Friday, January 08, 2021

Optimism vs. Pessimism: "You've never had it so good"

The first chart here is from JP Morgan, the American bank, and the second is from Bank of America. The spacing of increments on the x-axis varies because of missing data. Asia accounted for about three-fourths of global output (measured in gross domestic product) from the start of the common era. By 1860 it had been overtaken by the industrial revolution in Europe and America. The western economies peaked at about 1950 when they accounted for four-fifths of global output.

Our African ancestors had to be pessimists to survive and in modern times people tend to be more optimistic about their own lives than that of their society or country. However, pessimism is widespread in particular in Europe and the United States despite the stunning advances in the material standard of living and well-being in rich countries, and in recent decades many regions of the world.

The news we consume is typically on near term events and is overwhelmingly negative — disasters, bad weather, public officials' incompetence or corruption, wars and violence.

While it's bad news that gets the attention of the public, publications such as The New York Times have become more gloomy in recent decades. Kalev Leetaru, an American data scientist, wrote on his research "Perhaps the greatest takeaway is that by historical standards we live in unprecedentedly positive times. This raises the question of why we think our times are darkening."

“The problem with dystopian rhetoric is that if people believe that the country is a flaming dumpster, they will be receptive to the perennial appeal of demagogues,” Steven Pinker, a Harvard psychologist, wrote in his book 'Enlightenment Now: The Case for Reason, Science, Humanism, and Progress ' (2018.)

The old journalistic saying “If it Bleeds, It Leads,” remains strong and Prof Pinker commented "Plane crashes always make the news, but car crashes, which kill far more people, almost never do. Not surprisingly, many people have a fear of flying, but almost no one has a fear of driving. People rank tornadoes (which kill about 50 Americans a year) as a more common cause of death than asthma (which kills more than 4,000 Americans a year), presumably because tornadoes make for better television."

Janan Ganesh, the Financial Times columnist, wrote on Pinker's book "...populism is not just doubt about the existence of material improvement. It is doubt about whether material improvement is enough for humans. If progress comes at the cost of social cohesion or the inner peace formerly supplied by religion, a certain cast of mind  as common on the left as on the right  would regard it as not worth the candle...What is Brexit if not the sacrifice of some material advantage for the less quantifiable pleasure of a more familiar society? The galling thing for liberals is that this quest for something beyond economic comfort rather takes that hard-won comfort for granted. It issues its demand for nourishment of the soul from the very summit of Maslow’s hierarchy of needs. It banks the achievements of the Enlightenment that Pinker fights to defend."

Trump has made racism respectable again in the US and while economic anxiety was viewed as a primary reason for his success in November 2016, later research showed the potency of anti-immigrant sentiment, racism, and sexism.

Trump had road-tested racism before running for president with his false claim that President Obama had not been born in the United States. By 2011, about half of Republican voters believed Obama was born abroad and was, therefore an illegitimate president.

Trump's base did not care that he massively cheated on his taxes; he tried to scuttle the Affordable Care Act (Obamacare) which provided healthcare insurance for millions of poor people and far from draining the swamp of insider corruption in Washington DC, he made it worse.

 “The whole administration has taken Trump’s tone — self-dealing, self-enriching, enriching your friends and families — that’s smart, if you listen to Trump,” a spokesman for the Public Citizen watchdog commented to The Washington Post last October.

"You've never had it so good"

Adlai Stevenson, the Democratic Party's candidate for US president in 1952, ran on a slogan "You've never had it so good." However, the Republican Party had the perfect candidate in Dwight D. Eisenhower, the former supreme commander of US forces in Europe and the hero of D-Day, at a time when US armed forces were bogged down in Korea.

"Let us be frank about it: most of our people have never had it so good," Harold Macmillan, British prime minister, said in a speech five years later in 1957. "Go around the country, go to the industrial towns, go to the farms, and you’ll see a state of prosperity such as we have never had in my lifetime — nor indeed ever in the history of this country. What is beginning to worry some of us is 'Is it too good to be true?’ or perhaps I should say 'Is it too good to last?’"

I show below that both in advanced and developing countries, people tend to have a poor grasp of long term trends and are flummoxed by statistics.

1957 was a uniquely happy year since 1945

Coincidental or not, in Britain happiness peaked in 1957.

Research published in 2017 by the Social Market Foundation and the Centre for Competitive Advantage in the Global Economy (CAGE) at the University of Warwick showed that levels of happiness in Britain appeared to have been highest during the Victorian era, and during the 20th century peaked during 1957, a level to which they have never returned.

Researchers chose to begin in 1776, the date of the American Declaration of Independence, which refers to happiness, in a 233 years span to 2009. This comparison found that the massive collapse of well-being during the two world wars eclipses anything else except the Great Depression.

The researchers said that computational linguistics, a line of research that uses computer science techniques to analyse language and speech, turns words into a newly potent research tool – and with billions of words to choose from online, have given researchers a wealth of avenues to explore when researching our ancestors’ levels of well-being and satisfaction with their lives. The word content used for this analysis came from books digitised by Google. Researchers looked at 8m books to track changing patterns in happiness across the UK, Italy, the USA, France, Spain and Germany.

The term valence was used to signify the emotion contained in a word. Words with high ratings indicate that they are associated with positive emotions; words with low ratings with negative ones. High valence words include “enjoyment”; “vacation” and “peaceful”; low valence words include “murder”; “disease” and “starvation.”

Researchers found no connection between economic growth and the state of human happiness in the long run, but that economic instability and downturns such as recessions and economic collapse of the magnitude of the Great Depression do lead to plummeting levels of well-being.

The report concludes that happiness is a relative concept: it depends on things like expectations and aspirations, and these will certainly have changed since Victorian times when the level of happiness was high despite Dickensian conditions.

If we have much higher aspirations now than a century ago, then the report suggests that this could be one reason why there seems to be a good deal of unhappiness around today.

Understanding Happiness (2017)

The Dutch Republic was the richest country in Europe in the 17th century.

First Modern Economy: Myths on tulips & most valuable firm in history

Rising tide lifts many boats!

In 2005 Alan Greenspan, the chairman of the US Federal Reserve, in a speech in Kirkcaldy, Scotland — the birthplace in 1723, of Adam Smith, the philosopher-economist and author of the 1776 seminal book 'Wealth of Nations' — said:

"For most of recorded history, people appear to have acquiesced in, and in some ways embraced, a society that was static and predictable. A young twelfth-century vassal could look forward to tilling the same plot of his landlord's soil until disease, famine, natural disaster, or violence ended his life. And that end often came quickly. Life expectancy at birth was, on average, twenty-five years, the same as it had been for the previous thousand years. Moreover, the vassal could fully expect that his children and doubtless their children, in turn, would till the same plot. Perhaps such a programmed life had a certain security, established by a rigid social and legal hierarchy that left little to individual enterprise.

To be sure, improved agricultural techniques and the expansion of trade beyond the largely self-sufficient feudal manor increased the division of labor and raised living standards and populations, but growth in both was glacial. In the fifteenth century, the great mass of people were engaged in the same productive practices as those of their forebears many generations earlier."

Life expectancy at birth in the world in 1900 was 31 years. It is now 73 years thanks to medical advances in tackling disease; a plunge in child mortality and child labour; improved nutrition; education and declines in both wars and violence generally.

Sustained economic growth (with breaks during recessions) has only happened in the past 200 years when the world's population has risen from 1bn to 7.7bn people.

In 1820, the richest countries were about five times as wealthy as the poorest countries, whereas they were more than thirty times as well-off in 1950 according to the Organisation of Economic Cooperation and Development (OECD).

In 1950 GDP (gross domestic product) per capita of the United States was $15,273 in 2019 US$ while using 2016 World Bank purchasing power parities (PPPs) to strip out price differences and provide constant values over time.

Similar income levels or better compared with the United States were Switzerland at $23,500; New Zealand $15,392; Denmark $15,125; Australia $14,939; Sweden $13,712; Netherlands $13,219 and UK $12,607.

Other results were France $10,070; Germany $9,289; Italy $8,131; Ireland $7,542; Spain $5,073; Greece $4,891 and Portugal $4,703.

The global average GDP per capita (PPP) in 2019 using IMF GDP data and UN population estimates was $18,400. In 1960 the United States level was at $18,328 in 2019 US$.

Noah Smith, an American economist and Bloomberg columnist, has written that America was no nirvana in the 1950s — half of black Americans living below the poverty line in a segregated society; 18% of whites in poverty; women restricted in their jobs choice; pollution and poor health outcomes — however, in the world today using the same level of income, persistent extreme poverty has fallen in many regions.

At constant prices in 1960-2019 the world average GDP per capita according to the World Bank almost trebled while the world's population more than doubled — 1960: population 3.03bn; 2019: 7.70bn. China + India combined account for 35% of the total.

China's PPP-adjusted GDP per capita of $16,953 in 2019 was 47 times the 1960 level (the Conference Board Center Beijing has a higher 1960 level and lower GDP per capita 2019 level compared with official data, which gives a multiple of 16.)

India's multiple was 7 times in the 60 year period.

Among advanced countries in 1950, some big and small countries were in the rich category while others took advantage of strong economic growth in particular in the early decades.

In Taiwan, 2019 GDP per capita was 34.8 times the level in 1950; South Korea (34.2); Japan (16.7); Spain (8.5); Portugal (7.7); Austria (6.8); Greece (6.5); Finland (5.9); Germany (5.9); Ireland* (5.7); Italy (5.4); France (4.7); Belgium (4.6); Netherlands (4.5%); United States (4.2); Sweden (4.0); Denmark (3.9); United Kingdom (3.8); Australia (3.5); Switzerland (3.0); New Zealand (2.8).

*Ireland's 2019 value is at $73,335 but when multinational distortions are stripped from GDP, the income per capita falls to $42,920.

Pessimism in rich countries

According to the OECD "In the early decades of the 19th century, countries with higher GDP per capita did not necessarily report better well-being outcomes. Then, starting in the late 19th century, the correlation between GDP per capita and well-being measures became stronger, and eventually, well-being even began outpacing GDP per capita growth. Policies played a role in this, including the availability of cheaper American foodstuffs in Europe, the rise of democratic regimes, breakthroughs in medical knowledge and new social policy measures."

The think-tank for 36 governments (31 are from advanced economies) added "In general, there is a delinking between wellbeing outcomes and GDP per capita over time, but unlike convergence on economic growth, emerging economies are not outperforming the richest countries in the world. In other words, there does not appear to be a 'catch-up.' Their fast growth has yielded different results across regions, and not necessarily improvements in well-being to the same extent as the early industrialisers."

In the World Happiness 2020 report the prevalence of Nordic countries in the top rankings is noted. European countries and their rich western offshoots (US, Canada, Australia and New Zealand) dominate the rankings based on GDP per capita and life expectancy together with 4 questions on issues such corruption and social support from the Gallup World Poll.

Researchers have found in recent decades that people tend to be optimistic about their own family circumstances while being pessimistic about national trends in their countries.

In December 2019 a poll with a sample size of 12,933 in seven member states of the EU: Belgium, France, Germany, Italy, the Netherlands, Poland and Spain, found that 58% of respondents in the EU27 were optimistic about their personal future. At the same time, however, they were pessimistic about their country's future. Report

"The Germans stand out for their high level of trust in their own strength, while remaining particularly despondent about Germany's future," said Isabell Hoffmann, Europe expert at the Bertelsmann Foundation and head of the "eupinions" project. Sixty-five per cent of Germans stated that they are optimistic about their own future, while only 44% were optimistic about the future of their own country. "Only in Spain, this contradiction between personal and social expectations is similarly pronounced as in Germany," Hoffmann added. Belgium is an interesting case, too. Belgian respondents were split right in the middle when it comes to how optimistic or pessimistic they are about their personal future.

A total of 61% of French people expressed a pessimistic outlook about their personal lives and 69% in respect of the country’s future. Similarly, 56% of Italians reported pessimism about their personal lives, while 72% do so with respect to their country’s future.

The authors of an American paper published last month wrote "Especially in the US, for example, citizens stubbornly overestimate the likelihood that a person might rise-up, but not move down, the social and economic ladder. Although current levels of social mobility are particularly low in the US compared to other developed countries, this evidence suggests that Americans have a strong faith in the 'American Dream' promise, according to which all people have equal opportunities and can improve their social and economic status if they are determined to work hard. These optimistic beliefs about socio-economic advancement, however, appear to be a uniquely American phenomenon, given that Europeans, for instance, tend to be more realistic or may even underestimate social mobility in their nations. Nevertheless, studies have documented that views on social mobility affect policy preferences across all countries, with greater optimism being associated with lower support for redistribution."

Max Planck, the German scientist and recognised developer of quantum theory, who won the Nobel Prize in physics in 1918, once said: "When you change the way you look at things, the things you look at change.”

Ipsos Mori, the polling firm, has for almost a decade been publishing the Perils of Perceptions/ Index of Ignorance annual reports where residents of 30 to 40 advanced and emerging economies answer questions on topics such as health, crime, inequality, immigration, and economy. It involves thousands of interviews.

In 2014 Spanish participants thought the rate of unemployment was 46% not the actual rate of 25%. Germans put the jobless rate at 20% (true rate 6%); Americans thought the rate was at 32% (the real figure was 6%) and the Japanese average rate was 19% (real figure 4%). In 2018 the average guess across the study was 5 times greater than the actual: 34% vs. 7%).

In 2019 across all countries people on average underestimate the proportion of deaths from cardiovascular diseases and cancer. And the public tends to overestimate how many people die from transport injuries, terrorism, interpersonal violence, suicide and substance use disorders such as drug and alcohol addiction.

People also underestimate the size of their country’s economy relative to others. In 2018 the majority of people placed their country’s GDP rank lower than the reality. This is particularly the case for emerging economies such as Argentina, South Africa and Romania.

Every country massively overestimates the levels of growth of its elderly population. Across the countries on average, people think 54% of the population will be 65+ in 2050 when in reality the projection is less than half that (25%).

The majority of countries also hugely overestimate levels of immigration. In 2018 Ipsos Mori reported the "average guess across 37 countries is that 28% are immigrants when the actual figure is less than half that (12%). Nearly every country included in the study also overestimates their Muslim population by a large margin. The average guess was more than double the actual figure (20% vs 8%)."

Also in 2018 Ipsos Mori reported that "17 of the past 18 years have been the hottest since records began. However, every country in the study underestimates the global temperature rise over the past 18 years. The average estimate across the study was 9 years."

Negative news gets more attention than positive news while the majority of people have a poor grasp of long-term trends and numbers.

There is also what is called emotional innumeracy where people are subconsciously influenced by personal and societal fears and prejudices.

There are echo chambers such as Twitter but in 2019 according to Pew Research, 10% of US adults on the service accounted for 80% of the posts.

Herbert Simon, an American psychologist, who won the "Sveriges Riksbank (Swedish central bank) Prize in Economic Sciences in Memory of Alfred Nobel" in 1978 suggested that while people seek to make rational choices, human judgment is compromised by cognitive biases.

Amos Tversky and Daniel Kahneman, Israeli psychologists, also in the 1970s published research on biases that influence how people think and the judgments people make. Kahneman won the Nobel in the Economic Sciences in 2002 for their work (Tversky died in 1996).

Neo-classical economics is based on all agents acting rationally in their own self-interest while behavioural economics emphasises altruism where humans behave with more kindness and fairness than would be the case if they behaved rationally.


GDP is the most common measure of income and economic output. In recent times Actual Individual Consumption  (AIC) per capita is also used. It measures the consumption of public and private goods and services, adjusted for price differences between nations (see Related at bottom of page).

Real GDP per capita in England almost doubled in the 90 years between 1780 and 1870 when it was one third greater than GDP per person in the United States, and 70% more than both France and Germany.

From 1978 when the Chinese communist party embraced capitalism, real GDP per capita in 2019 had expanded by 30 times.

In the early decades, Chinese GDP per capita was doubling at about every 8 to 9 years, reflecting the benefits of participating in the global economy.

According to researchers at the University of Groningen, in the Netherlands "Between 1913 and 1950 income growth of European nations as conventionally measured by gross domestic product per capita was very low. But at the same time Europeans became healthier, taller, and older, and enjoyed increasing leisure time. Historical research into the human condition and level of living has revealed considerable growth trends in the general biological standard of living of European citizens. To understand this paradox, we need to re-examine and analyse indicators of the human condition such as economic living standards and broader human development standards."

The 1950-1973 period in the Western World was one of unprecedented prosperity in Europe and in the US. The annual average compound growth rate was led by Greece at 6.2% followed by Spain and Portugal at 5.8% and 5.7% while Italy and West Germany both grew at 5% annually; Ireland was at 3.1% and the UK was at 2.5%.

Growth became fragile from 1973 when the Arab oil producers began an oil embargo after a war with Israel and the price of crude oil quadrupled by 1974 at a time when there was a commodity price boom.

Britain had to get a bailout from the International Monetary Fund in 1976 and several European economies faced double-digit inflation and big annual budget deficits.

Real GDP per person in both Western Europe and Japan as the proportion of the United States level was similar in 2007 to what it had been in 1973. See here (inequality in US means that many people don't share in the high real GDP.)

From the 1990s a united Germany had a new source of low-cost materials from a skilled workforces across the former communist states of Eastern Europe while the rise of China resulted in new competition for traditional produce in Mediterranean countries.

In Italy, poor governance since 1973 has been a hallmark of the country. It has had 69 governments since 1945 and its economic growth in 1995-2019 has been 8%.

Italy has reported only one annual budget surplus since 1909/1910.

The OECD has looked into its crystal ball and it will take many years for economic growth rates in BRIICS countries to decline.

In a “business-as-usual” reference scenario without significant reforms, living standards (GDP per capita) in the OECD* countries improve by between 1½ and 2% per annum over the coming 40 years. Living standards in the BRIICS countries (Brazil, Russia, India, Indonesia, China and South Africa) grow faster, but decelerate from the 6% annual growth achieved over the last decade to just over 2% by 2060, leaving them at less than half the level seen in the leading countries.

*There are 31 advanced countries among 36 OECD member countries.

There currently are housing crises in a number of European countries including Ireland.

In the EU27 Eurostat reported in December 2019 in respect of 25-34-year-olds (excluding most students) that the rate of adults living with parents was 30%: 4% in Denmark; 4.8% in Finland; 5.4% in Sweden; 5.8% in Norway; 10.2% in the Netherlands; 11.4% in France; 14.5% in Switzerland; 21.0% in Belgium; 27.5% in Ireland; 45.25 in Portugal; 46% in Spain; 53% in Italy; 58.0% in Greece; 62.2% in Croatia.

The Irish population has been rising by about 50,000 annually in recent years and the housing supply has not been able to match demand. A decade before Ireland's property bubble burst was one of the world's greatest — in Dublin, a combination of poor policymaking, planning, land use (average small houses, but few apartments), and several other factors including owner-occupiers of residential property seeing it as also a financial asset, has brought on this crisis.

The Irish land racket and Dublin housing crisis

In Europe and the US, there is neither a Utopia nor Dystopia. The US is a flawed democracy and in Europe two of the former communist countries want to establish authoritarian systems while continuing to get benefits from their membership of the European Union.

Just 37% of Americans believed in 2017 that their children will grow up to be better off financially than their parents. The rate was 9% in France.

However, there is no economic rule that would give special protection to rich countries. Besides the period of 1950-1973 was unique in history.

On a global level with the exception of the pandemic, Steven Pinker sets out in slides here why we the citizens of the world have much to be thankful for.

World Health Organisation: "No vaccine in history has progressed through clinical trials and pre-approval as fast as the recent COVID-19 vaccines."

Check list of 29 main vaccines since 1798.

Voltaire (François-Marie Arouet: 1694-1778), the famous French writer, wrote in 1767: “En effet l’histoire n’est que le tableau des crimes et des malheurs” — “Indeed, history is nothing more than a tableau of crimes and misfortunes.”

"Plus ça change plus c'est la même chose" is a French saying: "the more things change, the more they remain the same."

Not always!

Europeans today live in the longest period of peace between great powers, in over 2,000 years of recorded history.

The fading American Dream: Stanford University


The economic rise of the Western World

Key indicators and Ireland's non-Covid economic challenges into 2021 — GDP vs. AIC

Slavery and myth of American exceptionalism 

Our World in Data 

EU GDP per capita outpaced UK and US in 2000-2018