The History and Lessons of Economic Growth

There is much to learn from Thomas Piketty’s book Capital in the Twenty-First Century.  Perhaps the most fundamental lesson is that much of the last century was a unique period in social and economic history.  The experiences and conclusions garnered from living in and studying this recent era may not be appropriate for a future in which the world returns to more normal circumstances.

Two world wars and the intervening Great Depression created enormous social and economic damage.  The period of rebuilding after World War II generated a large amount of economic activity.  This was also the period in which a number of underdeveloped countries, particularly in Asia began to acquire modern economies.  For them, this was a period of rapid economic growth as well.  It is easy to conclude, after living through this period, that rapid growth is the norm for a healthy economy.  Piketty warns us that that may be a dangerous assumption.

The table below is from his book and is made available by Piketty here. 

Roughly half of growth in world GDP can be attributed to population growth.  What is desired is GDP growth as an indicator of whether or not the income of the average citizen is growing or not.  To acquire that knowledge the population growth must be factored out.  Piketty nearly always uses per capita GDP to capture that effect.  Below is a more detailed historical tally of per capita growth by continent.

Note that the only periods of sustained high per capita growth (3% or more) are found in Europe and Asia in the immediate postwar years, and in Asia with the emergence of China and India as rapidly growing economies.  Note also that the average rate of economic growth in the developed countries of Europe and America since the beginning of the industrial revolution has been a modest 1%. 

Piketty breaks out the growth rate history of Western Europe and North America in the figure below.

Note that Western Europe with its supposed burden of inefficient “welfare state” policies actually performs a bit better in recent years than the more economically unrestrained states of North America.

Piketty believes the developed world is returning to a long-term condition of low growth—on the order of 1.0-1.5%.  The data in the above figure supports that claim.  This is equivalent to the growth rate that persisted in the century before World War I, a period of great concentration of wealth and extreme inequality.  Piketty warns us that we may be reverting to similar conditions as we look to the future.

One of Piketty’s principle observations is the relationship between economic growth (g) and return on investment of capital (r).  He treats wealth and capital as interchangeable quantities, defining wealth as anything that possesses a market value.  If r is much greater than g then the possessors of wealth will continue to reap returns much greater than those who only possess their wages and wealth will grow inexorably.  Consider the following figure.

Throughout history the annual return on capital has been in the range of 4-5.5%.  Note that this figure does not include any deduction for taxes on wealth or on income from wealth.  For most of history such taxes were essentially nonexistent.  It wasn’t until the shocks of war and depression began early in the twentieth century that the extreme need for state income initiated income and estate taxes broadly across the developed world.  The results of that development are obvious in the chart below.

After taxes and capital losses are included in the return on capital, the rate of return actually falls below the rate of growth g for a time.  This means that during the postwar period the importance of labor-derived income became much greater and in the developed countries led to a broader distribution of wealth.  More people earned enough to purchase homes for example.  Home ownership in the United States is the hallmark of the middle class and represents much of its wealth.

Note, however, that the plutocrats fought back and have been gradually disassembling the tax structure and policies that allowed the middle class to grow.  Return on capital is returning to previous levels and the rate of growth is falling.  Piketty provides this explanation for the dynamic involved:

“….it is important to note that the effect of the tax on capital income is not to reduce the total accumulation of wealth but to modify the structure of the wealth distribution over the long run.  In terms of the theoretical model, as well as in the historical data, an increase in the tax on capital income from 0 to 30 percent (reducing the net return on capital from 5 to 3.5 percent) may well leave the total stock of capital unchanged over the long run for the simple reason that the decrease in the upper centile’s share of wealth is compensated by the rise of the middle class.  This is precisely what happened in the twentieth century—although the lesson is sometimes forgotten today.”

If the increase in taxation of capital income helped create the middle class, the decrease in such taxation could lead to the diminishment of the middle class—an effect that seems obvious today.

Piketty looked closely at data on inheritance flows of wealth in France to see if there was evidence that the extreme concentration of wealth that existed in Europe prior to World War I might be returning.  France is the country with the best recordkeeping of wealth transfers.  The results are discussed in Inheritance, thePropagation of Wealth, and Inequality.  In summary, Piketty found that that inheritance flows fell to a minimum and bottomed out around 1970.  Since that point they have been steadily climbing.  Extrapolations based on reasonable growth and return on investment scenarios indicate that inherited wealth will grow to near the levels of the prewar years in France. 

There is an importance difference between that earlier era and the current one.  The creation of a significant middle class has led to a de-concentration of wealth in the sense that instead of a few extremely wealthy families, there is a broader base of merely wealthy families.  However, this wealth is distributed in such a way that a significant fraction of the population is capable of propagating to their children assets that will allow them to continue to reside in this wealthy class.  Piketty suggests that of the people born in France in the 1970-1980 timeframe about 12% will receive an inheritance in the form of gifts and bequests equivalent to $1 million or more.  He expects that number to increase to 15% for those born in the 2010-2020 period.

The fear is that as the importance of inherited wealth grows it will produce a bifurcated society in which the majority gains little or nothing by inheritance, and 10-15% gains a sufficient amount to guarantee that they remain in the class of the wealthy.  This is a situation more reminiscent of an aristocracy than a meritocracy.  Piketty provides us this warning:

“This is….a fairly disturbing form of inequality, which is in the process of attaining historically unprecedented heights.  It is also more difficult to represent artistically or to correct politically, because it is a commonplace inequality opposing broad segments of the population rather than pitting a small elite against the rest of society.”

Piketty has provided us with a clear message: taxing wealth and wealth’s income can lead to a more fair distribution of wealth as well as healthy economic growth.  If you do not like the direction in which society is moving, you will have to intervene and change things—as you once did in the past.

Capitalism is the offspring of society; society is not the offspring of capitalism.

The Future of Food

Since the time of Malthus predictions have been made that the earth will soon have more people than it can feed.  So far, those predictions have proved false, or, if you prefer, premature.  According to United Nations’ predictions of population and its growth we now have about 7 billion people to feed.  That number is expected to peak at about 10.85 billion by 2100.  That is a significant 55% increase yet to come. However, this is only an estimate. The UN dataset contains a range of possibilities from 6.75 billion to 16.64 billion (-4% to +238%). Consider what the population would be if the world went on its merry way procreating at the same rate as now; the UN’s constant fertility estimate would yield a population of 28.64 billion (+409%) in the year 2100. Human behavior must change considerably if we are to avoid a Malthusian future.

We have avoided catastrophic worldwide food shortages by extending and making more productive traditional agricultural techniques that were developed over thousands of years.  Lester R. Brown has made the case that we are reaching the end of the line with that approach in his book Full Planet, Empty Plates: The New Geopolitics of Food Scarcity.  Crop yields are rising slowly in developed countries and seem to be approaching an asymptote.   We are running down our water supplies and eroding our soil at unsustainable rates.  The agricultural techniques currently being used are polluting our waterways and destroying our oceans.  Climate change is raising temperatures and higher temperatures mean lower crop yields.  There is very little unused arable land, and what exists is in areas where the local population is already facing food shortages.  We cannot proceed in this fashion indefinitely.  Something has to change.

Population as a body count does not define the extent of the problem.  Humans like to eat meat.  Humans in wealthy countries like to eat a lot of meat.  As more people move beyond mere subsistence conditions, the demand for meat is going to grow—and at a rate greater than population growth.  Much of agricultural production is aimed not at feeding people directly, but at feeding the animals that produce the meat we so much enjoy.

Brown explains the extent of the problem:

“Worldwide, roughly 35 percent of the 2.3-billion-ton annual grain harvest is used for feed.  In contrast, nearly all of the soybean harvest ends up as feed.”

“A steer in a feedlot requires 7 pounds of grain for each pound of weight gain.  For pork, each pound of additional live weight requires 3.5 pounds.  For poultry it is just over 2.  For eggs the ratio is 2 to 1.  For carp in China and India and catfish in the United States, it takes less than 2 pounds of feed for each pound of additional weight gain.”

Brown argues that it takes about a pound of grain per day to meet nutritional requirements in India—about 380 pounds per person per year.

“The average American, in contrast, consumes roughly 1,400 pounds of grain per year, four fifths of it indirectly in the form of meat, milk, and eggs.  Thus the total grain consumption per person in the United States is nearly four times that in India.”

If the population is to continue to grow and more people will move into higher economic realms, something will have to change in the way we deal with our desire for meat.

Resource Revolution: How to Capture the Biggest Business Opportunity in a Century is a book by Stefan Heck and Matt Rogers with Paul Carroll.  These authors view the coming changes as a business opportunity rather than a potential disaster.  They provide us a means of appreciating how rapid is the change that is coming.

“The key fact for business for at least the next two decades is this: More than 2.5 billion people in China, India, and other developing countries are moving out of poverty and will urbanize and move into industrial and service occupations by 2030.”

“To accommodate all these people urbanizing, industrializing, and moving into the middle class, China alone will build two and a half cities the population of Chicago every year for the foreseeable future.  India will build one Chicago each year….Think of the amount of concrete, iron and steel in a bridge or skyscraper; the amount of copper in a power grid and the energy required to power the cranes, bulldozers, and other machines that build it—and multiply those amounts by tens of thousands.”

And think about how much more food those people will wish to consume as they move up the food ladder.  These authors recognize that food and its production will have to be reinvented.  Rather than dwell too long on how to go about this, they lay out the necessary target that it is assumed clever industrialists will be able to meet.

“….produce high quality food locally using one-tenth the water and energy of existing methods and deliver the food to customers with less than 20 percent waste….customize each person’s food with nutraceuticals and tailor diets based on genetic fingerprints to maximize longevity and reduce the risk of disease.”

The authors focus on technologies that have already shown promise in whipping up enthusiasm for the future.  In the realm of food, they highlight the efforts of various companies to mock the taste and texture of meat with plant products.

“….start-ups are attempting to essentially reinvent beef and chicken.  They have come up with ways to grow crops that provide the same protein but in a way that is several times more efficient in terms of land, water, and production.”

Peter H. Diamandis and Steven Kotler also face the future with enthusiasm in their book Abundance: The Future Is Better Than You Think.  These authors not only wish to reinvent meat, they wish to reinvent agriculture.

They credit the US military with demonstrating the viability of hydroponics, the growing of plants in nutrient rich water, as a means of feeding troops on remote rocky islands in World War II.  However, the approach was shunted aside for more traditional agricultural advances after the war.  There was another breakthrough that occurred much later that has yet to be taken advantage of.

“In 1983 Richard Stoner made a major breakthrough, discovering that it was possible to suspend plants in midair, delivering food through a nutrient rich mist.”

These techniques free us from the need for soil and provide other advantages.

“Traditional agriculture uses 70 percent of the water on the planet.  Hydroponics is 70 percent more efficient than traditional agriculture.  Aeroponics, meanwhile, is 70 percent more efficient than hydroponics.  Thus if we used aeroponics for agriculture, we could drop water use from 70 percent to 6 percent—quite the savings.”

If we are freed from the need for soil, then we are also freed from the constraint of two dimensional plots of land.  The authors suggest switching food production to vertical, multistory structures which can be located where the customers live rather than where the soil is good.

“….the average American foodstuff now travels 1,500 miles before being consumed….As 70 percent of a foodstuff’s final retail price comes from transportation, storage, and handling, these miles add up quickly.”

The authors describe the studies of Dickson Despommier and his students.

“’One thirty-story building,’ says Despommier, ‘one square New York block in footprint, could feed fifty thousand people a year.  One hundred fifty vertical farms could feed everyone in New York City.”

“Vertical farms are immune to weather, so crops can be grown year-round under optimal conditions.  One acre of skyscraper floor produces the equivalent of ten to twenty traditional soil-based acres.  Employing clean-room technologies means no pesticides or herbicides, so there’s no agricultural runoff.  The fossil fuels now used for plowing, fertilizing, seeding, weeding, harvesting, and delivery are all gone as well.  On top of all that, we could reforest the old farmland as parkland and slow the devastating loss of biodiversity.”

Diamandis and Kotler have described a new way to grow plants, but they must still face the issue of what to do about meat.  They reject out of hand ranching and grazing as too inefficient, and feedlots as too dangerous in terms of generating diseases.  Their short-term solution is to invest more in aquaculture and eat more farmed fish.  The long term solution they anticipate involves in-vitro (cultured) production of meat. We don’t need soil for agriculture so why not get rid of the animals as well.

“….an economic analysis presented at the In Vitro Meat Symposium in Norway showed that meat grown in giant tanks known as bioreactors could be cost competitive with European beef prices….”

Meat produced in this fashion could, in principle, be tuned to produce healthier meat products.  Whether taste and texture can be reproduced is another issue. 

In any event, the authors believe it will take ten to fifteen years for both in-vitro meat and vertical farms to begin to be significant factors.  One suspects that Heck, Rogers, and Carroll would have more faith in what industry can accomplish in a short period.  The world may not have ten to fifteen years to wait.

We’ve discussed proposals that eliminate meat, and eliminate traditional agriculture entirely.  There is another direction in which we could proceed, that would be to eliminate food—or at least food as we know it.

Lizzie Widdicombe has produced an article in The New Yorker titled The End of Food.  She describes the activities of a young entrepreneur named Rob Rhinehart who one day concluded that food was a terribly inefficient way of acquiring nutrients.

“Eventually, Rhinehart compiled a list of thirty-five nutrients required for survival. Then, instead of heading to the grocery store, he ordered them off the Internet—mostly in powder or pill form—and poured everything into a blender, with some water. ‘The result, a slurry of chemicals, looked like gooey lemonade. Then, he told me, “I started living on it’.”

Rhinehart has been living on what he whimsically named Soylent for a year and believes he could live on it indefinitely.

“Drinking Soylent was saving him time and money: his food costs had dropped from four hundred and seventy dollars a month to fifty. And physically, he wrote, ‘I feel like the six million dollar man. My physique has noticeably improved, my skin is clearer, my teeth whiter, my hair thicker and my dandruff gone’.”

Just as no two people have exactly the same diets of traditional food, there is no unique formula for a product like Soylent.  Rhinehart has published his formula and apparently has generated a lot of interest in people who want to experiment with their own formulas to produce a product more suitable to their tastes.  Those attracted to the product apparently like to save the time now consumed by meals for other purposes.  They also like the guarantee that what they do consume is nutritionally balanced.  Widdicome provided an entertaining encounter with some students who were Soylent devotees at Caltech.

Rhinehart’s product may become a commercial success, but he may have even a bigger plan: to eliminate traditional farming entirely.

“During the next two months, Soylent plans to ship its product to all of its twenty-five thousand initial backers. The company has ten thousand dollars in new orders coming in every day, and has started to become profitable. U.S. military and space programs have asked to run trials on Soylent. Rhinehart’s real goal, however, is more ambitious: the company has been testing an omega-3 oil that comes from algae instead of from fish oil. Eventually, Rhinehart hopes, he will figure out how to source all of Soylent’s ingredients that way—carbohydrates, protein, lipids.  ‘Then we won’t need farms’ to make Soylent, he said.”

Liquid concoctions that provide necessary nutrients are not new.  They are usually consumed for health reasons and are often combined with some quantity of traditional foods.  Others entrepreneurs are focusing not so much on replacing traditional food as on providing a product that is healthier than natural foods and perhaps tuned to an individual’s body chemistry.

One problem with all of these possibilities is that we cannot possibly know what the long-term effects might be.  Soylent-like approaches eliminate many things that we normally ingest with our food.  What if the “35 nutrients required for survival” are really 36?  And surviving and thriving are not necessarily the same things.  Even the “clean room conditions” in the vertical farms might prove dangerous.  We evolved in an environment laden with bacteria, viruses, and parasites.  Some of those we normally encounter in farmed food might prove valuable.  It will take a long time before any subtle effects become known.

Political and cultural inertia will be difficult to overcome if we are going to reinvent agriculture.  We messed with agriculture once when we encouraged the conversion of corn to gasoline.  That soon became a dumb idea, but now we are stuck with it.  There is a money-making industry out there that fights to maintain itself and we seem to be powerless to counter it.  How many stake holders would be hurt in the conversion to a system of vertical farms is difficult to even guess.  We would be living in interesting times.

In any event, it is encouraging to realize that there are options out there.  Let the times be interesting!

Charity Scams: Private Foundations and Donor-Advised Funds

Lewis B. Cullman is a wealthy old man who has given many millions to charitable causes.  He was in a bad mood when he wrote an article for The New York Review of Books in 2003.  It was titled Private Foundations: The Trick.  Scam would have been a more appropriate term, but Mr. Cullman is apparently also a gentleman.

“The next time you read about a rich person donating $100 million to charity, you should be aware that this seemingly generous gift may never actually reach the institutions that need it. The chances are that the donation is being used to set up a private foundation. The gift will earn the donor a full deduction against income or estate taxes. But the little-understood trick of this form of philanthropy is that the $100 million that launched the foundation need never go to charity.”

The “trick” involves hiding behind the IRS requirement that private foundations must spend at least 5% of their assets each year.  However, the IRS does not require those funds be issued as a grant of some sort.  It is perfectly legal to charge 5% against the assets for administration costs.  Consider also that it is relatively easy for smart money managers to earn at least 5% on $100 million nest eggs.  Given that private foundations have no termination date, a charitable foundation could go on forever without donating a significant amount to charity.

“Some large foundations typically pay out about 3 percent of their assets each year in the form of charitable gifts and divert 2 percent to administrative expenses and the like. Since even a mediocre money manager should be able to average a 5 percent return on a foundation’s principal, the IRS is in effect requiring that the foundation spend only its income plus capital gains. None of the principal need go to an active charity that provides services.”

Now consider the wealthy person who wanted to avoid estate taxes and still provide for his children.  The $100 million could be administered by a son or daughter or multiple offspring.  This task would provide a salary and expense account worth millions every year that could be passed on to subsequent generations.

Cullman’s anger arises from the fact that many of those who use this procedure to avoid taxes are also using it to avoid actually contributing the money to charity.  He was still angry a month ago when he returned to the same publication with a new article: Stop the Misuse of Philanthropy!

“In the past twenty years, I’ve given away close to $500 million of my own money.”

“At ninety-five, as a businessman and philanthropist, I want to call attention to little-known ploys in US philanthropy that rob our society of hundreds of millions of dollars earmarked for important charitable causes—leaving money stashed away in financial institutions and doing no good for anyone except money managers and other financial intermediaries.”

Cullman renews his disgust with private foundations and adds this bit of information:

“Recent estimates indicate that at least $700 billion is tucked away in private foundations, money that could be doing good for charities and for the economy—and you and I as taxpayers have underwritten the tax benefits awarded those foundations.”

The real reason for the current article is to alert us to what he fears is yet another scam that diverts money from charitable purposes to feather the nests of investment managers.

“The more aggressive game in philanthropy I have in mind, one with a soothing but misleading name, is called Donor-Advised Funds (DAFs). Back in 1991, the Boston-based Fidelity Investments applied to the Brooklyn IRS and got a ruling that drastically changed the tax landscape governing charitable donations.”

A Donor-Advised Fund appears to be a simplified way to shelter funds from taxes, but without the hassle of setting up a foundation.  Ownership of the funds is transferred to whomever is administering the fund— Fidelity for example.  The donor can specify when and how the funds are to be distributed.  It is not clear what happens when the donor passes on.  Presumably, the administrators acquire full control. 

“Donors get the same tax benefits when they give to a DAF that they would get by contributing to a museum, soup kitchen, university, or any other federally accepted charity. But rather than having the gift made directly to a charity, the funds can simply sit in the account awaiting instructions from the donor. If the donor never gets around to making distributions, they stay in the account earning substantial fees for investment managers. Recently, mutual fund management companies such as Fidelity, Vanguard, and Charles Schwab have set up separate charity accounts to compete for funds.”

“Professor Ray Madoff at Boston College Law School has long argued for laws that require timely payouts from DAFs; she says that there is now more than $60 billion tied up in them, and that the amount of money involved is growing at a high rate. Rather than the American people benefiting, it’s Fidelity and others who are thriving.”

Cullman finishes with this wish.

“Before I hit one hundred, I’d like to see all money designated as “charitable”—which the American government and its people underwrite through tax deductions—get into the hands of those who really need it. There should be a simple, uncomplicated bill relating to foundations and DAFs, fair and easy to understand, requiring that donated money not come under the control of profit-making financial managers.”

Some are distressed to learn how so little of the funds ostensibly designated as charitable contributions actually arrive in the hands of charitable organizations.  Others are outraged to learn how easy it is to avoid taxes and create a legacy to be passed on like an inheritance.  Those in this latter class can stoke their populist indignation by checking out an article in Slate by Alexander Arapoglou and Jerri-Lynn Scofield: 10 tax dodges that help the rich get richer.

Some might also find it useful as an estate-planning tool.

Placebos and Super Placebos: Medical Procedures and Drugs

The following is a good dictionary definition of the term “placebo.”

“a substance that is not medicine but is given to a patient who supposes it to be a medicine, either to appease a patient or as a control in an experiment”

The experiments referred to are generally clinical trials being run to determine the efficacy of a drug in treating a particular medical condition.  These trials are required to test medicines against a placebo because of the “placebo effect.”  If you give a sick person a pill and tell them it might make them feel better, there is a tendency for the person to feel as though they have improved even if the pill contained no medication at all.  This means that if you do give a person a specific medication she might feel better from this placebo effect rather from any actual medical change.  Consequently, medications are generally tested against placebos by giving a fraction of the patients a placebo and a fraction the actual medication.  The participants in these studies are aware that they may receive a placebo.

For this type of testing to work, the subjects cannot know whether they are given the actual medication or some inert substitute.  Generally, those performing the study will not know either in order to prevent inadvertent clues being provided to the subjects.  This process seems straightforward in principle, but it can be complicated in practice.

Aaron E. Carroll provided an interesting article in the New York Times that tells us that placebo effects are applicable to more than drug delivery: The Placebo Effect Doesn’t Apply Just to Pills.  Carroll provides examples where mock surgical procedures were performed in order to determine the existence of a placebo effect.

“At the turn of this century, arthroscopic surgery for osteoarthritis of the knee was common. Basically, surgeons would clean out the knee using arthroscopic devices. Another common procedure was lavage, in which a needle would inject saline into the knee to irrigate it. The thought was that these procedures would remove fragments of cartilage and calcium phosphate crystals that were causing inflammation. A number of studies had shown that people who had these procedures improved more than people who did not.”

A number of people were suspicious that these procedures might not actually be effective.  In 2002 a study was performed with the equivalent of a placebo control.

“A total of 180 patients who had osteoarthritis of the knee were randomly assigned (with their consent) to one of three groups. The first had a standard arthroscopic procedure, and the second had lavage. The third, however, had sham surgery. They had an incision, and a procedure was faked so that they didn’t know that they actually had nothing done. Then the incision was closed.”

The result was that those receiving the placebo treatment—the sham surgery—thought that they had improved as much as those who had actually received the procedures.

“The results were stunning. Those who had the actual procedures did no better than those who had the sham surgery. They all improved the same amount. The results were all in people’s heads.”

Carroll provides some additional examples where the efficacy of medical procedures turned out to be determined by a placebo effect.

“In 2005, a study was published in the Journal of the American College of Cardiology proving that percutaneous laser myocardial revascularization, in which a laser is threaded through blood vessels to cut tiny channels in the heart muscle, didn’t improve angina better than a placebo either.”

“A study published in 2003, without a sham placebo control, showed that vertebroplasty — treating back pain by injecting bone cement into fractured vertebrae — worked better than no procedure at all. From 2001 through 2005, the number of Medicare beneficiaries who underwent vertebroplasty each year almost doubled, from 45 to 87 per 100,000. Some of them had the procedure performed more than once because they failed to achieve relief. In 2009, not one but two placebo-controlled studies were published proving that vertebroplasty for osteoporotic vertebral fractures worked no better than faking the procedure.”

Carroll’s complaint is that introducing sham surgeries in order provide an assessment of the strength of a placebo effect is an approach that has been around for a long time, but it is too rarely used.  We subject a lot of patients to procedures of unproven validity and only think to verify them later, after the fact.

“Earlier this year, researchers published a systematic review of placebo controls in surgery. They searched the medical literature from its inception all the way through 2013. In all that time, they could find only 53 randomized controlled trials that included placebo surgery as one option. In more than half of them, though, the effect of sham surgery was equivalent to that of the actual procedure.”

One of the problems that arise with placebo controls in such studies is that subjects might be able to guess that they were recipients of the placebo and negate the effect.  Anesthesia and an actual incision would make that type of guess more difficult.  The use of sham surgeries might be referred to more accurately as utilizing an active placebo, or a super placebo.

Placebo effects are particularly important in evaluating medications targeting mental health issues.  They are very strong in these cases and can be subject to manipulation.  Marcia Angell provided an article in The New York Review that discusses the issues: The Epidemic ofMental Illness: Why?

Angell reports on the work of Irving Kirsch who published his findings in the book The Emperor’s New Drugs: Exploding the Antidepressant Myth.  Kirsch spent fifteen years trying to discover whether antidepressant drugs actually work.  His interest arose from a study of the effect of placebos.  In reviewing a large number of published clinical trials he discovered:

“Most such trials last for six to eight weeks, and during that time, patients tend to improve somewhat even without any treatment. But Kirsch found that placebos were three times as effective as no treatment. That didn’t particularly surprise him. What did surprise him was the fact that antidepressants were only marginally better than placebos. As judged by scales used to measure depression, placebos were 75 percent as effective as antidepressants.”

When drug companies perform clinical trials they don’t do just one.  Normally, they will do a number and they tend to promote publically those that make their product look good.  They often choose to bury those that do not make their product look good.  In a situation such as that involving antidepressants where efficacy appears marginal, one would really want to make sure that all the data was being evaluated.  As Angell points out:

“If two trials show that the drug is more effective than a placebo, the drug is generally approved. But companies may sponsor as many trials as they like, most of which could be negative—that is, fail to show effectiveness. All they need is two positive ones.”

“This practice greatly biases the medical literature, medical education, and treatment decisions.”

Unfortunately, the FDA allows drug companies to treat all results as proprietary data that can be withheld from the public.  Kirsch’s next step was to look at the broader set of data held by the FDA using the freedom of information path to gain access.  He examined data on six drugs: Prozac, Paxil, Zoloft, Celexa, Serzone, and Effexor.

“Altogether, there were forty-two trials of the six drugs. Most of them were negative. Overall, placebos were 82 percent as effective as the drugs, as measured by the Hamilton Depression Scale (HAM-D), a widely used score of symptoms of depression. The average difference between drug and placebo was only 1.8 points on the HAM-D, a difference that, while statistically significant, was clinically meaningless. The results were much the same for all six drugs: they were all equally unimpressive. Yet because the positive studies were extensively publicized, while the negative ones were hidden, the public and the medical profession came to believe that these drugs were highly effective antidepressants.”

Kirsch took advantage of other studies that indicated drugs that had no relation to the treatment of depression performed as well as the antidepressants on subjects.  What these various drugs had in common was the fact that they produced side effects in those who took them.  Kirsch suspected that it was the presence of side effects that was critical.  A fraction of the subjects receiving a placebo in a clinical trial might be concluding that the absence of a side effect was evidence that they had received a placebo, thus limiting the validity of the trial’s results.

“To further investigate whether side effects bias responses, Kirsch looked at some trials that employed ‘active’ placebos instead of inert ones. An active placebo is one that itself produces side effects, such as atropine—a drug that selectively blocks the action of certain types of nerve fibers. Although not an antidepressant, atropine causes, among other things, a noticeably dry mouth. In trials using atropine as the placebo, there was no difference between the antidepressant and the active placebo. Everyone had side effects of one type or another, and everyone reported the same level of improvement. Kirsch reported a number of other odd findings in clinical trials of antidepressants, including the fact that there is no dose-response curve—that is, high doses worked no better than low ones—which is extremely unlikely for truly effective drugs.”

Kirsch is not the only investigator to take the trouble to look at all the data, not just that publicized by the drug companies, and conclude that antidepressants work no better than a placebo.  Such a conclusion poses ethical and medical problems for those who prescribe such drugs.  Daniel J. Carlat is a psychiatrist who addresses these issues in his book Unhinged: The Trouble with Psychiatry - ADoctor's Revelations about a Profession in Crisis.

Carlat does not seem to be aware of Kirsch’s work, but he is familiar with a similar effort by the psychiatrist Erick Turner that came to the same conclusion. 

“Eventually, Turner and his colleagues tracked down the fate of all the research that had been submitted to the FDA about twelve newer antidepressants approved from 1987 to 2004.  This included all the SSRIs, both of the dual reuptake inhibitors (Effexor and Cymbalta), and several other antidepressants, such as Wellbutrin, Remeron, and serzone.”

Carlat defines the problem he faces as a psychiatrist:

“If I relied on the published medical literature for information (and what else can I rely on), it would appear that 94 percent of all antidepressant trials were positive.  But if I had access to all the suppressed data, I would see that the truth is that only about half—51 percent—of trials are positive.  Turner calls this the ‘dirty little secret’ of the psychiatric world.”

Carlat recognizes that Turners findings suggest that antidepressant drugs are acting as no more than a placebo—an expensive and dangerous placebo.  He deals with this by concluding that the clinical trials run by the drug companies are irrelevant to the “real” depression patients he sees.

“Companies have found by experience that if they want to be sure their drug outperforms a placebo, they have to be very picky about which patients are allowed into the study.”

He describes a study by Mark Zimmerman, a psychiatrist at Brown University, who applied the exclusions that drug companies usually apply to subjects for clinical studies and concluded that only 8.3 percent of a population 346 patients who showed up at a hospital for treatment of depression would have qualified for a clinical study.  This allowed Carlat to draw the following conclusion:

“The bottom line is that antidepressant research studies are not generalizable to real patients, meaning that few of their results, whether positive or negative, are reliable indicators of what would happen to your mood on antidepressants.”

Given this, Carlat decides that he and other psychiatrists are the best judges of the efficacy of prescribing antidepressants.  And even though most, or perhaps all, of the effect of the drugs might be due to a placebo effect, they believe it is still appropriate to prescribe them.

“….if you ask any psychiatrist in clinical practice, including me, whether antidepressants work for their patients, you will hear an unambiguous ‘yes.’  We see people getting better all the time.  True, much of the response is due to the placebo effect, but it would be deceptive for me to prescribe a sugar pill to my patients while telling them that it is a real medication.  So I am stuck with prescribing active psychotropic drugs in order to activate the placebo, with the main disadvantage being that such drugs have far more side effects.”

What this discussion should make clear is that placebo effects are strong.  Perhaps that is why witch doctors managed to stay in business for so long.

Placebo effects are important but not well understood.  Their existence suggests that the brain has means to either accentuate or alleviate feelings of pain and discomfort.  Placebo effects can often compete with surgery and powerful drugs in controlling symptoms.  Given that, it is disturbing that no one seems to be interested in discovering ways to activate them that do not involve surgeries and powerful drugs. 

Unfortunately, to understand the medical industry it is necessary to follow the money.  There are fortunes to be made in delivering drugs and procedures.  The interest is more in eliminating placebo effects because they interfere with business plans. 

Inheritance, the Propagation of Wealth, and Inequality

We in the United States like to think of ourselves as a meritocratic society—one in which wealth is accumulated by a combination of hard work, talent, and creativity.  However, wealth need not be earned; it can be inherited as well—a mechanism that is definitely not meritocratic.  Societies dominated by transmitted wealth are associated with now-defunct aristocracies of an earlier century.  One assumes—particularly in the United States—that we now we live in a much different society.  But is that true?

Thomas Piketty set out to assemble data so that a historical record of such fundamental quantities as wealth, its distribution, and its mode of transmission could be obtained in order to determine just exactly how our economies and societies have operated in the past, and how they might operate in the future.  His results are summarized in his best-selling book Capital in the Twenty-First Century.  One hopes that everyone who buys the book actually reads it.

In Piketty’s usage, wealth and capital are essentially interchangeable terms.  Capital is anything that has a marketable value.

Piketty includes this comment on the state of knowledge concerning inheritance as an economic issue.

“….the unreliability of the US sources makes it very difficult to study the historical evolution of inheritance flows in the United States with any precision.  This partly explains the intensity of the controversy that erupted in the 1980s over two diametrically opposed economic theories: Modigliani’s life-cycle theory, and with it the idea that inherited wealth accounts for only 20-30 percent of total US capital, and the Kotlikoff-Summers, according to which inherited wealth accounts for 70-80 percent of total capital.

“I was a young student when I discovered this work in the 1990s, and the controversy stunned me: how could such a dramatic disagreement exist among serious economists?”

Here were two economists proposing theories based as much on philosophy, or bias if you prefer, as on fact.  One assumed that wealthy people spent down their resources after they retired and quit earning income, while the other assumed that wealth persisted.  The data to decide between these contrasting viewpoints did not exist.  Piketty ultimately estimates that Kotlikoff and Summers were closer to reality at the time with a value of at least 50-60% for the private wealth accounted for by inheritance.

When Piketty became a practicing economist he spent some time in the United States and encountered a continuing tendency to propose and argue economic concepts that were little more than hypotheses with no data with which to evaluate them.  Piketty became disillusioned with this process. 

It is always a pleasure observe professional economists receive a well-deserved slap in the face.  Piketty obliges.

“To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.  Economists are all too often preoccupied with petty mathematical problems of interest only to themselves.  This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”

Piketty returned to his home country of France, partly because France had accumulated the best set of historical economic date, and partly because there was a better climate there for doing productive research.

“There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and institutional world or by political and financial elites.  Hence they must set aside their contempt for other disciplines and their absurd claim to scientific legitimacy, despite the fact that they know almost nothing about anything.  This, in any case, is the charm of the discipline and of the social sciences in general: one starts from square one, so that there is some hope of making major progress.”

France has been keeping detailed records of property and property transactions since the eighteenth century.  That is what allows Piketty to determine with some confidence the degree to which wealth and its distribution was determined by inheritance over much of modern history.

The importance of inherited wealth in French society is illustrated in the following chart (Picketty makes his charts and data available here).

This shows the cumulative value of inherited wealth as a percentage of the total wealth of the living over time.  The long period before 1910 was a stable period of low growth.  Piketty has shown that is a condition that favors growth of capital over growth in income from wages.  That period, known in France as the Belle Époque, was characterized by large fortunes possessed by a relatively few individuals.  Piketty has also shown that wealth tends to breed more wealth, and the greater the wealth the faster it breeds.  The amount of wealth that is inherited wealth continues to grow until it reaches about 90% just before World War I.  The period from 1910 to about 1970 indicates a large decrease in inherited wealth, followed by a significant recovery after 1970.

Almost every chart Piketty produces indicates the period that spans World War I, the Great Depression, World War II, and the period of reconstruction that followed, roughly 1910 to 1970, is an anomalous period in economic history.  It is interesting—or perhaps alarming—to consider that this is also the period in which most of our economists, social scientists, and politicians formed their world views.  Piketty constantly reminds the reader that no developed society can maintain the levels of economic growth we have come to expect based on the experience of the postwar years.  One of his messages to us is that the most likely outcome for us is that per capita growth will return to its pre-catastrophe levels of 1.0-1.5% per year.  This is an environment that favors the accumulation of wealth from capital ownership.  If we are not alert, we might find ourselves returning to the levels of inequality that existed in the Belle Époque.

Piketty extrapolates the growth in inherited wealth out to the end of the century using two views of the future.  Assuming a relatively high economic growth and a relatively low return on capital, he arrives at an estimate of about 80% of wealth derived from inheritance.  Under the assumption that the future will look more like the historical norm, the fraction reaches 90%, back to the level of the Belle Époque.

Wealth seems to have its own particular dynamic, but the nature of wealth and how it is treated has changed.  Consider the following chart tracking the average wealth of individuals at death relative to the average wealth of living individuals.  Note the significant change in the amount of wealth distributed in the form of gifts prior to death. At present, the wealthy in France are distributing about half their wealth as gifts before they die.  This is a large effect and it must be taken into consideration for the effect it has on the propagation of wealth and wealth inequality.

Piketty points out that in the earlier periods much of the gift giving was in the form of dowries.  One might expect that in an era of large fortunes, gift giving in order to fund an entrepreneurial adventure by a comfortably wealthy child might be a low frequency event. 

One of the consequences of the extreme events of 1910-1970 was that wealth was diluted as large fortunes were reconstituted into a greater number of smaller fortunes.  In the postwar years of great economic growth many more people had the opportunity to acquire capital, such as real estate, either by saving or by investment.  That created a society dominated by what Piketty refers to as petits rentiers.  Whereas the Belle Époque society of rentiers sat back and harvested the returns from their capital, Piketty observes that the top 1% in France today gains about half of their income from inherited wealth and half from earned income.

Piketty does not claim to understand exactly what the strategy might be behind the dramatic increase in gift giving over recent decades, but it clearly must be aimed at optimizing the wealth opportunities of children or other peers.  If most people considered wealthy today require a mixture of earnings from inheritance and earnings from labor, then a wealthy parent would wish to provide financial assistance to a child at the time it is most useful to the child.  That time would come relatively early in the child’s adult life, rather than at the time of the parent’s death.  Piketty indicates that the gift giving is often in the form of real estate transactions.  In the United States, home ownership has long been the entry point to wealth accumulation.

The existence of a cadre of people sufficiently wealthy that they can contribute a large fraction of their wealth to their children, and still be able to support themselves through retirement until deceased, must be evaluated in terms of the effect on inequality within society.

“….whatever the exact role of each of the possible explanations, the fact is that the upsurge in gift giving, which we also find in other European countries, including Germany, is an essential ingredient in the revived importance of inherited wealth in contemporary society.”

In order to illustrate the significant role that inheritance plays in society, Piketty has derived the following chart. 

Piketty provides this explanation:

“It is the percentage of individuals in each cohort who inherit (as bequest or gift) amounts larger than the least well paid 50 percent of the population earn in a lifetime.  This amount changes over time: at present, the average annual wage of the bottom half of the income distribution is around 15,000 euros, or a total of 750,000 euros [about $945,000 today] over the course of a fifty-year career….According to my estimates, the proportion has already risen to about 12 percent for cohorts born in 1970-1980 and may reach or exceed 15 percent for cohorts born in 2010-2020.  In other words, nearly one-sixth of each cohort will receive an inheritance larger than the amount the bottom half of the population earns through labor in a lifetime. (And this group largely coincides with the half of the population that inherits next to nothing.)”

He also provides this warning:

“This is….a fairly disturbing form of inequality, which is in the process of attaining historically unprecedented heights.  It is also more difficult to represent artistically or to correct politically, because it is a commonplace inequality opposing broad segments of the population rather than pitting a small elite against the rest of society.”

What does this imply for inheritance and wealth in the United States where data is scarce and much of it is based on surveys?  Piketty provides this warning:

“In France, for example, we find that gifts and bequests declared in the surveys represent barely half the flow observed in the fiscal data….”

Piketty’s best estimate is that the share of inherited wealth in the United States was “somewhat” smaller at the beginning of the current century.  Recall that he estimated the share in the 1970-1980 period to be in the range of 50-60%, a value not too different from that in France at that time.

“….this difference between Europe and the United States has little to do a priori with eternal cultural differences: it seems to be explained mainly by differences in demographic structure and population growth.  If population growth in the United States someday decreases, as long-term forecasts suggest it will, then inherited wealth will probably rebound as strongly there as in Europe.”

The economic history of the United States differs considerably from that of France due to quite different demographic and social evolutions.  However, because the pasts differed it is not appropriate to assume the futures will differ.  Piketty’s data indicate current trends that seem to be quite similar among the developed countries.  If our wealth distributions and inheritance flows are not exactly equal to those of France today, they seem to be headed in the same direction.

Let us return to the original question.  Given what we learned from Piketty’s data, should France be considered a meritocracy?  Should the United States be considered one?

What social science tells us is that in the United States if you are born wealthy, you will most likely die wealthy.  Conversely, if you are born poor, you will most likely die poor.  It is easy to understand why being born poor might make it unlikely that one could rise to a much higher economic status.  It is less obvious why it seems to be difficult for the wealthy to lose that status—no matter how hard they might try.

What Piketty’s data on inheritance tells us is that there is a significant population of the wealthy with sufficient resources to not only maintain their status, but to also convey it their children.  It is not a question of the 1% versus the 99%.  The self-sustaining wealthy class is broader than 1%.

There is a class consisting of perhaps 10% or more who have access to more money—via gift or bequest—than many people earn in a lifetime.  These people also have access to the best education and the best social capital.  These are the self-sustaining wealthy, a class which seems to have little flow across its boundary in either direction.

It is difficult to think of this situation as being representative of a meritocracy.  The more important consideration is whether or not this is a desirable—or even viable—societal model.  Piketty and many others would argue that it is not.  Many would argue that it is the inevitable—and even desirable—outcome of a capitalist system.

We must thank Piketty for providing us this information.  We must also thank him for reminding us that economists rarely know what they are talking about. 

Many economists seem to believe their roll in life is to provide justification for the offenses of capitalism.  They even go so far as to try to convince us that our society should conform to the rules of capitalism rather than have capitalism conform to the rules of society.  This is a view that finds favor with those wealthy enough to purchase allegiances and have their views publicly promoted. 

The decision as to whether our society and our economy are headed in a proper direction is one that society must make.  Piketty seems to believe that this ever-growing concentration of wealth is dangerous and must be addressed; the proper way to address it is with small but progressive tax on wealth.  Perhaps it is time to consider such an option.  Capitalism would hardly notice.

Aging: Why Would a 57-Year-Old Man Want to Die at 75?

Ezekial J. Emanuel has written a thought-provoking article for The Atlantic: Why I Hope to Die at 75.  Emanuel is currently 18 years away from this target age, but from his current position, it appears that by the age of 75, life is sufficiently degraded that it is not worth fighting for.  His title is a bit misleading; he does not actually wish to die at 75; rather, he believes that at that age he should not take measures to extend his life.  As one who is less than five years from Emanuel’s target age, I find this topic rather interesting.

Emanuel cites positive factors that have entered into his decision.

“By the time I reach 75, I will have lived a complete life. I will have loved and been loved. My children will be grown and in the midst of their own rich lives. I will have seen my grandchildren born and beginning their lives. I will have pursued my life’s projects and made whatever contributions, important or not, I am going to make. And hopefully, I will not have too many mental and physical limitations. Dying at 75 will not be a tragedy.”

He also cites negative factors that were determinative.

“Doubtless, death is a loss. It deprives us of experiences and milestones, of time spent with our spouse and children. In short, it deprives us of all the things we value.”

“But here is a simple truth that many of us seem to resist: living too long is also a loss. It renders many of us, if not disabled, then faltering and declining, a state that may not be worse than death but is nonetheless deprived. It robs us of our creativity and ability to contribute to work, society, the world. It transforms how people experience us, relate to us, and, most important, remember us. We are no longer remembered as vibrant and engaged but as feeble, ineffectual, even pathetic.”

He plans, when he reaches 75, to stop taking measures intended merely to extend his life.  There would be no more screenings or preventive tests looking for problems to fix.  Life prolonging measures that will no longer be allowed include things like getting a flu shot or taking an antibiotic to fight an infection.  The only care he would allow is palliative care to treat pain and discomfort, not curative treatments.

One might counter Emanuel by claiming that 18 years is a long time and medical advancements are likely to greatly alter what life might be like when he reaches 75.  However, Emanuel has an excellent counter for that logic.  He points to a study by Eileen Cummins and Hiram Beltran-Sanchez that spanned the years between 1996 and 2008 and concluded that we are not living longer and healthier lives.  In fact, we are acquiring chronic, debilitating diseases at an earlier age and suffering decreased physical mobility at an earlier age as well.  Our longer lives are due to medical interventions that keep our bodies running a bit longer.  Emanuel summarizes this observation with some apt words from Crimmins:

“As Crimmins puts it, over the past 50 years, health care hasn’t slowed the aging process so much as it has slowed the dying process.”

The life expectancy of a male at 75 is about 86 years.  Emanuel seems to believe that those extra ten or eleven years would likely not be worth living through.  He implies that those are years of debilitation and lessening ability to pursue positive experiences.  Perhaps it would have been wise to query those who are actually living through those years in order to discover how they view their life. 

An interesting article appeared in The Economist a few years back titled The U-Bend of Life.  It begins with this lede:

“Why, beyond middle age, people get happier as they get older”

The article reported on a number of studies of how people viewed their lives at various ages in life.  What persists as a universal phenomenon is a “u-bend” in the curve of personal satisfaction versus age as illustrated in the following chart.

“….interest in the U-bend has been growing. Its effect on happiness is significant….It appears all over the world. David Blanchflower, professor of economics at Dartmouth College, and Mr Oswald looked at the figures for 72 countries. The nadir varies among countries—Ukrainians, at the top of the range, are at their most miserable at 62, and Swiss, at the bottom, at 35—but in the great majority of countries people are at their unhappiest in their 40s and early 50s. The global average is 46.”

There does not appear to be a single compelling explanation for why people are, on average, happier and more satisfied with their lives as they become elderly.  This article suggests physical and mental changes that occur as part of the aging process and are not related to economic or other circumstances.

“….control for cash, employment status and children, and the U-bend is still there. So the growing happiness that follows middle-aged misery must be the result not of external circumstances but of internal changes.”

“People, studies show, behave differently at different ages. Older people have fewer rows and come up with better solutions to conflict. They are better at controlling their emotions, better at accepting misfortune and less prone to anger.”

It seems clear that, one way or another, the elderly come to terms with increasing sickness and debility and continue to find ways to derive satisfaction from life.  The elderly themselves have proclaimed this to be true.

It is also informative to assess the feelings of those who have already lived longer than any of us have any right to expect.  A couple of nonagenarians have recently looked back at their lives, expressed feelings about their current precarious state of health, and discussed how they deal with the nearness of death.  Roger Angell produced This Old Man for The New Yorker.  Doris Grumbach provides The View from 90 in The American Scholar.  Both authors continue to work and have produced fascinating and exquisitely constructed essays.  The word “fortunate” appears often—and no one would consider them “feeble, ineffectual, even pathetic.”

Emanuel, while dwelling in the darkest part of man’s life-experience, looks to the future and despairs.  He has formed and expressed his opinion while residing in a relative chasm of human discontent.  There are conditions that could lead one to decide that life is not worth living, but would appear wise to wait until they actually occur before one makes life-termination decisions.  Perhaps he would be better served, now and in the future, by accepting the “u-bend of life” and looking forward to an interesting and satisfying old age.

Emanuel worries that he will no longer be “creative” at age 75.  If one were to grade the essays produced by Angell and Grumbach with that of his on content and style (creativity if you wish), the nonagenarians would win hands down.  If Emanuel feels he is not creative and cannot enjoy life when he reaches 75, he should examine his own character to discover the problem.

I especially enjoyed Doris Grumbach’s final thought on her 90-plus years.

“However death arrives, in installments or in one instant stroke, I regard myself as fortunate. I will be able to echo the last words of Lady Mary Wortley Montague (who died in 1762):

‘It has all been very interesting’.”