Poor Bankers’ Feeling Hurt

Financial Times reports from Davos Switzerland:

Stop bashing the bankers, Davos meeting told

Governments around the world must stop banker-bashing and create the right environment for lenders to support economic growth, some of the world’s most powerful bankers will tell finance ministers on Saturday.

Bankers say the meeting will be an effort to replicate internationally the attempt by UK banks to persuade the government to make peace. “We need to stop authorities around the world throwing sticks and stones at us. We should be past that now,” said one.

Aww, the poor little bankers’ feelings are hurt.  Apparently bonuses in the tens and hundreds of millions of dollars are not enough to grow thick skin. But I’ll agree on one condition.  I’ll stop criticizing and “bashing” big banks and their plutocratic managers when they stop behaving badly.

International Comparisons of Per Capita GDP

When we make comparisons between countries using per-capita GDP, we must always take a closer look.  The simple numbers don’t say what you think.  For example, per capita GDP in France is only approximately 78-80% of per capita GDP in the U.S.  The temptation is to quickly assume that the U.S. is a more developed or richer country, or that the U.S. enjoys a higher standard of living. But that’s not what’s happening. Paul Krugman has an excellent and well written analysis so I’ll let him say it:

one comment that often arises here is that Europe must be doing something wrong, because it has much lower GDP per capita. And it’s true: French GDP per capita, adjusted for purchasing power, is only about 3/4 the US level.But when you look behind that number, the story isn’t quite what you might think.

David Leonhardt recently pointed to a useful summary (pdf) produced by the BLS, which lets us break apart the factors between the GDP gap. I’m going to do this for France, not Europe more broadly, because that’s what the BLS gives us; but anyway, France is the country we have strong feelings about, right?

One more thing: I’m going to use 2008, not 2009. In 2009 US firms laid off lots of workers, while European firms didn’t; that produces a divergence in productivity that has more to do with short-run business cycle events than with fundamental trends. You can go back to the data source and roll your own for 2009, if you like, but I think this gives a better sense of the underlying differences.

So, here are some ratios of France to the United States:

GDP per capita: 0.731
GDP per hour worked: 0.988
Employment as a share of population: 0.837
Hours per worker: 0.884

So French workers are roughly as productive as US workers. But fewer Frenchmen and women are working, and when they work, they work fewer hours.

Why are fewer Frenchmen working? As I’ve pointed out, during prime working years they’re as likely to work as Americans. But fewer young people work (in part because of more generous college aid); and, mainly, the French retire earlier. The latter is arguably the result of misguided policies: Mitterand made early retirement alarmingly attractive. But it’s not a problem of weak productivity or mass unemployment.

And why do the French work shorter hours? Probably for the most part because of government policies mandating vacation time.

The bottom line is that France is a society with the same level of technology and productivity as the US, but one that has made different choices about retirement and leisure. Vive la difference!

Income Inequality: Worse in US than Egypt/Tunisia

Washington’s blog observes:

Egyptian, Tunisian and Yemeni protesters all say that inequality is one of the main reasons they’re protesting.However, the U.S. actually has much greater inequality than in any of those countries.

Specifically, the “Gini Coefficient” – the figure economists use to measure inequality – is higher in the U.S.

Global Map of Income Inequality Gini Coefficients by Country

[Click for larger image]

Gini Coefficients are like golf – the lower the score, the better (i.e. the more equality).

According to the CIA World Fact Book, the U.S. is ranked as the 42nd most unequal country in the world, with a Gini Coefficient of 45.

In contrast:

  • Tunisia is ranked the 62nd most unequal country, with a Gini Coefficient of 40.
  • Yemen is ranked 76th most unequal, with a Gini Coefficient of 37.7.
  • And Egypt is ranked as the 90th most unequal country, with a Gini Coefficient of around 34.4.

And inequality in the U.S. has soared in the last couple of years, since the Gini Coefficient was last calculated, so it is undoubtedly currently much higher.
So why are Egyptians rioting, while the Americans are complacent?

Well, Americans – until recently – have been some of the wealthiest people in the world, with most having plenty of comforts (and/or entertainment) and more than enough to eat.

But another reason is that – as Dan Ariely of Duke University and Michael I. Norton of Harvard Business School demonstrate – Americans consistently underestimate the amount of inequality in our nation.

As William Alden wrote last September:

Americans vastly underestimate the degree of wealth inequality in America, and we believe that the distribution should be far more equitable than it actually is, according to a new study.

Or, as the study’s authors put it: “All demographic groups — even those not usually associated with wealth redistribution such as Republicans and the wealthy — desired a more equal distribution of wealth than the status quo.”

The report … “Building a Better America — One Wealth Quintile At A Time” by Dan Ariely of Duke University and Michael I. Norton of Harvard Business School … shows that across ideological, economic and gender groups, Americans thought the richest 20 percent of our society controlled about 59 percent of the wealth, while the real number is closer to 84 percent.

I accept the protesters at their word that inequality is a major part of what’s driving the protests, even though relative to the rest of the world, their income inequality is rather middling – certainly not as bad as the U.S.  As to why income inequality should fuel protests in Egypt/Tunisia while not in the U.S. where it is much worse, I suggest that age and expectations are part of it also.  Ariely, Norton, and Alden have a good point: Americans are largely ignorant of just how narrowly concentrated wealth and income are in the U.S..  It’s part of U.S. culture to pretend that everyone is equal or at least has an equal opportunity to become stinking rich, no matter how unlikely that truly is.

I think another factor has to do with age as my previous post points out. The power of income inequality to enrage and fuel revolution depends also on expectations and age as well as perception.  In the U.S., we do not perceive the inequality. We are generally older and older people are more interested in security and stability (death and old age is more real to them and adventure less attractive). Finally, our culture in the U.S. conditions us to expect that if we aren’t rich now, we could become richer soon. In Tunisia and Egypt I surmise, the young adults not accurately perceive the injustice and unequal distribution of wealth/income, but they likewise do not perceive that their prospects for the future are bright unless they revolt. They do not perceive that things have or are changing and so they need to push the change.

Demography and Revolutions

Continuing the discussion on Egypt, Tunisia, and the protests in North Africa/Middle East…

One important characteristic of these nations is that they have very young populations. Young adults, those under say age 35, dominate the population, much the same way the Baby Boomers dominated the U.S. in the turbulent 1960’s and 1970’s.   Having a lot of young people bodes well for a nation’s future prosperity – these are potential workers just starting their prime productive years. But it also poses definite challenges to the established hierarchies and systems. The opportunities must exist for the young adults and those opportunities need to be attractive.

Let’s compare some population pyramids courtesy of the U.S. Census Bureau’s International Information Gateway and their country Population Pyramid by Country tool:

Population Pyramid for Egypt 2011

Population Pyramid for Egypt 2011

Population Pyramid 2011 Tunisia

Population Pyramid 2011 Tunisia

In both cases, we see young populations. In the case of Egypt, it’s interesting that we see a surge in population at age 30 and below. So what happened 30 years ago? One obvious answer is the Camp David Peace Accords in 1978 which finally brought assurances of peace to Egypt. For the decades before then, Egypt had frequently been involved in war, either WWII or with Israel. With Camp David Accords, Egypt also became a favored U.S. ally and started receiving significant U.S. aid. There’s nothing like peace and some increased income to raise birth rates.

In Tunisia’s case, the bulge starts 50 years ago and gradually keeps growing with a very large bulge in the age 15-30 age bracket. I’m not sure why the birth rate has apparently declined in the last decade with lower under age 10 population.  In both countries you a nations that are trying to develop and industrialize to join the fully-industrialized world. That alone will cause enormous disruption in society. But both countries also face a  much larger challenge in creating opportunities for these large numbers of young adults. Further, many of these young adults are college- and university-educated. Their expectations are higher than their parents. Finally, in today’s world, these young adults are connected to the rest of the world in ways unimaginable when the ruling dictators took office a few decades ago. There’s international TV, the Internet, and social networks such as Facebook and Twitter.
But the interesting thing is to compare to the U.S. where we do not have a young-dominated population anymore.  In the U.S., the population is much older.  Older populations are harder to rouse to revolution. But the U.S. hasn’t always been this old.  It’s largely the result of the aging Baby Boom.  If we look at the graphic at the bottom, we see a side-by-side comparison of population pyramids for the U.S. in 1970, 1990, and 2010.  Taken together they look like a snake swallowing an animal.  That bulge working it’s way up is/was the Baby Boom.  So if we look at the 1970 graph, we see a bulge in young adult population in the U.S. similar to Egypt and Tunisia today. So what was happening then in the U.S.? The U.S. was shaken by riots, youthful anti-war protests and major changes in culture. This was the era of anti-war protests that often shut down universities. At Kent State University, the National Guard was called out and the conflict resulted in 4 dead students.  At the time, many people worried that the U.S. was experiencing some type of revolution, although it didn’t come to pass.

U.S. Population Pyramid 2011

U.S. Population Pyramid 2011

US Population Pyramids 1970-1990-2010

US Population Pyramids 1970-1990-2010

Tunisia, Egypt and “isms”

Note to regular readers: You may notice an increasing number of posts that deal with pure political economy or international issues.  In the past my posts have been dominated by macro-economic concerns and that’s largely because my teaching schedule was heavily macro.  I’m teaching a new class this term that is essentially Political Economy 101, so in addition to the usual macro and money and banking, there should be more pure political-economy stuff, such as this.

First Tunisia erupted in popular protest two weeks ago and drove a long-term autocrat/dictator from office.  Now inspiration from the Tunisians appears to be spreading throughout the Muslim and Arabic-speaking world of North Africa and the Middle East. Protests have been most notable in Egypt and Yemen, but have reportedly also occurred in Saudi Arabia (in Jeddah), in Jordan, and Lebanon.  In Lebanon, the Hezbollah party has peacefully and constitutionally emerged as the lead party in a new government.

But it’s in Egypt where most of the attention is focused right now.  Hosni Mubarak, the long-time Egyptian autocrat/dictator has dismissed his cabinet and announced he will form a new government (with himself still in charge), but it appears at this point to not be enough.  Instead, it looks as if Egypt, the 15th largest nation in population, (approx. same size as Germany) will experience a relatively peaceful revolution as a result of popular protest.  The events are capturing the attention of the world.  Although it is too early to tell, these events have a certain feeling that is reminiscent of 1989-1991 when waves of peaceful popular protests led to the collapse of the Berlin Wall, communism in Eastern Europe, and eventually the Soviet Union. Although the media will no doubt focus much attention on these events, it’s doubtful the media will shed much light on the deeper causes or dynamics of what’s happening.  That’s up to us to think through.  I’m going to try to shed some insight in a series of posts.

First, up is that I want to simply alert students to the complexity and nuances of our current, 21st century world as opposed to the categorizations of our textbooks.  Textbooks are still using terms such as capitalism, socialism, communism, democracy, totalitarianism, and dictatorship to describe and categorize different political-economic systems. But using these terms and their definitions may as easily hinder our understanding of some situations today as help us.  For example, how are we to describe the regimes and systems that just toppled in Tunisia and might topple in Egypt?  They clearly were not democratic in the sense that the people were able to regularly assert their will and have a government that represented them. They were/are repressive regimes. Yet, the governments had the forms and features of democracy: elections, national assemblies, constitutions, courts, etc.  Economically how are we to describe these countries? They clearly were not primarily socialist or communist.  The governments are involved in a few industries, but international capital is welcome and corporations can function. Private property clearly exists, even though it is not necessarily widely distributed. Yet neither were/are these countries, nor much of the Arabic-speaking world, truly free-market capitalist either. Private economic activity is heavily regulated and bureaucratically restricted.

I have no answers here. My purpose is to stimulate some thought. It seems to me that too much our existing thinking about political and economic systems is guided by  terms and thinking that are relics of the Cold War 50 years ago. Further, it may be that we pay too much attention to the titles and appearances of institutions rather than their performance.  For example, it should be clear that “holding elections” is not a sufficient criterion to make a system democratic. Those elections must also be free elections, the elected must be responsive and representative of the will of the people, and the electors must be informed and have options.  But these criteria are harder to define.  Just how do we tell if an election is “free”?