Canaries in the Coal Mine

Although we still do not know the winner of the electoral college, it is clear that the polls were systematically wrong in the swing states and several others.  Here is a recap, with links, of what we knew in advance but few dared discuss openly.

 

Election forecasting became an economics-free zone

 

I wrote about this last week:

 

(1) Better information-aggregation methods were showing less Biden lead and sometimes a Trump lead.

 

(2) The incentives for individuals to truthfully participate in polls were skewed relative to a neutral situation, and relative to 2016.  Incentives matter!

 

(3) The costs to individuals of participating in the election are different during a pandemic.  During this pandemic, perceptions of the new costs were correlated with party affiliation.

 

The forecasters were dismissing these economic insights.  That they used foul language and straw men rather than real argument and measurement was a telltale sign to somebody (me) who is an expert on economics but not on election forecasting.  There were exceptions such as Trafalgar – they cited some of the effects above and made better forecasts – but of course they were maligned for being different from the crowd.

 

 

Forecast errors were correlated over time, questioning their rationality

 

The June 2016 Brexit vote was an early notable case where educated people in big cities had no clue what their fellow citizens were thinking and made little effort to learn about it.  The British polls had been closed for hours before currency markets absorbed what happened.

 

The Obama Administration and most other Democrats were very slow to understand what happened around Brexit.   I tell the story in my book of “a conversation between a Laotian woman and Ben Rhodes (Obama’s speechwriter). Citing the British populist victory, the woman expects that candidate Trump will win. Mr. Rhodes confidently assures her that Mrs. Clinton will be the new president.”  People living on the other side of the planet knew better what was happening in the 2016 election than the “30 people setting the direction for the entire U.S. government.”

 

Back to British populism, polls indicated that there was no way that their leader Boris Johnson could form a majority coalition in the December 2019 election.  In reality, Mr. Johnson was getting most of the votes from areas of Britain that had long been solidly with his opponents.  No electoral victory in Britain since Thatcher had been as overwhelming.

 

Still in 2020 the conventional wisdom was that the populists would not surprise us again.  Any surprises would be purely random.

 

 

Companies with enough data to know acted like small things mattered

 

Twitter and Facebook have products that have overwhelmingly passed the market test, and they are free of charge!  Except that we pay with our personal data.  They know a lot about us as individuals and, especially, as a group.

 

In the weeks leading up to the election, these two companies tried to suppress the viewpoints of those on the side of our populist president, ranging from a Stanford professor to one of the biggest newspapers.  Why would Twitter particularly drive millions of consumers to its competitor?  Likely the company thought that the election was close enough that even small news stories might matter.

 

 

The Rallies

 

Trump was holding up to five massive rallies per day.  Biden rarely came out of the house and then to tiny crowds.  This difference was a signal from both sides of the market.  On the voter side, this was a more stark difference than in 2016.  On the campaign side, given that with 20-years-ago technology the Bush campaign knew that Florida was close and to have their candidate there at the end, we can assume that the Trump campaign knew that it was close in the places where Trump visited at the end (AZ, FL, MI, MN, NC, PA, WI).

 

 

"No One in Ohio Cares About Burma": The Washington Bubble

Less than 600 Federal employees are directly accountable to the voters.  Almost a half million Federal employees live in the DC metro area and are accountable to someone who lives in the DC metro area.  Naturally, Federal agencies are sensitive to media coverage, and journalists and think tanks covering Federal matters also disproportionately live in the DC metro area.

This results in groupthink, a.k.a., the Washington bubble.  Groupthink results in unnecessary errors, of which being surprised by the 2016 election is the most famous instance of a large sample.

Both General Kelly and Mick Mulvaney encouraged EOP staff and agency leadership to spend time outside the Washington bubble.  E.g., holding policy events outside the bubble, or even going to the site of a Presidential rally.  CEA’s high turnover helps too, although professors living near DC are disproportionately interested in taking a CEA position.

I went home to Illinois every other weekend and immediately noticed the contrast.  Here are three examples drawn from those trips.

The opioid epidemic.  Between 2009 and 2016, there were over 100,000 U.S. overdose deaths involving illicit opioids (especially illicit fentanyl).  I have been to funerals in Illinois where overdose was the cause of death.

Yet, in the Washington bubble, attention to this subject was low.  The CEA published 16 Economic Reports of the President during the Bush and Obama Administrations, and none of them mentioned opioids, overdoses, or heroin.  By comparison, the 2013 Economic Report of the President had a full chapter on climate change.  (That attention to the opioid epidemic changed beginning with President Trump's CEA).

I’ve read two memoirs from staffers in the Obama White House.  Rhodes’ memoir mentions climate change 21 times (Trump is mentioned 95 times) but never the opioid epidemic.  The 2016 meeting between Presidents Obama and Xi receives a lot of attention in the book because climate change was discussed, but no mention of the Chinese production and export of illicit fentanyl (fentanyl was a topic of the meeting, but apparently not important enough to explicitly appear on the White House fact sheet, which did mention space debris and protecting elephants). 

(A related film that also features Samantha Power and Susan Rice also has a lot of climate change and zero opioid epidemic).

Pfieffer’s memoir mentions climate change 9 times (Trump 303 times) but never the opioid epidemic.  (The "fact-checked" memoir does find space to declare that, with President Trump, we staff "wander[] the halls of the White House doing dumb, mean, s[]t"). 

In contrast, the memoir Hillbilly Elegy -- cited by the New York Times as one of "6 books to help understand why Trump won" -- mentions climate change zero times and (in some detail) the opioid epidemic ten times.

To be a bit more systematic about this, I looked at google trends for “fentanyl” and “climate change” state by state over the past 5 years.  The results are well summarized by comparing Ohio and DC, both of which had age-adjusted overdose death rates of 39 people per 100,000 in the year 2016.  By this metric, Ohio's attention to fentanyl was more than triple DC's, as shown in the chart below.

Wage stagnation.  Last summer the bubble’s economic meme was that real wages had “stagnated”: that is, since 2016 (if not longer) worker’s wages had not advanced beyond inflation and that workers were suffering from “feeble bargaining power.”

Meanwhile back home I was seeing more striking workers than I can ever remember.  Is that what feeble bargaining power means?  Local friends and neighbors asked me “I read/heard about this ‘wage stagnation’ stuff – why aren’t I seeing it in my line of business?”

CEA had been working on a report about measuring wage growth, using the economic literature on how to do such things.  The report showed that wages were growing significantly more than inflation; the groupthink was wrong.  More surprising, some of the perpetrators of the groupthink acknowledged that they had suspected that real wages were growing but for some reason did not speak up about their understanding until CEA’s report was published.  (The charitable interpretation is that, living in the bubble, they viewed it as too risky to say what they knew until CEA offered more evidence as protection).

The cost of an American lifestyle in a Nordic country.  As part of its work on socialism, CEA looked at the costs of living an American lifestyle in a Nordic country.  Part of the American lifestyle is driving a vehicle.  Because the top three selling vehicles are pickup trucks (I see them all the time at home), our October socialism report looked at the cost of owning and operating a pickup truck in Nordic countries.

That was a mistake (entirely mine).  Although the President’s speeches (which rely on some of CEA’s socialism findings) are for the entire country, CEA reports are primarily read inside the Washington bubble where pickup trucks are objects of derision.  So the subsequent Economic Report of the President's socialism chapter deleted all references to pickup trucks and change the analysis to a Honda Civic.

Much of the public has an interest in bringing outsiders into elected Federal offices.  While an outsider can initiate important changes, he still has the challenge that much of the Federal manpower lives and works in the Washington bubble, if not originating from it.

Many among the UNELECTED in the Washington bubble are unaware of the gaps above, and at best dimly aware of any gap at all, between them and the rest of the nation.

Take Ben Rhodes (unelected), who had to be repeatedly reminded by (elected) President Obama that "no one cares about Burma in Ohio" (pp. 174, 390 of Rhodes' memoirs).  Mr. Rhodes absorbed the lesson well enough to italicize it in his book, and well enough to recall that candidate Obama himself ran against the DC bubble (p. 403), but not deeply enough to think about gaps such as those mentioned above (or the economic damage from Obamacare, historic regulatory overreach, etc.) that in principle his party could manage.  Even with a year of reflection, the best he can discern is that his party lost the White House and both houses of Congress primarily due to "racist, mean-spirited, truthless politics" (p. 401).

The best Dan Pfeiffer (p. 95) can discern is that technological change in journalism created an environment where a purportedly unqualified outsider could win a Presidential election.  Pfeiffer does perceive that the economy may be one issue among many (pp. 269-71), but only regarding economic messaging; there were no policy mistakes between 2009 and 2016 that caused significant and genuine harm to voters living outside the Washington bubble.

There is a London bubble too, with a large gap in perspectives between those living in the London metro area and those living elsewhere in Britain.  Sir Kim Darroch invited me, several White House staffers, and many others from DC to an April event at the British embassy with Phil Hammond as guest of honor.  I was shocked that the public remarks were so straightforward as to their continued disdain for UK and US voters' decisions, almost 3 years past.  I expected that Darroch and Hammond would have short political life spans but not so short that Darroch would enter political intensive care already today.

As the Spectator put it,

"This high-handed [policy-making] process relieves us of the burden of thinking about what our rules will do to individuals on the receiving end. In its own way, this is a species of dehumanisation; when people rebel at the ballot box, we are shocked."

[My experience at the Irish embassy was entirely different (a smaller group with Finance minister Paschal Donohoe and Ambassador Daniel Mulhall).  Although preferring that UK remain (Ireland is part of the EU, so exit would put an EU-nonEU barrier on their island), these smart, thoughtful people understood why many British would want to Brexit.  Perhaps there is no "Dublin bubble"?]

Consider it good news for US political outsiders that the Washington bubble shows little sign of adjusting its outlook.

[update: I just got the Susan Rice memoir.  It mentions opioids, heroin, fentanyl, and drug overdoses zero times.  Climate change/policy appears 22 times.  Trump appears almost 100 times.

update2: I just got the Barack Obama memoir.  It mentions opioids, heroin, fentanyl, and drug overdoses zero times.  Climate change appears 60 times.  Trump appears 31 times.  (The counts exclude the index and references).]

Public Policy and Wages in the US and UK

Copyright, The New York Times Company

Between 2009 and 2011, the value-added tax in Britain increased to 20 percent from 15 percent. (The value-added tax is essentially a national sales tax.) Because the tax is part of the overall price of essentially anything bought in the country, it was no surprise that the rate of inflation of prices on consumer goods was elevated during those years as businesses passed on the cost of the taxes they paid to their customers.

In many circumstances, wages roughly keep up with consumer price inflation as the sellers of consumer goods use their extra revenue to compete for workers. But wage inflation is not guaranteed when consumer price inflation comes from sales tax increases, because the extra revenue goes to the public treasury in the form of sales tax receipts rather than going to the sellers of consumer goods.

In this way, increasing the sales tax rate to 20 percent from 15 percent should reduce real wages by 4 or 5 percent. (By real wages, I mean the resources that a person has as a consequence of working after taxes, subsidies and inflation. Because of taxes and subsidies, those resources are less than the aggregate economic value created by working and less than the cost to employers of having employees on the payroll.)

A recent study of wages in Britain confirmed this: inflation-adjusted wages fell 4 or 5 percent in Britain between 2009 and 2011.

While British workers saw their purchasing power eroded by the sales tax increase, the unemployed did not, because unemployment benefits in Britain are automatically indexed to inflation. Additional inflation of 5 percent meant a 5 percent rise in unemployment benefits. By giving a raise to the unemployed without giving a raise to workers, the added sales tax in Britain reduced the reward of working.

The United States does not have a national sales tax. A few states did increase their state sales tax rates between 2011 and this year (others decreased it), but the national average increase since 2007 has been only a couple of tenths of a percentage point.

Nevertheless, adjusted for taxes, subsidies and inflation, wages are lower in the United States, too. As I showed in a post last year (see especially the second chart), public policies in the United States reduced real wages by increasing the incomes of unemployed people through new unemployment benefits, food stamp expansions and other increases in benefits of the social safety net.

As long as the United States and Britain retain their wage-depressing public policies, neither country should expect its labor markets to return to what they used to be.

Myth: Constant Marginal Tax Rates in Europe

One of the myths (perpetuated here and here) about the labor market since 2007 is that marginal tax rates have been constant in Europe. Somebody needs to carefully measure marginal tax rates around the world (my book provides a framework for doing so -- see chapter 3), but with news stories like this (Portugal), this (UK), this (France), this (Japan, admittedly not Europe), and this (Ireland), I don't see how one could assume that European countries have had constant or declining rates. "Austerity" is by no means the same as cutting marginal tax rates.

International readers, if you have information or anecdotes about marginal tax rate changes, please leave a comment. Don't forget that so-called "tax cuts" do not cut marginal tax rates if only-low income people are eligible for the cut. For the same reason, government benefit cuts do not cut marginal tax rates if the cuts occur primarily by withholding benefits from people with high and middle incomes.

What Does Korea's Development Have in Common With the UK & the US?

Find out the answer, based on supply and demand, in Marc Teignier-Baque's The Role of Trade in Structural Transformation. He just earned his PhD at the University of Chicago (the only one wearing the tie)!