Correlations observed in affluent, developed countries between (i) wealth and health or (ii) parental income and children’s outcomes do not reflect a causal effect of wealth

From Arnold Kling.

"We use administrative data on Swedish lottery players to estimate the causal impact of wealth on players’ own health and their children’s health and developmental outcomes. Our estimation sample is large, virtually free of attrition, and allows us to control for the factors ‒ such as the number of lottery tickets ‒ conditional on which the prizes were randomly assigned. In adults, we find no evidence that wealth impacts mortality or health care utilization, with the possible exception of a small reduction in the consumption of mental health drugs.

Our estimates allow us to rule out effects on 10-year mortality one sixth as large the cross-sectional gradient. In our intergenerational analyses, we find that wealth increases children’s health care utilization in the years following the lottery and may also reduce obesity risk. The effects on most other child outcomes, which include drug consumption, scholastic performance, and skills, can usually be bounded to a tight interval around zero. Overall, our findings suggest that correlations observed in affluent, developed countries between (i) wealth and health or (ii) parental income and children’s outcomes do not reflect a causal effect of wealth.

Pointer from James Pethokoukis.

Somebody should replicate this study in the United States. I would not be surprised if the effects on child outcomes were closely bounded to a tight interval around zero here, also.

This is the sort of evidence that I wish Robert Putnam would confront."

Psychedelic Drugs Less Harmful Than Alcohol, New Study Suggests

By Ed Jones at Modern Readers.

"A pioneering study has reached the conclusion that psychedelic drugs may not in fact have a detrimental impact on a person’s mental health after all. A team set out to investigate the conclusion reached by a prior study carried out at the Norwegian University of Science and Technology in Trondheim, which suggested that the recreational use of psychedelic drugs could open a person to increase risk of anxiety, depression and even suicidal thoughts.

This, however, may not be the case at all.

For the latest study, a team carried out a survey involving over 130,000 people chosen at random and with a generally good overall state of mental health. The project was carried out by neuroscientist Teri Krebs and clinical psychologist Pål-Ørjan Johansen, who incorporated 19,000 individuals with a history of psychedelic drug use.

When the results were collated and analyzed, the data suggested that magic mushrooms, LSD and other psychedelics were not in fact linked with a higher likelihood of the respective individual developing problems with their mental health.

“Over 30 million US adults have tried psychedelics and there just is not much evidence of health problems,” wrote Pål-Ørjan Johansen, the study’s co-author.

“Drug experts consistently rank LSD and psilocybin mushrooms as much less harmful to the individual user and to society compared to alcohol and other controlled substances,” added Teri Krebs."

Stagnant Wages: Fact or Fiction?

From Salim Furth of Heritage. Excerpts:

"Abstract

Wages have grown over the past few years at rates similar to historical trends. Even when including the Great Recession, the average annual growth rate has been positive. The frequently repeated claim that wages are “stagnant” is at odds with six measures of wages and compensation, which indicate that hourly and weekly wages have grown about 0.9 percent per year since the beginning of 2013. Wages are certainly not booming, however, and policymakers can increase real wages by reforming laws and regulations that artificially raise prices of consumer goods.
 

Recent data show that wages have been growing recently at rates comparable to their long-term trends. Measuring average wages accurately is more difficult than it sounds, so this paper looks at six metrics of wage and compensation to present a complete picture.

Since the beginning of 2013, wages have grown about 0.9 percent per year. Since 2006 (and thus including the recession), annual growth has been around 0.5 percent. Over longer horizons reaching back to 1960, wages and compensation have usually grown between 0.7 percent and 1.7 percent per year. Thus, recent wage trends are typical of the modern era, although modestly lower than average.

Are Wages Stagnant?

A widely repeated narrative is that wage growth in recent years has been terrible. Many economists and journalists have written about how slowly wages are growing—and have often written that they are not growing at all.[1] Yet six common indicators show modest but steady growth in the past two years and even in the past eight years. Why the discrepancy?

One reason that wages appear to be growing more slowly is that inflation has been low, especially since oil and gas prices have dropped. In the past two years, inflation has averaged just 1.16 percent per year. This is less than half the rate of inflation from 2000 through 2007, and it means that fewer people are receiving nominal raises.

However, what matters for well-being is the real (inflation-adjusted) value of wages.[2] Low inflation means that receiving a nominal raise of 2 percent in 2014 increases a worker’s real income more than a 3 percent raise would have in 2004.

The analysis in this paper uses the Personal Consumption Expenditures (PCE) deflator, which is the most accurate measurement of the general cost of living. The other common inflation measure, the Consumer Price Index (CPI), covers fewer consumer goods and is known to be biased upward.[3]

Since 1960, the gap between the two measures has averaged 0.5 percent per year, although in the past few years it has narrowed to about 0.25 percent.[4] Thus, if someone reports current wage growth of 0.7 percent using the CPI, the same data would show 0.95 percent growth using the PCE.

Wage Growth in 2013 and 2014

The consensus among six common measures of compensation (see Box 1) is that wages have been growing at around 0.9 percent per year since the beginning of 2013. At this rate, average wages will rise 31 percent in 30 years.

The six wage metrics cover slightly different concepts. Chart 1 shows how the different metrics report recent wage growth.

The data show no disagreement between hourly and weekly metrics. The metrics that better represent working-class wages performed slightly better than the metrics that cover all workers.

The two measures of hourly compensation were the outliers, reporting 0.65 percent and 1.5 percent annualized growth, respectively.

While 0.9 percent annual wage growth is nothing to celebrate, it is much better than zero growth, and it is not stagnant by historical standards. Like employment and gross domestic product (GDP), wages were slow to recover from the Great Recession and earn no praise for the policies enacted in response to the recession. 

 

Wage Growth Since 2000

Although current wage growth is in line with historical averages, wages may be just recovering ground lost to the recession.

Wage growth since 2006—the first year in which all six data sources are available—has been lower than most historical averages, but still positive. Four of the measures are clustered around 0.45 percent annualized growth, while two measures of hourly earnings offer an optimistic dissent.

Going back further to include two recessions and the 2000s expansion, wage growth has been about 0.8 percent per year, in line with historical averages. This would yield a 27 percent increase in average wages over 30 years. In this period, compensation growth was highest, and the two measures of weekly wages were lowest.[5] Commerce Department data confirm that the non-wage share of compensation shrank in the late 1990s and then grew from 2000 to 2005.[6]

Wage Growth Since 1960

How strong has wage growth been historically? Less data are available for earlier decades, and the available data are less in agreement. Chart 2 shows growth periods for several measures of wages and compensation since 1960 or their earliest availability.

From 1960 to 2007 (both business cycle peaks[7]), hourly compensation grew by 1.8 percent per year. Splicing together two measures of wages,[8] I find that wages grew 1.0 percent per year from 1964 to 2007.



During the first part of this era, before 1980, the gap between compensation and wage growth was large: Hourly compensation grew 2.0 percent per year, and wages grew 0.7 percent per year. About one-third of the gap is explained by the rapid growth of non-wage benefits. In 1964, 10.3 percent of compensation was non-wage; in 1980, it was 15.5 percent. However, two-thirds of the gap cannot be easily explained.

From 1980 to 2007, hourly compensation and weekly wages grew side by side. Compensation grew 1.5 percent per year and weekly wages 1.2 percent per year, with the gap substantially explained by the continued growth of non-wage compensation. However, median weekly earnings from the Current Population Survey (CPS) rose only 0.7 percent per year.[9]"

Why Do Wages Seem Stagnant?

Given that straightforward data unanimously show steady, historically typical wage growth over the past few years, it is surprising that a cottage industry has grown up around making wages appear to be stagnant. Other analysts arrived at their claims that wages are stagnant by:

• Inviting readers to implicitly compare average to individual wage growth. As individuals gain experience, their own wages rise faster than the national average. Because people enter the labor force with low wages and retire with high wages, the average grows much more slowly than most individuals’ experience. Wage growth of 1 percent for an individual might be stagnant, but for the economy it is typical.
• Using an inferior inflation measure. Most wage growth pessimists use a CPI series, which systematically understates wage growth. Using the wrong measure can make wage gains sound smaller, but it should actually make the current era look better than it is compared with the past because the gap between the CPI and PCE has fallen in the past several years.
• Using different starting points. In one graph[13] by the Center for American Progress, wage gains are dated from February 2010, the trough of the Great Recession. Recessions can do strange things to average wages since low-wage individuals are more likely to lose their jobs. From February 2008 to February 2010, wages grew 1.6 percent per year, but that was in the context of the worst labor market collapse in a generation.
• Conflating household income with individual wages.[14] The decrease in labor force participation lowers incomes independently of wage trends. During an era when fewer people are working, wages will grow faster than household incomes. Some policies that would raise wages, such as increasing the minimum wage, would decrease employment, with an ambiguous effect on total income."

Lower-income Americans have more money, experience less poverty, and receive far more safety-net support than their grandparents ever did

From Ross Douthat in the NY Times. Excerpts:

"And yet, for all these disturbances and shifts, lower-income Americans have more money, experience less poverty, and receive far more safety-net support than their grandparents ever did. Over all, material conditions have improved, not worsened, across the period when their communities have come apart.

Between 1979 and 2010, for instance, the average after-tax income for the poorest quintile of American households rose from $14,800 to $19,200; for the second-poorest quintile, it rose from $29,900 to $39,100.

Meanwhile, per-person antipoverty spending at the state and federal level increased sixfold between 1968 and 2008 — and that’s excluding Medicare, unemployment benefits and Social Security. Despite some conservative skepticism, this spending did reduce the poverty rate (though probably more so after welfare reform). One plausible estimate suggests the rate fell from 26 percent in 1967 to 15 percent in 2012, and child poverty fell as well.

These trends simply do not match the left-wing depiction of a working class devastated by Reagonomics. Nor does the long-term trend in insurance coverage, or per-student spending, or other data. The left sometimes claims that the income instability of working Americans is unprecedented, for instance — but a 2007 Congressional Budget Office estimate found “little change in earnings variability” over the preceding decades."

"In a substantially poorer American past with a much thinner safety net, lower-income Americans found a way to cultivate monogamy, fidelity, sobriety and thrift to an extent that they have not in our richer, higher-spending present."

The U.S. export ban is harming the oil patch and raising gasoline prices

See Oil Export Folly from the WSJ. Excerpts:

"That production is now under pressure from lower prices, but the damage could be reduced if U.S. producers were able to export more of their product to meet demand in the global market. American frackers produce the light, sweet crude known as West Texas Intermediate (WTI), and world refineries are eager for more.

But U.S. producers can’t export their oil, and U.S. refineries are mainly built to process heavier oil imported from Mexico, Venezuela and Canada. This refining mismatch means that U.S. oil is piling up in storage or being sold at a discount. WTI now trades 20% below the world market price, which means additional pressure on U.S. producers to stop drilling."

"The political fear is that lifting the ban would increase U.S. gasoline prices, but the opposite is true. U.S. pump prices are mainly tied to the price of Brent crude, which is freely traded on the world market and is higher than it might otherwise be because of the ban on U.S. exports.

If U.S. producers were allowed to compete globally, prices of Brent and WTI would converge over time, and U.S. gasoline prices would come down, all other things being equal. As former Obama White House economic aide Larry Summers explained at the Brookings Institution last summer, “permitting the export of oil will actually reduce the price of gasoline.”"

Fossil Fuels Will Save the World (Really)

There are problems with oil, gas and coal, but their benefits for people—and the planet—are beyond dispute

By Matt Ridley in the WSJ. Excerpts:

"In 2013, about 87% of the energy that the world consumed came from fossil fuels, a figure that—remarkably—was unchanged from 10 years before."

"a diminishing amount of carbon-dioxide emissions per unit of energy produced. The biggest contribution to decarbonizing the energy system has been the switch from high-carbon coal to lower-carbon gas in electricity generation."

"wind and solar have contributed hardly at all to the drop in carbon emissions"

"The collapse of the price of oil over the past six months is the result of abundance: an inevitable consequence of the high oil prices of recent years, which stimulated innovation in hydraulic fracturing, horizontal drilling, seismology and information technology."

"hale drillers can step back in whenever the price rebounds."

"frackers are currently experiencing their own version of Moore’s law: a rapid fall in the cost and time it takes to drill a well, along with a rapid rise in the volume of hydrocarbons they are able to extract."

"And the shale revolution has yet to go global. When it does, oil and gas in tight rock formations will give the world ample supplies of hydrocarbons for decades, if not centuries."

"no nonrenewable resource has ever run dry, while renewable resources—whales, cod, forests, passenger pigeons—have frequently done so."

"The world’s nuclear output is down from 6% of world energy consumption in 2003 to 4% today."

"As for renewable energy, hydroelectric is the biggest and cheapest supplier, but it has the least capacity for expansion. Technologies that tap the energy of waves and tides remain unaffordable and impractical"

"bioenergy—that is, wood, ethanol made from corn or sugar cane, or diesel made from palm oil—is proving an ecological disaster: It encourages deforestation and food-price hikes that cause devastation among the world’s poor,"

"Wind power, for all the public money spent on its expansion, has inched up to—wait for it—1% of world energy consumption in 2013. Solar, for all the hype, has not even managed that"

"World-wide, the subsidies given to renewable energy currently amount to roughly $10 per gigajoule"

"some countries subsidize the use of fossil fuels, but they do so at a much lower rate—the world average is about $1.20 per gigajoule"

"even if solar panels were free, the power they produce would still struggle to compete with fossil fuel—except in some very sunny locations"

"the great expanses of land on which solar facilities must be built and the cost of retaining sufficient conventional generator capacity to guarantee supply on a dark, cold, windless evening.

The two fundamental problems that renewables face are that they take up too much space and produce too little energy"

"In the case of the U.S., there has been a roughly 9,000% increase in the value of goods and services available to the average American since 1800, almost all of which are made with, made of, powered by or propelled by fossil fuels."

"Indoor air pollution from wood fires kills four million people a year."

"the use of coal halted and then reversed the deforestation of Europe and North America. The turn to oil halted the slaughter of the world’s whales and seals for their blubber. Fertilizer manufactured with gas halved the amount of land needed to produce a given amount of food"

"Although the world has certainly warmed since the 19th century, the rate of warming has been slow and erratic. There has been no increase in the frequency or severity of storms or droughts, no acceleration of sea-level rise. Arctic sea ice has decreased, but Antarctic sea ice has increased. At the same time, scientists are agreed that the extra carbon dioxide in the air has contributed to an improvement in crop yields and a roughly 14% increase in the amount of all types of green vegetation on the planet since 1980."

"Only in the 1970s and 1980s did scientists begin to say that the mild warming expected as a direct result of burning fossil fuels—roughly a degree Celsius per doubling of carbon-dioxide concentrations in the atmosphere—might be greatly amplified by water vapor"

"since 2000, 14 peer-reviewed papers, published by 42 authors, many of whom are key contributors to the reports of the IPCC, have concluded that climate sensitivity is low because net feedbacks are modest."

"they find sensitivity to be 40% lower than the models on which the IPCC relies."

"the warming rate has never reached even two-tenths of a degree per decade and has slowed down to virtually nothing in the past 15 to 20 years"

The real prices of commodities have been undulating downward for more than a century

See Mistaking Peak Prices for "Peak Everything": Economic Super-cycles and Falling Commodity Prices. ByRonald Bailey of Reason.

"Plunging oil prices have been big news over the past year. Since mid-summer 2014, the price for benchmark West Texas Intermediate (WTI) crude has fallen from $105 to $48 per barrel. But it's not just the price of petroleum that has plummeted. The prices of lots of other industrially important commodities have also been dropping.

The International Monetary Fund Metals Price Index soared to 250 points in March 2011 over its 2005 baseline of 100 points. By February 2015, the IMF Metals index had dropped to 137 points—a tumble of about 55 percent from its high. In other words, commodity metal prices are now back to where they were in early 2006. The IMF metals index covers copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium.  Similarly, the IMF price index for all commodities—including fuel, food, beverages, and metals—topped 210 points above the 100 point 2005 baseline in March 2011 but has now sunk to 121 points, a fall of about 57 percent. Again, it's about back to its level in early 2006.

The steep run-up in commodity prices that occurred over the past decade provoked numerous predictions that the world was about to run out of all sorts of resources. And why not? Higher prices, after all, would indicate that resources are becoming scarcer relative to demand. The classic of the doomster genre is Peak Everything: Waking Up to a Century of Declines by Post Carbon Institute fellow Richard Heinberg. In 2010, Heinberg doubled down and asserted, "The world is at, nearing, or past the points of peak production of a number of critical nonrenewable resources—including oil, natural gas, and coal, as well as many economically important minerals ranging from antimony to zinc."

If everything was "peaking" when prices were going up; what does it mean when they are coming down? This is where explanations based on the theory of economic "super-cycles" might shed some light. Economists Nikolai Kondratiev and Joseph Schumpeter noticed that since the late 18^th century the prices of most commodities tended to rise and fall in waves lasting 40 to 60 years. However, the troughs of each successive price wave tended to be lower than the last, indicating that the real prices of commodities were falling over time. In general resources are becoming ever more abundant, not scarcer.

According to Kondratiev and Schumpeter these "long cycles" in commodity prices are driven by periods of rapid industrialization and economic growth spurred by technological progress. In 1938, Schumpeter identified three cycles: the first associated with the beginning of the Industrial Revolution in the early 19^th century; a second characterized by "railroadization" and industrial expansion in Western Europe and the United States; and third that based on "electrification" and the internal combustion engine.

Another way to conceptualize the price upswings of past super-cycles is that each occurred as new countries joined the global capitalist enterprise system. This would include cycles associated with the successive industrialization and economic expansion of Britain, followed by the United States, then Germany and Japan, post-World War II reconstruction, and lately the rise of China and India.

Commodity prices ramp up as economic growth speeds up in the early part of each cycle. Incited by rising prices, entrepreneurs then work hard to develop new supplies, increase resource use efficiencies, and find substitutes. In essence, this process is technological progress. On the downswing of the each super-cycle supplies catch up with demand and prices begin falling.

Are we on the downward sloping side of the latest super-cycle? Very likely. In his 2014 working paper, "150 Years of Boom and Bust: What Drives Mineral Commodity Prices?," Dallas Federal Reserve Bank economist Martin Stuermer analyzed the real price and production trends of four industrially important metals—copper, tin, lead, and zinc—between 1840 and 2010.

Stuermer reports that "price surges caused by rapid industrialization are a recurrent phenomenon throughout history."  The most recent surge in commodity prices, according to Stuermer, is due mostly to "large demand shocks attributable to China in 2003 to 2007." The effects of China's demand shock are now dissipating. Stuermer asserts that if "there are no new positive demand shocks, the results [of this analysis] suggest that current prices might further fall, as supply catches up and prices return to their long-run trend." He adds, "Commodity exporters should thus prepare for a further down swing of mineral commodity prices." Ultimately, Stuermer expects that mineral commodity prices will "return to their declining or stable trends in the long run."

Stuermer's analysis bolsters the conclusions on super-cycles reached by Northeastern University economist Bilge Erten and Columbia University economist Jose Antonio Ocampo. In their 2012 super-cycle working paper, Erten and Ocampo report evidence for four commodity super-cycles between 1865 and 2009, each one lasting between 30 to 40 years. They find that "for non-oil commodities, the mean of each super-cycle has a tendency to be lower than that of the previous cycle." In other words, the real prices of commodities have been undulating downward for more than a century.

Erten and Ocampo also point out, "The magnitude of cumulative decline during the downward trend is 47 percent for the non-fuel commodity prices, with recent increases of around 8 percent far from compensating for this long-term cumulative deterioration." The recent upswing phase of the current super-cycle did not boost commodity prices to nearly what they were a few cycles back.

However, Erten and Ocampo report that metals have been an exception—the mean of the last cycle was higher than the preceding one. Still, they note, "The contraction phase of this cycle has not even begun yet, which can lower the mean of the whole cycle in the upcoming years." It now appears that commodity prices were just reaching their pinnacles when Erten and Ocampo were writing up their results back in 2011. Instead of peak resource production we are most likely now past peak commodity prices—and heading lower for at least for the next ten to fifteen years."