Karl Smith has been predicting for a while that pent-up demand for cars and housing will start to drive economic recovery in the very near future. Today, he notes that auto sales are starting to rebound, apartment construction is up smartly, and private forecasters are starting to project nice GDP gains in the fourth quarter:

As long as Europe doesn’t destroy the world — and it very well may — I expect Multi-Family starts to be posting record highs by the end of 2012.

And I mean record, never before in American history will construction be started on so many apartment complex units.

I continue to think that debt constraints are going to keep growth reined in for a while, and that both Europe and China might have serious effects on the U.S. economy in the near term. Still, there's also reason for optimism, and I think Karl makes about as good a case as anyone for it.

Last year, Judge Vaughn Walker ruled that Proposition 8, a California initiative banning same-sex marriage, was unconstitutional. The initiative's backers wanted to appeal the decision, but neither California's governor nor its attorney general was willing to defend it. With no one to defend it, Walker's ruling would have stood by default and same-sex marriage would have been legal in California.

Yesterday, the California Supreme Court ruled unanimously that Prop 8's backers could defend the initiative if the state wouldn't:

Thursday's unanimous decision, written by Chief Justice Tani Cantil-Sakauye, strongly affirmed that ballot sponsors may represent California in defending initiatives when elected officials fail to do so...."Neither the Governor, the Attorney General, nor any other executive or legislative official has the authority to veto or invalidate an initiative measure that has been approved by the voters," Cantil-Sakauye wrote for the court.

Legal scholars said the state high court's decision was so adamant that the U.S. Supreme Court, which could decide marriage rights as early as 2013, was unlikely to limit its ruling to the narrow and technical issue of "standing," a legal term for the right to go to court.

It feels more than usually loathsome to take sides with the Prop 8 folks here, but this is a good decision. It would be a travesty if a successful ballot measure could be overturned by a single district court judge and then, by virtue of a procedural formality, stay overturned simply because state officials declined to defend one of their own laws. If the tables were turned, I'd be blisteringly outraged by shenanigans like this.

Like it or not, Prop 8 was passed legally and properly. If it's overturned, it should be overturned on its merits — as Walker's decision did — not thanks to a legal technicality. I hope they lose, but Prop 8's backers deserve their day in court.

I don't know if this is firm enough to be worth blogging about, but even if it's not, it'll be interesting to hear physicists cautioning us in comments not to go overboard about what this means. So here it is: three physicists have produced a theorem implying that the quantum wavefunction is not merely a mathematical abstraction that tells us the probability of subatomic particles being in certain locations and having certain properties. The Copenhagen interpretation, they say, is wrong. The wavefunction is an actual physical thing:

“I don't like to sound hyperbolic, but I think the word 'seismic' is likely to apply to this paper,” says Antony Valentini, a theoretical physicist specializing in quantum foundations at Clemson University in South Carolina.

Valentini believes that this result may be the most important general theorem relating to the foundations of quantum mechanics since Bell’s theorem, the 1964 result in which Northern Irish physicist John Stewart Bell proved that if quantum mechanics describes real entities, it has to include mysterious “action at a distance”.

Action at a distance occurs when pairs of quantum particles interact in such a way that they become entangled. But the new paper, by a trio of physicists led by Matthew Pusey at Imperial College London, presents a theorem showing that if a quantum wavefunction were purely a statistical tool, then even quantum states that are unconnected across space and time would be able to communicate with each other. As that seems very unlikely to be true, the researchers conclude that the wavefunction must be physically real after all.

....Their theorem effectively says that individual quantum systems must “know” exactly what state they have been prepared in, or the results of measurements on them would lead to results at odds with quantum mechanics. They declined to comment while their preprint is undergoing the journal-submission process, but say in their paper that their finding is similar to the notion that an individual coin being flipped in a biased way — for example, so that it comes up 'heads' six out of ten times — has the intrinsic, physical property of being biased, in contrast to the idea that the bias is simply a statistical property of many coin-flip outcomes.

So if this is true, what does it mean? In my vague and probably confused understanding of things, I always understood that the wavefunction of Bell's Theorem traveled faster than light. However, that was OK since it wasn't a physical thing and didn't convey any information. But if it's a physical thing, even a massless physical thing, how can that be?

Or does this result mean that entanglement doesn't really operate over long distances in the first place, that particles know their own states all along and don't react to observations of their entangled twin? Help!

In other, probably unrelated news, those Italian researchers who say that neutrinos travel faster than light have doubled down. They now claim to have reproduced their initial results.

The 2-Year Window

In The New Republic this week, Jon Cohn has an eye-opening piece, "The Two Year Window," about advances in the science of early childhood development. It opens with a description of the Bucharest Early Intervention Project, a study that removed infants from warehouse-style orphanages in Romania and adopted them out:

      It was ten years after the fall of the Communist dictator Nicolae Ceau┼čescu, whose scheme for increasing the country's population through bans on birth control and abortion had filled state-run institutions with children their parents couldn't support.... The new government remained convinced that the institutions were a good idea—and was still warehousing at least 60,000 kids, some of them born after the old regime's fall, in facilities where many received almost no meaningful human interaction. [Neuroscientist Charles Nelson] prevailed upon the government to allow them to remove some of the children from the orphanages and place them with foster families. Then, the researchers would observe how they fared over time in comparison with the children still in the orphanages.

…Prior to the project, investigators had observed that the orphans had a high frequency of serious developmental problems, from diminished IQs to extreme difficulty forming emotional attachments. Meanwhile, imaging and other tests revealed that some of the orphans had reduced activity in their brains. The Bucharest project confirmed that these findings were more than random observations. It also uncovered a striking pattern: Orphans who went to foster homes before their second birthdays often recovered some of their abilities. Those who went to foster homes after that point rarely did.

This past May, a team led by Stacy Drury of Tulane reported a similar finding—with an intriguing twist. The researchers found that telomeres, which are protective caps that sit on the ends of chromosomes, were shorter in children who had spent more time in the Romanian orphanages....It was the clearest signal yet that neglect of very young children does not merely stunt their emotional development. It changes the architecture of their brains.

…"The concept of disrupting brain circuitry is much more compelling than the concept that poverty is bad for your health," says Jack Shonkoff, a Harvard pediatrician and chair of the National Scientific Council on the Developing Child. "It gives us a basis for developing new ideas, for going into policy areas, given what we know, and saying here are some new strategies worth trying."

What's new here isn't really the idea that experiences in early childhood are important. In fact, in the era following the Second World War, the idea that habits established early in life are permanent was, if anything, belabored too much. "If mothers did not nurture their infants properly," Jerome Kagan wrote in 1999, criticizing this widespread belief, "their children would be vulnerable to a dull mind, a wild spirit, and a downward spiral…This view of development rests on the assumption that every experience produces a permanent physical change somewhere in the central nervous system, and therefore the earliest experiences provide the scaffolding for the child's future thought and behavior."

What Kagan was criticizing, though, was primarily the idea that particular styles of parenting were necessary to produce well-adjusted children. Generally speaking, that turns out not to be true: You don't need to play Mozart to your baby or jump through hoops to make sure she's properly "attached." Most middle-class kids turn out okay even though they're exposed to a wide variety of parenting styles.

But Cohn's piece is about something different: It's about kids whose infancy is, to put it bluntly, fairly appalling. And not just in warehouses in Bucharest. Diana Rauner visited child care facilities in Chicago while she was working on her doctoral dissertation and "described facilities where infants were strapped in car seats, 'watching The Lion King all day,' while the older kids were 'circling the room almost like sharks' and throwing things at the infants, because they had nothing else to do." That kind of environment, it turns out, can cause permanent cognitive damage, sometimes at a biological level, and it's probably a lot more common than you think.

You can see more of the evidence for the importance of early childhood in the chart on the right, which I posted earlier this year. It comes from James Heckman, probably the preeminent researcher in this area, and it shows average achievement test scores for different classes of children. All show the exact same dynamic: Gaps show up as early as age three and persist pretty much forever. Some of this is due to genetic differences, but not all of it. It's also due to differences in children's early environments. The lesson is simple: If you want to have a real impact on how kids do in school, you have to get to them early.

But even this understates the benefit of intensive early interventions. The payoff, in general, doesn't come in higher test scores, anyway. A large and growing body of research suggests that it comes in other behaviors: for example, the ability to delay gratification, the ability to hold a job, the ability to control your temper, and the ability to stay away from drugs and alcohol.

The problem, of course, is that early intervention costs money. Lots of money. According to Cohn, we currently spend about $11,000 per student in K-12 and about $4,000 per child under the age of four. That's crazy. But if we wanted to equalize that spending, how could we do it? One option is just to raise more money. But if we spent $11,000 for every child under the age of four, that would come to over $100 billion per year in new spending. There's no way that's going to happen.

Another option would be to take the pot of money we already spend and equalize it: spend about $9,000 per child all the way from ages 1-18. Unfortunately, this is hardly any more likely: If we tried to reduce the amount we spend on K-12, teachers unions would go ballistic, ed reformers would go ballistic, and suburban parents would go ballistic. If I were a benevolent dictator, I'd do it anyway, because it would almost certainly be a far better use of our existing money. But I'm not, am I?

Still, this is an area that cuts across party lines and deserves far more attention than it gets. The evidence has been mounting for a long time that intensive early interventions produce a huge bang for the buck, far more than what we spend in primary and secondary schools. The problem is that the bucks have to be spent now, and the bang doesn't arrive for another decade or two. Where's Bill Gates when you need him?

Miscellaneous Links

Some miscellaneous reading that I didn't get around to blogging about today:

Eli Lake writes that Israel is gearing up for a strike on Iran's nuclear program. "Israel has been assembling a multibillion-dollar array of high-tech weapons that would allow it to jam, blind, and deafen Tehran's defenses in the case of a pre-emptive aerial strike....Israel also likely would exploit a vulnerability that U.S. officials detected two years ago in Iran's big-city electric grids, which are not “air-gapped”—meaning they are connected to the Internet and therefore vulnerable to a Stuxnet-style cyberattack—officials say."

The Crystal Cathedral has been sold in bankruptcy to the Diocese of Orange. It will become a countywide cathedral for the Catholic church in Orange County, replacing their current home, St. Callistus.

Ramesh Ponnuru debunks the idea that Republicans lost Congress in 2006 because they had abandoned true conservatism by overspending: "If Republican overspending drove voters away, they should have lost support first among conservatives. But there was no sign of a demoralized base in 2006....It was among independent voters that Republicans got slaughtered." The real problem, he says, is that "Republicans had nothing to say about wage stagnation then and are saying nothing about it now. The real cost of Republicans’ fixation on ideological purity is that it distracts them from their real problems, and the nation’s."

David Corn reports that Newt Gingrich's Center for Health Transformation supports an individual mandate as part of their plan for healthcare reform. Among other things, their proposal would "Require that anyone who earns more than $50,000 a year must purchase health insurance or post a bond." This isn't from last month or last year. It's from today.

Matt Taibbi wants to know why a woman who fraudulently applied for food stamps got three years in jail while Wall Street bigshots have all walked free. "Compare this court decision to the fraud settlements on Wall Street....[Citigroup, Goldman Sachs, and Deutsche Bank] have been repeatedly dragged into court for fraud, and not one individual defendant has ever been forced to give back anything like a significant portion of his ill-gotten gains. The closest we've come is in a fraud case involving Citi, in which a pair of executives, Gary Crittenden and Arthur Tildesley, were fined the token amounts of $100,000 and $80,000, respectively, for lying to shareholders about the extent of Citi’s debt. Neither man was forced to admit to intentional fraud. Both got to keep their jobs."

How does a decline in consumer demand affect different geographic regions? Well, suppose that consumer demand falls heavily in Orange County, where I live. You'd naturally expect to see a large employment drop in industries that are stuck in Orange County and depend solely on Orange Country residents for their business. Local accounting firms, for example. Schools. Restaurants. Construction companies.

But what about industries that sell their stuff all over the country? Pharmaceuticals, say, or high tech or clothing. In Orange County, that would include companies like Allergan, Western Digital, Broadcom, and Quiksilver. You'd expect employment at these companies to react not so much to Orange County, but to the country as a whole. So even if Orange County is doing poorly, these companies might continue to do well as long as the country is doing well.

The first category is called the non-tradable sector. The second is called the tradable sector. So if weak consumer demand is at the core of our economic problems, here's what you'd expect to see:

  • Employment in the non-tradable sector would be worse in counties that are the most depressed.
  • Employment in the tradable sector would be about the same everywhere, and would depend on how the country as a whole is doing.

So is this how things look? Economists Atif Mian and Amir Sufi took a look at tradable and non-tradable employment in all large counties in the United States and plotted it against the level of debt in each county. If consumer demand is responsible for our sluggish economy, you'd expect counties with high debt loads to have employment declines in the non-tradable sectors, but to see no real differences in the tradable sector. And that's exactly what they found:

From the paper:

In order to remove any direct effect of the residential housing boom and bust, we explicitly remove construction or any other real-estate related sector from the non-tradable definition.

Consistent with the aggregate demand channel, job losses in the non-tradable sector from 2007 to 2009 were significantly higher in high leverage counties that experienced sharp demand declines. In particular, a one standard deviation increase in the 2006 debt to income ratio of a county is associated with a 3 percentage point drop in non-tradable employment during this time period, which is 2/5 a standard deviation. Moreover, the large decline in employment in the tradable sector is completely uncorrelated with 2006 debt to income – exactly as predicted by the aggregate demand channel.

This comes via Paul Krugman, who says this paper demonstrates that the data doesn't really fit a structural unemployment story, but instead fits a story in which spending is just too low. "The empirical evidence," he says, "more and more, exhibits a clear Keynesian bias."

For related work from Mian and Sufi on the effect of household debt on unemployment, see this post from earlier in the year.

I haven't read Erik Brynjolfsson and Andrew McAfee's Race Against the Machine yet, but Matt Yglesias has and he says that one of their analogies has changed the way he thinks about technological progress. Basically, if something improves x% per year, then the level of change looks small at first but explodes later, even though the actual rate of change has stayed the same the entire time:

The point of this, in terms of technological progress, is that we’ve gotten so accustomed to Moore’s Law that we sometimes overlook the implication that the deeper we get into the chessboard, the bigger the changes. We all know that computers advanced a lot between 1991 and 2011, but we should expect the scale of change over the next 20 years to dwarf those changes. This is a straightforward application of a well-known principle and some pretty basic math, but it’s usually not discussed in quite the right way. We think we’re used to the idea of rapid improvements in information technology, but we’re actually standing on the precipice of changes that are much larger in scale than what we’ve seen thus far.

This gives me an excuse to make the exact same point in a different way, specifically about the possibility of creating a computer with human-level intelligence. Suppose that in 1950 the fastest computer on the planet had about a trillionth the computing power of a human brain, and suppose also that computing power increases 1000x every 20 years. Here's what things would look like:

  • 1950: Trillionth
  • 1970: Billionth
  • 1990: Millionth
  • 2010: Thousandth
  • 2024: Tenth
  • 2030: One

In 1950, true AI would look like a joke. A computer with a trillionth the processing power of the human brain is just a pile of vacuum tubes. In 1970, even though computers are 1000x faster, it's still a joke. In 1990 it's still a joke. In 2010 it's still a joke. In 2024, it's still a joke. A tenth of a human brain is about the processing power of a housecat. It's interesting, but no threat to actual humans.

So: joke, joke, joke, joke, joke. Then, suddenly, in the space of six years, we have computers with the processing power of a human brain. Kaboom.

Here's the point: technological progress has been exactly the same for the entire 80-year period. But in the early years, although the relative progress was high, the absolute progress was minute. Moving from a billionth to a trillionth is invisible on a human scale. So computers progressed from ballistics to accounting to word processing to speech recognition, and sure, it was all impressive, but at no point did it seem like we were actually making any serious progress toward true AI. And yet, we were.

Assuming that Moore's Law doesn't break down, this is how AI is going to happen. At some point, we're going to go from 10% of a human brain to 100% of a human brain, and it's going to seem like it came from nowhere. But it didn't. It will have taken 80 years, but only the final few years will really be visible. As inventions go, video games and iPhones may not seem as important as radios and air conditioners, but don't be fooled. As milestones, they're more important. Never make the mistake of thinking that just because the growing intelligence of computers has been largely invisible up to now that it hasn't happened. It has.

So what's wrong with the economy? Weak consumer demand seems the most likely candidate, and Karl Smith usefully points out that looking at the Personal Consumption Indicator, which has recovered fairly decently since the recession, doesn't really give you the whole story on this:

Ironically Real PCE does not actually measure consumer spending. This is because to make the metric consistent it has to include implicit spending. Things like the rent that you pay to yourself. Things like the medical bills that Medicare and Medicaid pay on your behalf....Those things, however, are not fungible using cash. It doesn’t matter what is happening to the relative price of potatoes [if] you can’t spend Medicare dollars on them. Thus the pool [of] goods purchased with cash moves separately from the pool of goods either purchased on your behalf by the government or consumed implicitly.

Instead he suggests looking at retail sales, which haven't yet returned to their 2008 peak. But why?

The straightforward explanations for this are either that people are optimally choosing to consume more leisure and fewer goods and services — that is, we are in the midst of a Great Vacation. Or, that something is preventing people from purchasing as many goods and services as our society is capable of producing. Since the former strikes us as so counter-intuitive, we fall back on explanations for the latter.....At certain times, for reasons we don’t completely understand, people suddenly start buying fewer things than we are capable of producing.

Hmmm. In one sense, the reason we're buying fewer things is mysterious, but in another it's not: it's because we don't have enough money. The NGDP targeting folks would probably tell us to look at nominal disposable income, and if you do that you see that we're something like a trillion dollars under the trend growth rate of the last decade. The Fed could do something about that, but it's chosen not to. So the nickel version looks like this: less money --> less demand --> less hiring --> more unemployment --> less money. Rinse and repeat.

This comes via Felix Salmon, but I edited his chart to create a different one. Roughly speaking, mine shows total corporate income tax paid as a percent of pretax profit, and as you can see, it's been on a pretty steady downward trend for a long time, from around 50% in 1950 to 20% today. But of course, this is just an aggregate number. As Felix says, "What we don’t know — because they won’t say, and no one’s forcing them to say — is how much any given public company pays." And you can hardly blame them, since the tax rate for lots of big companies would be so laughably small that no one would ever take them seriously again when they complained about America's terribly burdensome tax system.

None of this is to say that we shouldn't reform the corporate tax code. We should. Intead of a high basic rate with lots of exemptions, we should have a somewhat lower rate with fewer exemptions. And we probably ought to adopt a territorial system while we're at it. Or, alternatively, we could just ditch corporate taxation entirely and replace it with something else that has a similar or more progressive incidence.

But whatever we do, don't ever fall for the complaint that corporate tax rates in the U.S. are high. They aren't. (See Table 1 here.) American taxes are complex, but they aren't especially high.

There's voluminous evidence demonstrating that income inequality has skyrocketed in the United States over the past few decades and is now higher than in virtually every other developed country. This might not be all that bad if income mobility had also increased, but a number of recent studies have shown just the opposite: at best, mobility is no better than it's ever been, and it might actually have decreased a bit. Generally speaking, the rich are a lot richer than they used to be, and unless you start in an upper middle class family to begin with, the odds of ever joining the ranks of the rich have gone down.

But why? The Pew Economic Mobility Project gives us a clue today. The chart on the right compares four big English-speaking countries on a single measure: vocabulary test scores of five-year-olds. You'd expect that children of highly educated parents would do well and children of poorly educated parents would do badly. And you'd be right. On average, the children of poorly educated parents have both genetic and environmental disadvantages, so it's no surprise that they do worse than average.

But in the United States they do a lot worse. The Pew chart is normalized so that children of middle-educated parents score in the 50th percentile and other children are compared to that standard. In Canada, the least-advantaged kids manage to score at the 37th percentile. In the United States they score at only the 27th percentile.

Now, it's pretty unlikely that Canadian kids with low-educated parents are genetically unluckier than American kids with low-educated parents. Genes may account for some of the overall difference between rich and poor kids, but not for the difference between Canada and the U.S. That has a lot more to do with how we raise our kids and what kind of attention we give them at early ages. On that score, the United States does wretchedly. We simply don't give our poorest kids a fair start in life.

More on that tomorrow morning.