do less well on the opportunity side. American families are less socially mobile than families in other countries.
Much of the U.S. national catechism is simply incorrect.
People do not do best as rugged individuals working for their own benefit. We are social creatures who do best as collections of individuals working together and helping each other.
People are not naturally dishonest or working to game the system. There is a persistent, endemic problem of dishonesty, but this is the exception not the rule. Most people getting unemployment benefits, welfare, food stamps, WIC payments, social security, medicaid ... are ordinary hard-working folks just like you and me who have hit hard times. Most of them will be back on their feet in a little while, they just need some help to see them through.
Work and money are not the center of most people's lives. Most people work for money to earn enough to live, but are not particularly interested in accumulating large amounts of wealth. Everyone would love to be wealthy, but if you talk to people about what they would do once they got that big pile of cash, very few of them talk about accumulating more. Most people would simply do more of what they currently enjoy the most. We should not be educating our children to be effective workers, we should be educating them to understand themselves and the world around them.
Government can be effective. Government is comparable to other large organizations in efficiency and effectiveness. I have worked as a consultant to both government and private entities. The problems are somewhat different, but both government and private entities tend to have about the same level of bone headedness. If we look around the world, we can see examples of more effective governance. Sweden seems to be one of those places.
The United States has low taxation, both at the individual and the corporate level. The question in most of the developed world is not "how much am I taxed", but "what do I get for my tax dollars". As an example, the citizens of every country with universal health care are basically pleased with their system do not want a privatized system.

If We Aren't Careful, We May End Up Where We Are Heading.

It is easy to predict man made catastrophes. Sometimes they even happen. Here are some intractable problems/trends that are likely to make the next hundred years "difficult". If we do not find some way, pretty quickly (fifty to one hundred years), to change course I think we could be fairly described as a failed species. That is, things will look much more like "Blade Runner" or "The Mote in God's Eye" than "Ecotopia".
This post assumes an unstated desired future. If your view of a desirable world differs significantly from mine, you may not find any problems here.
The good news is that we can relatively easily make things much much better. The bad news is that, as a species, we seem incapable of making good long term choices. If change occurs it will likely occur on the back of poverty, war, famine, and plague. If change does not occur, we are condemning our descendants to an impoverished, less habitable planet.

Social Trends - Concentration of Wealth

It has always been true in settled societies that wealth is concentrated. As productivity increases in industrialized societies, it takes less and less labor to make the same amount of goods. Either we constantly increase the amount of goods we desire and require (endless growth) or more and more people become "redundant" as they say in England. That is, there is no need for their labor.
In the nineteenth and twentieth centuries there was a serious countervailing social movement to redistribute wealth to make societies more equitable. Tides seemed to have turned and, particularly in the United States, the scales have tilted toward unfettered wealth and, along with it, increasing manipulation of both media and elections to serve the plutocracy.
I am not suggesting a trilateral commission type conspiracy. Instead, individuals and groups with plenty of money are doing their best to publicize their point of view and make it the basis of discourse. There has been about a century of systematic work to improve marketing. In the political arena the admonition that government should be more like business has been taken to heart in the propaganda department. Political messages use the tools of marketing (focus groups, test markets ...) to find the most immediately effective messages.
There have been some genuine innovations in the exercise of power though. For example, it is no longer necessary to buy politicians. It is much easier to find someone who already holds your point of view and work for their election. An extreme example is Caperton v. A.T. Massey Coal Co..
Sometimes there are social policies that reinforce the concentration of wealth as an unintended consequence. For example, higher education is increasing in cost and is commonly funded with loans. Forbes reports that two thirds of all students graduating from four year colleges and universities carry loans with an average debt of $23,000. This is a doubling from 1996. Instead of leaving the University with knowledge and a clean slate to start new enterprises, this generation is pretty much forced by debt to become simple employees of existing operations.
We know the end of this story. In the U.S. there is relentless propaganda campaign that insists that we have a pure meritocracy and the wealthy are the ones who feed us all. As the gap between haves and have nots continues to widen and the number of have nots increases, eventually they will simply rebel. If that happens, expect decades of chaos and class warfare with guns.

Social Trends - Fewer, Larger Entities

As technology improves it becomes possible to create larger and larger organizations. Advances in information processing have accelerated this capability.
The current tendency is writ large in the video distribution industry. When VHS tapes became the technology winner, the low entry costs for starting a video store allowed thousands or even tens of thousands of independently owned video stores to blossom. Almost as quickly there was a wave of consolidation as smaller operations were either bought or driven out of business by a regional video chains. These, in turn, were consolidated into a few national chains (Blockbuster, Showtime) which dominated the market. There are still mom and pop video stores, but after the first boom they never had appreciable impact on the market as a whole.
In many industries there are very few real players. This includes media companies where nine companies control virtually all television and Clear Channel controls 1200 radio stations. Four cell phone providers own the lion's share of the mobile phone market (280 million subscribers). There are five major oil companies. Oil companies are among the largest companies that have ever existed. Over half of all farm seed is produced by fewer than ten companies.
As a side effect, increasing institution size also works to further concentrate wealth.
We know from network theory and from study of biological systems that diverse systems which have large numbers of highly interconnected parts are more resilient and less prone to catastrophic failure than systems with fewer nodes and interconnections. When diverse systems of many nodes have some of them fail, the remainder of the system tends to work around the problem. When their are fewer, strongly connected nodes, they tend to drag each other down in the face of disaster. Note how this sounds just like the start of the 2008 financial crisis and the current Greek debt crisis.
In agriculture, the number of farms has decreased, the acreage of each farm has increased, and the vast majority of farms are a monoculture. We have centralized meat and food processing. While the system may be immediately efficient, it is also incredibly fragile and shortsighted. We impoverish the ecosystem, including the soil ecosystem. We also make our food supply dependent on a smaller variety of foods where a single virulent disease can spell disaster. Centralized processing means that millions of people can be infected or poisoned from a single point.
Despite their inherent fragility when faced with the unexpected, in the normal course of events, centralization tends to win. The only way to redress the problems is by creating an environment that rewards smallness or penalizes bigness.

Social Trends - Race to the Bottom

Globalization has allowed the entire world to become a source of labor and products. One side of this is that wealth has flowed to some desperately poor places. The other side is that it has depressed pay in many developed countries and made jobs much less secure. While money does flow toward poor areas of the world, the net effect is to lower labor costs in general. It is interesting to note that globalization involves capital and goods, not people. A factory worker in Sheboygan is competing with workers in Bangalore, but it is unlikely the factory worker can emigrate to Bangalore and take advantage of its lower cost of living.
Globalization allows producers to reduce costs. Labor is part of this, but not the whole picture. It is also possible to reduce costs by operating in locales that allow costs to be ignored or externalized. For example, it will be cheaper to produce in a country that allows wholesale pollution or deforestation because you don't have to install that expensive emission control equipment or worry about forty years down the road when the trees are all gone.
Because every locality wants the jobs, the tendency is to offer the most attractive deal possible to producers who promise jobs. Producers use this to pit localities against each other. Internationally, this rewards countries with the worst labor practices and the most lax regulations. Within the U.S., communities generally bid by offering tax breaks. The hope is that the increased wage base will make up for the breaks, but often the end result is simply to starve local government.
When the cost of production goes down, a number of things can happen. The cost of goods to the end consumer can go down. High tech items show this most clearly but it also shows up in the price of clothes at Old Navy. Second, profits for producers can increase. This has happened as well. In the current "recession" profits for U.S. manufacturers have completely recovered. Finally wages for workers can increase. In the past few decades this has not happened. Wages in the U.S. have been stagnant for almost two generations. When producers (owners) increase profits but workers do not share in the wealth, this increases the concentration of wealth.
Remarkably, public discourse on workers benefits has joined this race to the bottom. Look at the discussion over public pensions. There is a problem with pension funding. Governments have sometimes promised more than was prudent (as did GM and other major corporations). The discussion never seems to be "how can we get private retirement better", it is always "public employees are getting benefits that private employees do not, let's reduce them".

Social Trends - Rise of the Ideologues

Never underestimate the power of a simple idea or worldview even if it is completely wrong or destructive.
People will take a few general principles and assume everything can be explained by them without much regard to complicating factors. If the ideas lead to bad results, it is a failure of application, not the principle.
Among the current Ideologies that are threatening social destruction I would include (non-exhaustive list): radical violent Islam, any religion based on literal inerrancy of the bible, libertarianism, and all forms of racism.

Social Trends - Algorithms and Hubris

There is a notion in computer science called the singularity. This is the creation of smarter than human intelligence. A basic question is, will we notice it?
We already have specialized machines that perform much better than humans. Computers have bested humans in games like chess. Robots create and assemble parts much faster and more accurately than humans. In the computer gaming world, our "enemies" are dumbed down to correspond to our terribly slow human reaction time and limited ability to handle large numbers of inputs. Our planes and cars are already run by computers. Humans enter basic parameters for flight, but the plane itself makes virtually all decisions.
To increase efficiency we constantly streamline and automate business processes. The end result is an expansion in the power of algorithmic systems. In a modern corporation there are fewer and fewer levers pulled by fewer and fewer people. Take shipping as an example. A company like Fed-Ex has completely automated the routing of packages. Once your package information is entered into the system, humans do nothing but follow a machine generated instruction to pick up a box in one place and drop it at another. Airline reservations are another example. Humans do not play any role in the process. The price is determined by complex algorithms that are probably beyond the understanding of any single person. Planes are automatically booked and overbooked. Even upgrades and seat re-assignments are pretty much controlled by the algorithm. The person at the gate has almost no choices and no authority.
The system we have to create these systems is not reassuring. When a business decides to automate a process, a team of people, often outside specialists, is assembled to analyze the problem and implement a solution. When successful, the results are put into production and handed off to a separate team that is in charge of operating, maintaining, and improving the system. In theory this is a repeatable process with each group playing its specialized role. The players usually do not understand each other's roles very well. At the business level, the indicators are productivity (how many flights are booked in how much time and at how much cost) and overall profit and loss. The systems are designed to report some set of indicators so this can be tracked. The people who look at the indicators do not usually understand the underlying algorithms. The people who design and implement the system are specialists in new product creation and generally leave the scene after the process is in place. The people who maintain and improve the system generally have documentation, but they may not be aware of why particular design choices were made and the trade-offs involved.
Another way to state this is that every day we create large algorithmic systems that no single person, or even group of people, understands. As long as he systems work reasonably well or can be discarded, there is no real problem. When the systems fail or are critical but so complex they cannot be discarded, we run into trouble.
On Wall Street, most trading does not involve humans. In 2009 almost three quarters of all stock trades were automated trades based on computer algorithms. Since then this number has almost certainly increased. When you listen to commentators discuss the stock market and why it moves one way or another, it is complete nonsense. It sounds good and it always supports the commentator's overall view of the world, but it is not based in any kind of fact. On May 6, 2010 the stock market briefly crashed. It took five months to issue a report that could attempt to explain what actually happened. The basic answer is that the machines did it.
The hubris part of this trend is that there are people who think we can model and control complex systems. As an example, one of the great failures of modern economics has been the attempt to quantify risk. Do a google search for "quantification of risk economics". You will get pages of google results that are complete nonsense written by people who actually believe they are close to the holy grail of putting a number on risk. Often they create models that work well in certain circumstances - but their predictions ALWAYS fail catastrophically in the long term.
What happens when you put a couple of people with Nobel Prizes in Economics in a room with the Vice Chairman and Head of Bond Trading at Solomon Brothers. You get a well funded scheme to make money based on the finest and most capable economic models of the day. You get "Long Term Capital Management" a firm which made profits until it completely failed in 2000. The failure of a single firm, even a big one, is not particularly important. Unfortunately the firm was so highly leveraged (highly leveraged means "playing with huge sums of other peoples money") it threatened to bring down large portions of the financial system. Fixing the problem required a massive bailout supervised by the Federal Reserve. It failed because of events that they simply could not predict. That is the point. There are always events that we simply cannot predict. We do pretty well with "normal distributions", hence the reliable existence of life insurance. Unfortunately, most real world economics are not "normal".
The run-up to the 2008 collapse was a tribute to the power of simple greed, but all good cons need a convincing story. In this case, investors were reassured that the risk involved in collections of mortgages was known and quantified, and besides, we can hedge (insure) to limit losses. There was outright lying at every level of the financial transactions, but a systemic problem was that the intertwined system intended to reduce risk by spreading it, simply increased risk for everyone. Of course there were some folks who knew about the lying and worked the system to their own advantage (notably, Goldman Sachs).

Social Trends - Missing the Big Picture

Evidence based action is important to understand what works and what doesn't. When we have the evidence it seems silly to ignore it. But, it is also silly to read more into our simple experiments than is actually there.
Experimentation is difficult and expensive. This is especially true with trying to understand humans. Too often we end up understanding and exploiting a tendency. The results may be immediately satisfying but ultimately destructive.
There are many situations where short term investigation gives us a "local optimum" where people are more satisfied at this instant, but the end result is ultimately destructive to our health and well being.
The prime example of this is industrial food production. To build a more popular food product you have to understand what people want so they will buy your product. An industry with a new product must be able to produce it consistently and on a large scale. If you create a focus group or simply ask people on the street to tell you which of several food products they prefer, the winner is likely to be the the cheapest product with the highest sugar/fat/salt. As organisms that evolved in circumstances of want, we crave these things. To produce the product consistently and in large quantities you have to industrialize the production of the raw ingredients. In the case of food this is living organisms. For crops, we standardize the breeds, the methods of production, and we process the results in chemical plants to homogenize, filter, and extract. For animals, we reduce them to eating machines on a cheap controlled diet and we engineer their genetics to change what was an animal into a muscle production machine.
We get consistent products that we biologically crave, we also get obesity, diabetes, heart disease, and an odd form of malnutrition. Don't worry about the malnutrition though, because we have processed supplements to fix that.
Since the introduction of the automobile we have done exactly the same sort of short term fixes. When faced with traffic problems, typically traffic congestion, the answer is always the same. Congestion will be alleviated if we add more lanes and reduce the number of entrances into the main streets (no houses on arterials). It also helps if people stay away from the congested areas. The end result is our typical suburban city form. That is, a built environment that is reasonable if you are a car, but not very suitable for supportive human culture.
On a business level the question is usually "How can we improve our profits this quarter or this year?" It is almost never "How can we stay in this business in a sustainable way?" or "How can we make the world a better place in ten or a hundred years?" If your time horizon for profit is one or even five years and an opportunity arises to make a profit based on destruction that will not become apparent for ten or twenty years, most businesses will take the profit and screw the future, which leads to the next section.

Environmental Trends - Destruction of the Natural World

It is clear that as a species we are quite willing to destroy everything around us for short term survival or short term gain. We are willing to completely destroy the natural environment. Take as examples mountaintop removal for coal, deforestation and overfishing.
On top of this, there are unintended results of our actions. The prime example is global warming. General habitat destruction as we exploit more and more of the world is a severe problem.

Environmental Trends - Unsustainable Human Population

We have already passed a tipping point in human population. We have more people than the planet can sustainably support. Like a profligate child with a large inheritance, we can live for some time by depleting our inheritance, but in the end we will be broke. In this case of humanity, our inheritance is the natural world and all its riches which we are rapidly despoiling.
It is not clear what the carrying capacity of our planet is, particularly since this is partially related to the technology at hand. It is clear that we have exceeded the current capacity. As the human population continues to increase we will see even more rapid environmental degradation as well as more frequent human disasters (crop collapse, famine, social unrest, war for resources...).
In industrial countries population has stabilized or even decreased. This gives some hope that we can control our own numbers. For the world as a whole I think it is likely that we will simply exhaust natural resources. This will cause a very painful decline in human population based on misery.
As a contrast, think what the world would be like with our current technology if we had a third of our current population. We could live in a world of human plenty with a massively improved environment. We have passed the point in human society where increasing human labor is the best way to improve the human condition.

Fairness and US Federal Tax

I keep seeing articles about "fairness" of the federal tax system. In particular, that the wealthiest americans fund most of the government. For example, the Wall Street Journal "As it happens, the top fifth of earners currently pay 67% of all federal taxes". On the face of it, it doesn't seem fair that twenty percent of the population should pay two thirds of federal taxes. To make this even worse, depending on how you work the accounting, somewhere between ten and forty seven percent of households pay no Federal taxes at all.

This blog entry was triggered by an opinion piece written by Glenn Hubbard, a chairman of the Council of Economic Advisers under President George W. Bush. "Left, Right and Wrong on Taxes". In that piece Mr. Hubbard says

When I left my job as the deputy assistant Treasury secretary for tax policy in 1993, I left a message on my office blackboard for my successor. I wrote, “Broaden the base, lower the rates” repeatedly until I filled the entire space. I then had it covered with wax so it could not be erased. (Yes, the government charged me for my bit of vandalism. But it was worth it.)

I think all of this is nonsense. It seems to be based on the simplest possible notion of "fair" and a deep misunderstanding of wealth, taxes, and spending.

Anything to do with taxes and finance is complicated, but this note is not. I am using a very broad brush, but in data I use the numbers that argue against my point of view. For example, I use federal spending numbers from 2000 when the government spent much less than it does now. The income figures come from 2005, which gives households a higher income than in 2000. I did this because it is hard to get a consistent data set but I wanted to make sure I could not be accused of cherry picking data.

The gist of my argument is that the wealthiest must pay most of the burden because, frankly, they are the only ones that have any money. The federal government goes after them because they cannot get the money anywhere else without having people starving in the streets.

In 2000 the federal government spent about 1,789 billion (about 1.8 trillion) dollars. See: Government Spending Details, Federal Spending by the Numbers 2010, Table 1.1 — Summary of Receipts, Outlays, and Surpluses or Deficits: 1789–2009 . In 2005 there were about 110 million households . Dividing federal spending by households gives an "average" federal tax burden matching taxes to spending. In billions, this is: 1,789/.11 or $17,890/household

In 2005, twenty percent of all households had an income less than $18,500. That means for one out of five people to pay their "fair share" we would have to confiscate all their money leaving them nothing for food, shelter, heat, water... Looking at income breakdowns, the poor are disproportionately young and have less education. This group has more households headed by single women. My own experience and the fact that they tend to by younger indicates there are often children in the households. Children have no say in when or to whom they are born.

My earlier post discusses how, in virtually all societies, wealth is concentrated in the hands of a few. If you compare the wealth curve to the tax curve. you will find general agreement. Compare "But by 2005, the top 10 percent accounted for nearly 55 percent of all federal tax revenues, while the rest of the population paid about 45 percent." with the fact that the top ten percent has about 71% of the wealth.

The federal government taxes the rich for the same reasons Willie Sutton robbed banks. That is where the money is. If you look at capability to pay taxes (percent of wealth vs. percent of tax burden), the top ten percent are getting off easy. In terms of power politics, that makes sense. The wealthiest have the greatest ability to influence government policy and public opinion. As Warren Buffet famously said, "There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning."

We have income redistribution in the United States, as does every industrialized country in the world. We do this because the alternative is having malnourished children and a huge homeless population.

It would be impossible to argue in favor of the current federal tax system with its arcane rules and special deductions. Eliminating many of the current deductions would allow stated tax rates to go down and would make the stated rates closer to the actual rates. But calls to “Broaden the base, lower the rates” are another salvo in the class warfare already going on. If we look at Mr. Hubbard's specific proposals we can see where he stands.

Broaden the base lower the rates.

Reduce taxes for the wealthiest americans (softened by removing deductions).

Cut corporate taxes.

Increase income mostly for the wealthiest americans. The evidence that this spurs economic growth is sketchy at best.

Shift from income tax to a consumption tax.

This disproportionately affects those who must spend all their income.

The United States is the wealthiest nation that has ever existed. Even with our debt crisis we can afford to support those among us who are the poorest and most vulnerable, but it will require taking some wealth from those who have the most.

Wealth Distribution and The Work Week

In this post I have quite a few links. They vary in political slant and probably somewhat in numerical values, but the overall picture is largely consistent. Often I reference an article rather than the base data because I found the article itself interesting. Sometimes the general articles contain other useful links.

I read a quote a while ago - but cannot find it now. It went something like "Every successful person says they got that way by dint of hard work, intelligence and perseverance. I never met an unsuccessful person who did not blame circumstance and bad luck."

I can interpret this statement in at least three ways, all of which have some truth. One is that successful people work hard and meet adversity with intelligence and persistence while unsuccessful people blame the world around them. A second interpretation is that successful people are likely to pat themselves on the back and attribute to themselves results that may have come from simple luck. A third interpretation is that both sides are correct. Hard work, intelligence and perseverance may be necessary precursors of self earned success. While these traits may be necessary, they are not sufficient. Many people are defeated by events beyond their control.

In my last blog post I requested a 1950 lifestyle in exchange for a work week that corresponds to current productivity compared to 1950 (11 hours per week). With steady increases in productivity it is a reasonable to question why life is as hard as it is and why the work week has not gotten any shorter, and may have gotten longer. I saw an analysis (unfortunately not very good) of hunter-gatherers that estimated they spent about 40 hours a week on survival. That means that in the past 4000 years we have we made no progress on shortening the labor needed to survive. Admittedly "survival" now is much different than 4000 years ago. Life is much more comfortable, longer and, for most of us, less brutish. Still... something seems wrong.

About a century ago an economist named Wilfried Pareto noticed than many phenomena including income and wealth follow what is now called a Pareto Distribution. This is often known as the 80/20 rule and says that 20% of the population have 80% of the wealth/income... The distribution is self similar in that if you take the top 20% it will follow the same distribution. That is, 20% of the most wealthy people will have 80% of the wealth in the wealthy group.


The distribution of wealth is not exactly a Pareto Distribution but it is close, particularly at the high end of the income/wealth scales. This is true in many societies around the globe including medieval Hungary.

When something is this widespread it argues for a common mechanism. This mechanism could be the distribution of brains/work ethic/persistence or it could be something having to do with the nature of economic systems. In 2002 the Harvard Business Review published an article "Wealth Happens" . Simulations based on a few assumptions about money flow show a Pareto Distribution occurring strictly by chance. That is, a few chance events may cause one person to become wealthy while another becomes poor. In their simulations, the basic feedback mechanism was investment. If you gained enough wealth to start investing in things that provided more wealth, you headed up the wealth chain. Wealth is compounding, so the more you have the more you get.

The numbers 80%/20% are really just an example. Different societies have different percentages. Most people underestimate how skewed wealth is and overestimate social mobility (moving from poor to rich or vice versa).

Net worth is the value of everything you own minus all debt. In 2007 the median net worth of a family was $120,000. If this were a stack of $100 bills, it would be a little less than six inches tall. The 400th richest American in 2007 was Kenny Troutt of Excel Communications with a net worth of 1.3 billion. That would be a stack of $100 bills just over a mile tall. Bill Gates topped the world list that year at 59 billion, a stack of $100 bills about 45.5 miles tall.

It is worth a moment to talk about "mean" and "median". In the last paragraph I said the median net worth in 2007 was $120,000. The median is the middle number. That is, if you have 11 different numbers then 5 numbers will be less than the median and 5 numbers will be greater than the median. The "mean" is the average you get by adding up all the numbers and dividing by the total. For the numbers (1,2,3,4, 10000) the median is 3. There are two numbers (1, 2) that are less than the median and two numbers (4, 100000) that are greater than the median. The mean of these numbers is 2002 = (1 + 2 + 3 + 4 + 10000)/5. The difference between the median and the mean is an indication of how skewed a distribution is.

In the case of US family net worth in 2007, the median was $120,000. The mean was $556,380. The Pareto Distribution is quite skewed. If we confiscated all wealth and redistributed it evenly among all families, every family in the US would be around the current 80th percentile of net worth. That is, every single family would be better off than about 80% of the families today.

Before you start the revolution remember the Harvard Business Review article. It indicates that inequality would quickly reassert itself and we would be in the same position as today in relatively short order. Many people would lose almost all their money and a few people would become fabulously wealthy.

Over the past 20 years the US has become less equal in terms of wealth distribution, but the absolute wealth of each class may have increased. That is, the economic pie has gotten bigger so that even though the very wealthy have increased their percentage of the pie, the rest of us still got a little more pie than we used to.

In social mobility there is a general trend for poor families to improve their lot over several generations. In the US it takes about four generations to move from 20% of the average income to about 90% of the average income. There is more social mobility in much of the developed world than in the United States. That is, families pull themselves out of poverty significantly faster in France, Canada, and Denmark than they do in the US.

On a macroeconomic level, measurements indicate productivity and wages are somewhat linked. At and industry level, this correlation does not hold. This can be seen in agriculture. Agricultural production has increased many fold over the past century and a half, but farm wages remain among the lowest of any industry.

I have said that Pareto Distributions of wealth and income probably have some basic underlying cause. That means we will always have a lot of relatively poor people and a very very few fabulously wealthy. However the percentages can and do vary from society to society. I believe that much of the difference is a result of government policy. In a Kleptocracy, 95% of the wealth may be owned by 5% of the population. Social welfare states (most of Western Europe) tend to have less wealth inequality than we have in the US.

The difference between median and mean income in the United States indicates there is plenty of room for increasing the general welfare of people and, at the same time, shortening the work week. The average American worker works 500 hours per year more than the average German worker, yet German quality of life and social security is at least as high. The difference is social policy.

The Pareto Distribution ensures that there will always be a pool of less well off people who may be willing to work more hours or for less pay. Decisions on the length of the work week are political and are based in part on how the populace feels about wealth redistribution. In US politics this topic cannot be discussed rationally. Because structural changes to the economy are likely to further concentrate wealth (possible topic of another blog post) and lack of rational discussion, you can expect to be working even longer hours in the near future.

Productivity and Lifestyle - Are We Being Shafted?

If we are to believe productivity statistics it should take 11 hours of work per week to have an output that is equivalent to a 40 hour work week in 1950. It should take 23 hours per week to equal 40 hours in 1975. http://groups.csail.mit.edu/mac/users/rauch/worktime/

I am writing this in my house, built in 1956. In front of the house is our single car, a ten year old Honda. Something seems wrong either with the statistics or with my life. Currently I am starting a new business, so I expect to be working a lot without much (any) monetary gain. That said, I have worked at least 40 hours per week for decades and I have never been four times as well off as the equivalent worker in 1950.

There are explanations (aside from the obvious one that I have been shafted for my entire adult life). Mostly these revolve around the difficulty of comparing time periods. On the measurement side, we have shifted from a manufacturing to a service economy. How do you compare my productivity as a software engineer (a white collar position that did not exist in 1950) with that of a mid level manager at a blender manufacturer in 1950. Within an industry we can more easily measure productivity gains, but as one industry becomes more productive, workers are laid off and shift to new industries.

On the consumption side, the goods and services we use have changed drastically. Instead of an expensive, crummy, black and white TV, I have a a big screen high definition TV that I can use to stream movies off the internet. Instead of a single phone line with expensive long distance, we have multiple cell phones and the internet. My 10 year old car is undoubtedly more efficient, comfortable and reliable than a brand new car in 1950. We have several computers in the house all of which are wirelessly connected to the internet.

Despite these difficulties, I personally believe the "we are all being shafted" theory. Honestly, my life is not that much different from life in the 1950's or the 1970s. My house was built in 1956 and has no air conditioning. The heater has changed several times, but is still a natural gas burning central system. My car, while of higher quality, is still just a car. I do not own that many appliances. Those that I do own are of higher quality and probably more reliable than anything available a couple decades ago, but their basic design and operation is essentially the same.

On the working side, I have always worked at a full time job, but these days most households have every adult member working outside the home for wages. In 1950 a primary white collar wage earner would have supported a household on 40 hours a week. Now we need two wage earners working close to 80 hours for my household. On top of that, many of the tasks that used to be someone else's job are now mine. For example, in the grocery store I used to wheel my cart up to a check out lane and someone would ring up my purchases. Now I have to ring it up myself. A business traveler in the 1950s or even the 1970s would have a travel agency - either external or internal - book travel. Now even highly paid executives book their own travel. White collar workers in 1950 or 1970 had secretaries for clerical work, now we do it all ourselves.

I would trade my current lifestyle for a 1950 lifestyle working 11 hours per week. It is true that I enjoy modern conveniences, so I am willing to double my work week to get some of that (computers and the internet). That brings me up to 22 hours per week. Heck, I'll throw in a couple hours for free and make it an even 24 hours of work a week - but that is my final offer.

Don't even get me started on the flying car that all visions of the future thought we would have by now.

Small Thoughts on Slack

Things vary. Streams flood, temperature drops or rises. Traffic thickens and thins. In human endeavors sometimes there is to much too do, sometimes too little. How an organization responds to these fluctuations tells us a lot about the nature of the events and the organization. There are a range of reactions.

Every city in the United States has firefighters. Firefighters are constantly available even though fires are not that common. The speed and destructiveness of fires makes it worthwhile to keep crews on duty even though most of the time they are not fighting fires.

In an ordinary restaurant there is a predictable fluctuation of customers throughout the day with pulses around meal times. There are also unpredictable surges for particular meals. Restaurant owners typically respond by having a flexible work force and scheduling somewhat more than the expected need. If a rush does not materialize, someone can be sent home. If a rush is large, extra help may be brought in at the last minute. Starting with some excess capacity is less expensive than perhaps losing a customer.

The opposite approach can be seen at an airline counter or telephone call center. A line of waiting people is used to even the load. When there is a rush, the line gets longer. When things calm down, the line shortens. The business goal is to always have some line so workers are constantly occupied. On the surface this is the least expensive from the business point of view. Workers are always busy and staffing is consistent. However, it only works if customers do not have a better alternative or do not value their own time highly.

The "always have a line" business model is a form of cost shifting. The cost of normal fluctuations in business are borne by the consumer who is forced to wait rather than the company paying someone who may not be completely busy.

Hospital emergency rooms have largely gone to the line model. That is, they seem to have little or no excess capacity. They do take the trouble to constantly re-order the waiting line, a process called triage. Occasionally someone dies, but normally the impact is only an excessively long wait for those who are not in dire straits.

Very popular restaurants encourage a line. It makes them seem all the more desirable. It is a way of saying "there is no alternative that can provide what we do". This demand allows the owners to raise prices. For something exclusive, you may pay more. Almost paradoxically, this exclusivity can increase demand. One step further is the doorman with a list. Those on the list are allowed immediate entry. The hoi poloi must wait in line for a chance to rub elbows with the elect.

Humans can be trained to be remarkably tolerant of others wasting their time. An object lesson can be found in the shopping queues of the former Soviet Union. People will wait without complaint for a very long time even when the wait is pointless. One example is the line at the airport for security screening (which does not increase security). Because the alternative to quietly waiting your turn is to miss your flight and perhaps face police questioning, people will wait for as long as it takes with nary a word of complaint.


Slack in financial matters is often the difference between profit and bankruptcy. Businesses must be able to accommodate shifting amounts of money coming in and leaving. This can be a problem of timing. A business may sell enough product to make a profit, but if payments do not arrive soon enough, it may not be able to pay the bills. Of course if the problem is simply one of timing, then there are usually lenders willing to bridge the gap - at a price. One of the major differences between large and small business is the ability to last out temporary changes in circumstance. A large business has two advantages. One is that downturns in one segment can be covered by profits in another. The second is that large businesses find it easier to borrow money to make it through lean times.

Student Debt is Bad for All of Us

In the Atlantic (online) Conor Clarke wrote a blog entry called "Let College Students Get Into Debt". One statement in the note really stands out.

The second problem is more specific: if the the point of credit-based consumption is to bring lifetime consumption more in line with lifetime income -- as I believe it is -- then college students more than anyone else should be getting into debt.

An interesting rebuttal can be found at
Problems With Clarke's Student Debt Post.

The practical absurdity of the Clarke's statement can be seen in the phrase "bring lifetime consumption more in line with lifetime income". Let us make the giant leap of faith that individuals and lenders are rational enough to take expected lifetime income into consideration. In order to smooth out our consumption we would have to have an accurate notion of an individual's lifetime income. This brings to mind my favorite John Kenneth Galbraith quote. "The only function of economic forecasting is to make astrology look respectable." It is the rare person of any age who can accurately predict their income even five years in the future.

The best information about lifetime income comes from statistics about current and past incomes for people in various occupations. This information is useless to an individual for several reasons. First, it is out of date. If the buggy whip apprentice in 1890 had access to these kind of statistics, he would feel good about borrowing money because his future was so secure. Second, it assumes an occupation. Apparently the average college student changes majors two to three times during the course of their studies. Most basically, aggregate statistics may not accurately describe the situation for any individual Averages and Actuals.

Every debt you incur and intend to pay limits future options. Suppose you are a college student anticipating a career with a relatively high income and you borrow commensurately while you are in school. When you graduate, you must quickly (usually within six months to a year) generate sufficient, steady income to service the debt. This puts lower income jobs out of reach. The problem is, many career paths demand some time at a low income. If you cannot tolerate a low income for a period of years, you may not be able to start a business of your own.

Student debt is pernicious because it limits options at a time of life where options are most important. Individuals and society gain when bright people are free to pursue their dreams. These people often give us the new ideas and new businesses that are the lifeblood of the future. One of the natural times for this adventure is the time between schooling and family. Many of our brightest and most educated end their schooling not with a clear field of opportunity, but with the almost immediate need to generate a steady income to service school debt. For many, this pushes them down the employee rather than the entrepreneur path.

Why Does Government Interfere With Markets?

Since I wrote my blog post on big vs. small business I have been thinking a fair amount about the role of commerce in society as a whole and our view of commerce in the United States.

This story has to do with the cultural narrative about economics and choice. In some of the circles in which I run it seems that people have a simplistic notion of economics. The basic story is that the free market, unencumbered by government intervention, is an ideal condition and that deviation from this ideal is a distortion that is bound to backfire. I do not put this argument forward as a straw man. I hear the simplistic point of view expressed and I think it influences public debate and policy in the United States. Since the financial meltdowns and obvious abuses of 2008, the argument has lost some power, but it is still seems to be a bedrock view for many people.

The argument starts off with free market economics. In a free market buyers and sellers negotiate with each other to establish prices. Goods that better satisfy a need are more popular in the marketplace and command a higher price and perhaps higher profit. Higher profit draws competition which tends to reduce price and profit. This in turn spurs innovation in both production (lower production costs at a fixed price increases profit) and the good itself (better satisfaction of the consumer need leads to higher price and profit).

The second step is laissez-faire economics. If a free market leads to better satisfaction of self stated needs (ever cheaper and better products), then any interference with the operation of a free market is a distortion that will lead to less than optimal results. In this view, government intervention in markets should be restricted to ensuring that they are free. Any discussion of government intervention centers around whether the market has ceased to be free and what the corrective mechanism should be. For example, intervention to break up monopolies may be considered to be a restoration of a free market. If there is a single supplier of a good and that supplier can prevent the emergence of competitors the free market ceases to operate and government may intervene to restore the free market.

In outline this seems sensible and, I believe, is the basic narrative for economic discussion in the United States. There are some hidden simplifications in this basic narrative. Serious discussions of economics and society should at least acknowledge some of the additional complexities. I will go through a some of these in what I consider to be reverse order of importance. As I move toward the more important considerations the discussion moves farther from strictly economic concerns.

EXTERNALITIES

Hidden in the free market explanation is the assumption that the important parties in an economic transaction are the buyer and seller. This is often untrue. The classic case is pollution. A mine or factory may produce a good but as a side effect pollute air, water or land. The people downwind or downriver may pay a price for additional health care or reduced utility of their property, but this cost is not reflected in the transaction between buyer and seller. These are called externalities because they are costs or benefits that are external to the buyer and seller in the transaction. When the externality is a cost, the price paid for a good is artificially low, so the good tends to be overproduced relative to the overall benefit. While we normally discuss externalities in terms of costs there can be external benefits as well.

Externalities are sometimes time-based. This brings up a second shortcoming of the simple free market story. Transactions are based on immediate needs and products. It is true that each actor may be planning for the future, but the transaction is today and the evaluation of price takes only the immediate situation into account. This is easy to see in the exploitation of natural resources. The cost of tropical hardwood is based on the immediate supply of tropical trees. As long as there are large stands of forest, the cost of the hardwood basically reflects the cost of cutting and transport. As the forests decline, the wood will become more scarce and the price will increase. But that will only occur after the native utility of tropical forest is lost, essentially forever. The immediate cost and profit available from the trees is taken into consideration, but future utility of the rainforest is not.

For future externalities some of the problems are often simplified as the "tragedy of the unregulated commons". For situations like logging and fishing, the resource is not controlled, so there is no immediate incentive for anyone to restrict their activity. Each individual has an incentive to exploit the resource until it is gone.

In the United States the predominant reaction to the tragedy of the unregulated commons is to privatize the resource. For example, pollution can be addressed by capping and trading emissions. Resources like fisheries can be sold to individuals. This gives the owner a greater incentive to consider the long term in managing the resource. There is another solution. The basic problem is the tragedy of the unregulated commons. Resources can be regulated instead of owned. For example, Balinese rice farmers traditionally handled allocation of water by setting irrigation schedules. The water was controlled by the community instead of individuals and a water board arranged irrigation schedules to grant use to the farmers in the community. Once we agree on a problem, the solution may depend on both the physical and social situation. For example, for preserving fisheries a combination of protected reserves around the most productive areas and owned fishing rights in other areas seems to be most effective.

EXTERNALIZING COSTS

To the extent they can, businesses will always externalize costs. A cost not paid is direct profit to the business. A simple example can be seen in the retail market. In many stores there is no one who actually understands the products being sold. The job of understanding the products and their fitness for the task is left completely to the consumer. This allows the store to hire fewer, less skilled, and cheaper workers. On the whole, consumers seem to prefer this model. There has always been a conflict of interest between the salesman as a purveyor of information and the salesman as someone trying to sell the products on the floor. Another example, is "big box" stores like Sam's Club or Home Depot. These are essentially warehouses open to the public. The selection and price make it likely that the consumer will find something close to what they need at a relatively low price. The externalized costs include transportation. The larger store draws customers from a larger area, so rather than have to reship to more, smaller, local stores the company can stock a single warehouse and let the consumer transport goods the final miles.

For many businesses the largest cost is labor. Lowering labor costs can be done in a number of ways. Typical techniques include automation, de-skilling work, and externalizing labor costs. Automation typically reduces the amount of human input needed in a process. On the whole, this tends to increase the quality and reduce the cost of goods and services. Skill implies experience and training. Skilled workers get higher pay because it is cheaper for the business to pay a higher wage to a known skilled worker than to risk the time, energy and lost productivity of training an unskilled worker. Externalizing labor costs can be done in a couple of ways. Pushing needed work outside the boundaries of the business decreases labor costs. So does forcing labor costs outside the business.

The contemporary supermarket shows all these trends. The supermarket itself was an innovation that reduced labor costs by having the consumer choose products directly off the shelf (externalize work). Two generations ago, supermarket prices were marked on each object. Stockers had to both put items on the shelf and mark the prices. The advent of the bar code and scanner eliminated the need for marking prices on individual items (automation). It also eliminated the need for checkers to know produce prices or how to work a cash register (de-skilling). The checker's job today is sufficiently deskilled that customers now check themselves out (externalize work). This does two things, it reduces the number of employees needed and it reduces the wages of those who are left because they can be replaced easily.

Forcing labor costs outside the business is an interesting development. Businesses do this on both a short term and a long term scale. When there are jobs, highly skilled workers are largely exempt from these processes because they can demand and receive higher wages. In the short term, unskilled labor always commands a lower price. The floor of this price is somewhere near the minimum amount of pay it takes for a single person to live. The existence of a public safety net reduces this number. For example, if a low income person can have food subsidized through government food stamps, and medical care through Medicaid, then the business hiring low skill workers can effectively subtract that amount from the wages paid to low skilled workers. In one idealized labor market, workers move completely freely between employers and employers pay for exactly the work done while the person is working. Unfortunately, people sometimes get sick and always, if they are lucky, get old. The most fortunate among us spend about a quarter of our lives under the care of others and unable to gainfully work. The society as a whole must pay for this downtime. For a brief period of time in the United States, many employers took long term responsibility for workers in the form of pensions. These defined benefit plans have essentially disappeared and it is the responsibility of employees to make provisions for old age in the form of defined contribution plans (e.g. 401K plans). Employers may provide such retirement plans, but are not compelled to. Employers may contribute to these plans, but are not compelled to. The net effect is to push the long term care of those who cannot work, particularly low wage earners, onto the government.


ASYMMETRY OF POWER

In a true free market, both buyer and seller freely enter into an agreement and choose to make the trade. In fact, this ideal rarely holds. When we add to that the almost limitless capacity for cruelty in our species, abuse and exploitation become almost inevitable.

Asymmetry in trading power only matters if one party or the other is effectively forced to trade. It is unimportant for non-essential goods. For example, manufacturers of television sets can conspire on price. This will raise their relative prices, but if the price becomes too high, buyers will simply withdraw from the market. Essential goods include employment, food, and shelter. Employment is probably the most important of these and the root cause of much abuse.

First let me say that employment is a squishy concept because individuals do not have to trade their labor for money. Anyone who has skills or goods can become self employed. That said, the ability of people to become self employed also depends on macro economic conditions. The level of self-employment has varied tremendously over time. In the United States, self employment probably reached its zenith in the early Eighteenth Century when vast tracts of land were opened to ordinary people and the ideal of a country of yeoman farmers seemed within reach. Right now, no more than 10% of the population is self employed http://www.smallbusinessnotes.com/aboutsb/rs243.html.

When there are more people than jobs, pay decreases and conditions become more miserable. To understand the necessity of government intervention, the words "triangle shirtwaist factory" should be sufficient. The height of abuse can be seen in company towns, where the employer controls not just employment, but food and shelter as well. Prices for necessary commodities can be set slightly higher than wages resulting in virtual slavery. As the Merle Travis song says:

You load sixteen tons and what do you get?
Another day older and deeper in debt.
Saint Peter, don't you call me 'cause I can't go,
I owe my soul to the company store.

LOCAL DECISIONS, GLOBAL OPTIMUMS

I certainly feel best when I can freely make my own choices. I like to think I make good decisions and I suspect others feel the same way. It seems to be an article of faith in the U.S. that these sorts of personal and local decisions lead to an optimum (whatever that means) for the society as a whole. Or if individual decisions do not lead to a global optimum, they are still better than any other decision making regime. This fits well into laissez-faire, free market economics. If each of us is left alone in the economic sphere things will work out as well as they can.

We can take this a step further and say that the definition of global optimum is the result of completely free economic choice. Let us avoid that tautology. In social situations, where each person has his or her own views, it is hard to make any decisions about "best" or "optimal". However, there are situations that we can agree are "not best". As a society we have some agreements about unacceptable situations. Check the papers after someone has been denied medical care and died as a result (http://www.msnbc.msn.com/id/25475759/, http://www.bookrags.com/news/911-dispatchers-denied-dying-woman-moc/).

The notion that laissez-faire economics leads to any kind of global optimum in the real world is vacuous. As any physicist will tell you, there are local optimums that are difficult to escape, but are far from a global optimum. In the economic sphere the parties to a transaction often cannot make free and rational choices; there are almost always inherent asymmetries in power and information. Given this, it takes blind faith, unsupported by fact, to assume that a reasonable, sustainable society can be built strictly on economic choices.

Some government interventions are aimed at creating a better global situation than simple economic transactions can provide. Public funding for education is one example. Everyone, particularly property owners, is charged for public education whether or not they have children. The same is true of child nutrition programs. The benefits of these programs cannot be seriously questioned. The quality of childhood education and nutrition drastically affect the quality of life and the productivity of the adults these children become. By making education and nutrition artificially cheap, we encourage "overuse" of these "products". The benefits may be clear, but the distance in time and space between investment in the child and the payoff in the improved quality of life of the adult is too large to be handled by ordinary transactions.

NOT EVERYONE PARTICIPATES ECONOMICALLY

In most societies, only about half the population directly get income. The other half are too young, too old, too infirm, or participate in direct unpaid work caring for those people. That means that on average, each wage earner supports a non-wage earner. The largest part of this income transfer is within families as family members take care of each other.

It often happens that those who cannot work do not have families to take care of them. Sometimes the most economically ruthless among us seem to take the attitude Oscar Wilde parodied. "To lose one parent Mr. Worthing may be considered misfortunate, to lose both looks simply careless". In all industrialized nations there are welfare programs that take the place of family income transfer where that is not available. We have these programs because, as a society, we have decided we do not want people starving and dying on the streets.

Even when people are gainfully employed, it often happens that there are catastrophic events that can bankrupt them. These are typically medical emergencies, but there are other emergencies like fire, tornadoes, hurricanes and global economic collapses. All industrial countries have a mix of private insurance and government aid for these events. In the United States, there is a large reliance on private insurance and personal bankruptcy. The government does step in for national disasters with a combination of direct aid, grants, and loans. For medical expenses, the government provides a floor on care with Medicaid and Medicare. To smooth temporary job dislocations, unemployment insurance is mandated.

Where there are welfare (including Social Security in the United States) and emergency aid programs, they must be paid for. In the United States these programs consume roughly half of the federal budget. That means overall taxes must be set high enough to cover these costs. These taxes are straight, necessary, income redistribution.


ECONOMIC VALUE VERSUS HUMAN VALUE

My basic objection to the simple laissez-faire free market story is much more basic. In the simple story, monetary value is essentially equated with human value. This view cheapens us all.

We live in a money economy. The economy puts a value on goods and services. The tendency to confuse monetary value with personal value is natural. As I look at my life, the falseness of this becomes clear. Many of the things that make my life worth living have no monetary value and I would be insulted if anyone tried to put one on them. For example, the chance glance of a beautiful woman, a sunset, a musical passage that I happen to play well. I could pay a beautiful woman to smile, but the mere existence of payment cheapens the experience. Things I purchase often have a personal value far in excess of the monetary value. My filing cabinet and my cordless power drill are two inexpensive items. They are inexpensive because production and intellectual property costs are low. They have improved my life immeasurably and I value them greatly. Although their manufacturers would be delighted if they could charge me in proportion to the personal value I place on them, this would be unfair and artificial.

Human value is distinct from monetary value. Sometimes it is practical to pretend that human and monetary value are interchangeable (creating markets for clean air) but let us acknowledge that this is a pretense. We are economic animals, but that does not mean we can be explained, or our actions should be based, strictly on economics. This simplistic view makes no more sense than insisting that because we are sexual animals, all our behavior and decisions are based on sex.

Because I have gotten to sex, I feel I can end this little essay.