It’s Families Stupid

In Nate Silver's recent post "What Do Economic Models Really Tell Us About Elections?" he argues that it's not much. All in all I agree with his conclusions, but for different reasons. He takes a look at GDP growth and the margin of victory/loss in a presidential election, and shows when you take away inflation, 43 percent of incumbents win reelection. He admits these numbers don't go into why, but that's where I come in.

The fact is GDP doesn't measure what voters really care about and can miss a lot of important aspects to a families quality of life. Pollster's never ask how many people know how much the economy grew in the last quarter. Instead they ask how they feel it is going, and since the majority of voters aren't economists, the only reference they can refer to is themselves. So they think about if they are able to pay the bills, put food on the table, and have healthcare for the members of their family. The reason why Nate's formulas are so off is because GDP, like most macro data, doesn't cover these things. Even basic data like average incomes still don't tell you the whole story. Take a look at the average income for individuals:

Whether incomes have gone up or down, it hasn't lead to a President, or his party, keeping the White House. This was the case in 1976, 1992, and 2000. While there wasn't much change between 2004 and 2008,  there was a drop in 2009 because of the Great Recession, and we all know who won that year.

While pollsters try and figure out what's on people's minds, economists need to try and start doing the same thing. A Washington think tank called the Economic Policy Institute came out with a report titled The Rising Instability of American Family Incomes, 1969-2004. The authors point out that "Part of the reason why family economic instability—sometimes called "income volatility"—has not been extensively examined is that aggregate economic statistics have been relatively stable and favorable. Neither the 1991 nor the 2001 recessions were particularly deep, and inflation and unemployment have remained historically low. Yet.. these broadly stable and favorable aggregate indicators mask many signs of declining economic security among American families."

The report came out in May of 2008, before the Great Recession, but some of the findings might surprise you. It turns out 15 percent of American's saw their salaries decrease between 1969 and 2004, causing serious strain within the family. Right at the turn of the century, levels of family income were extremely violent, where over half of American families saw their earnings drop.

Just because incomes were rising and unemployment was low, didn't mean all families were living the high life. Health care costs soared way over inflation, so even if there were two breadwinners per household, there was still a good chance they couldn't afford health insurance. Not to mention most people received coverage through their job. And future problems are becoming apparent. As the price of food has gone up, it will eventually start affecting a large amount of families.

The unemployment numbers that came out last week weren't good. And yes those and other macro indicators can show politicians where the state of the overall economy is right now. But if politicians want to actually do something about it, they need to look at the root causes of high unemployment, why food prices are rising, and figure out why the cost of health care has been rising. But they can't do this without getting the right information. If a politicians job is to get reelected, they will start demanding the information that will show them how to help their constituents, and economists will start figuring out ways to calculate it.

Taxes: Political vs. Reality

It's not every day the Working Families Party and the Manhattan Institute agree on a issue. But in the case of capping property taxes here in New York, they found a common cause.

Last week Governor Cuomo and Republican's in the Senate agreed to cap property taxes by 2 percent for parts of Long Island, Westchester, and most of upstate New York (you're welcome Westchester, I won't bundle you in with the suburbs of Albany, Syracuse, or Buffalo). There was no choice but to lower property taxes. Being that they were already one of the highest in the nation and many families were already tightening their belts as much as they could. But the problem was that the revenue was not made up from anywhere else.

Instead of raising taxes on the wealthy or corporations, New York's legislature cut programs for education, the homeless, and safety. These cuts have had a disproportionate affect on the bigger counties and cities. While 93 percent of counties were able to pass education budgets, New York City's Council is now debating the ways it can stop experienced teachers from being fired. Neither Syracuse, Buffalo, or Albany, figured out how to pass their budgets either.

One of the reasons for the bad employment data that came out today was because state governments cut their budgets. But raising taxes is never a popular move, especially in bad economic times. One of the problems with tax policy is that it's so complicated. The federal code is longer than War and Peace, and it makes it hard in this thirty seconds or less media to explain the effects this compromise will have on the state.

But the fact remains people are willing to pay for the programs that benefit their families like public education and safety. Cuomo got the political victory for getting his agenda passed, but the reality is most New Yorker's are facing the reality of those cuts.  
     

Egypt’s Capability

Friday morning I was completely off the grid. I had a appointment downtown, went on the subway to get back to my place so I wasn't checking my cell phone, Twitter, or Facebook. It was just the like the 90's but better because Destiny's Child wasn't playing in the background. When I got back to my apartment I checked to see what was going on in the world and saw a peaceful revolution coming to a peaceful end, and a new beginning for the people of Egypt. There are no words that can describe what was being shown on television, but the word that can't be used enough is incredible.

When the first round of protests started on January 25^th, it seemed to catch many people by surprise. Either people at the CIA don't have Facebook or Twitter accounts, or their efforts were focused on something else. But with all the countries in the middle east, why even worry about Egypt? With Mubarak in charge the country had been stable for 30 years, a peace treaty with Israel that it wasn't breaking, and it's GDP was growing at a higher rate than any other nations in Africa, and 25^th in the world. So, what do Egyptians have anything to worry about?

The reasons for Egypt's revolt are complex, there are so many directions a writer can take in describing the events that lead up to January 25^th. But what they all have in common is the Egyptians wanted to be free and have a democratic government working for them. I have written in the past about standard economic models and how they are inadequate assessments. The reason: they don't assess what people need or care about. Economists should look at what happened in Egypt and realize if the measurements they use do not change, the whole practice is in danger of becoming obsolete.

Before the recession in 2008 Egypt's GDP grew 7.2%, in 2009 it still grew another 4.6% (when most economies shrunk), and in 2010 it contued upward at 5.3%. Part of the growth was drilled from the oil in the country's vast dessert in the west, but its leading industry is in textiles, which grew at 5.5% just last year. But despite this improvement in production, it did not lead to people's lives being improved. Unemployment was still at 9.7% and over 14 million people were living below the poverty line.

Nobel laureate Amartya Sen developed the Capabilities Theory, an alternative to standard economic models. Instead of focusing on GDP as the primary factor in development, he argues economists should focus on social programs such as education and health care, which enable people to live their lives to the fullest extent possible. An important part of this theory is strong democratic governance where people can make their grievances known and work to expand their freedom. The theory calls for redistributive policies to be enacted through social programs, similar to Social Security and Medicaid, which give people the resources and skills they need.

If economists are going to solve this problem, they have to understand what's important to Egyptians, and people living around the world. There have been tons of stories written about the importance of bread, and all the people who have gone hungry (and I make no apologies for saying mine is the best) because they are not able to afford it. What's also important to the Egyptians is their health. When Mubarak first came into power in the 1980's he expanded health care by building hospitals and providing beds across the country. But despite the fact all Egyptians are eligible for health insurance, the government was refusing to pay for it (sound familiar?). The Ministry of Health owes $270 million dollars to health care providers across the country. But because they don't have the money, hospitals have had to delay or refuse people treatment because they can't afford to take them in.

Much of the talk has been about the smart, young people, who organized the protests through Facebook and Twitter. While this is true, the facts don't speak well for Egypt's education system. In the past, Egypt did have a good education system. But in recent years, as the population grew, more students were attending schools but were not receiving a good education. These children became disenfranchised only to drop out. Most of them tried to get the few jobs that were available, or went to a life in crime. This can lead to future economic stagnation because young Egyptians won't know how, or have the will, to start or run a business. More schools needed to be built and more teachers needed to be hired, both of which would have reduced the unemployment rate and brought brighter prospects for Egypt's future and the people who started the revolution.

The Carnegie Endowment for International Peace released a study on how hard it was to start a business in Egypt. This only empowered the rich and leaving behind the rest. While money was being given to the growing industries like textiles, this only enabled the rich and the businesses they own. Money wasn't being spent on other areas where the majority of the people needed it. Overall investment by the government was only 18% of GDP. This is despite the fact Egypt's purchasing power grew by $25 billion each year between 2008-2010.

The Capabilities Theory allows economists to focus on the areas of an economy that is most important to people, and their welling being. Providing for areas such as education, health care, housing, and food, provides security and stability allowing people to live their lives and pursue the areas they choose. Egyptians wanted access to better education and health care, among other things, and because they were being ruled instead of governed, they had to take to the streets in order to attain these freedoms.

February 11^th 2011 is a day that my generation will ask itself "where were you?" when Egyptians took their country back? Now that it is in their hands, Egyptians will be able to elect officials that can enact policies which will help those desperately in need, and build a better stronger country for future generations.