Marginal Utility

by Ken Houghton

Don't let anyone ever again tell you that Conservatives support "free trade":

London’s Tory mayor, Boris Johnson, today announced that he was scrapping a discounted oil agreement with Venezuela that provides half price bus fares for London ’s poorest citizens. Fares for those on Income Support are expected to double by the end of year, causing serious financial hardship for 80,000 Londoners who had taken advantage of the scheme....

The agreement, which was negotiated by Johnson’s predecessor, Ken Livingstone, bartered London's strategic advice on city planning for cheap Venezuelan oil.

This is precisely the type of agreement you want to make in free trade: rent out your expertise (a non-rival, public good) for a discount on a commodity that allows you to raise the marginal utility to your population of its government services.

Which is also what Venezuela has been doing with its oil revenues:

Venezuela’s socialist president, Hugo Chavez, has used the proceeds from record oil revenues to roll out free health and education services across the country. Incomes for the poorest 60% of Venezuelans have risen by 130% in real terms, according to surveys conducted for the Venezuelan American Chamber of Commerce.

Now you can argue, as some are prone to do, that making life marginally easier for the poorer members of your society is not a path to growth. But that's an entirely different argument than "we should charge our poorest members of society more."

Isn't it?

Labels: Economic Development, free trade

by Ken Houghton

1. If the prescription for open markets and universal trade used by many of the "Washington Consensus" is accurate, can someone please cite two examples (I'd probably settle for one, but it would have to be a Really Good One) of companies that have made the transition using that method?
   
2. Relatedly, how is a country supposed to develop a Competitive Advantage in such a scenario?

Cross-posted at Economics Question of the Day.

Labels: Economic Development, free riders, free trade

by Ken Houghton

My favorite paper from this year's AEA is now available from NBER (gated; non-gated copy available here).

Also noted, the prepared text for the most interesting presentation (most interesting, to some extent, from the non-prepared text at the beginning) was the lead article in the current issue of Post-Autistic Real World Economics Review (not clearly available on the website; PDF available here; AEA version here).

More later, which probably means the middle of next week.

Labels: Bushonomics, Economic Development, Economics

by Ken Houghton

And the Really Cool Discussions pass me by. (Which is as it should be.)

Fortunately, YouNotSneaky! has my (and your) back. And adds value, increasing returns with:

Socrates thought there were two, maybe three, kinds of people in the world and that you could arrange them in a hierarchy;

1. Those who don't know but think they know.
2. Those who don't know but know they don't know.

and then maybe some lucky ones;

3. Those who know and know they know.

There aren't many people in the 3rd category. But for some reason we always expect our models to move us from the 2nd category to the 3rd. And we're not satisfied if the movement is from the 1st to the 2nd.

and it gets better (and easier to understand, even without the artifice of order) from there.

Labels: Economic Development

by Ken Houghton

Of course, there could very well be some unemployment of workers who know only the old technology—like the original Luddites—and this unemployment will be excruciating to its victims. But workers as a whole are better off with more powerful output-producing technology available to them.
--William Easterly, The Elusive Quest for Growth, p. 54 (MIT pb, 2002)

Conspicuous by its absence is an indicator that the winners will (or should) in any way compensate the losers.*

An alternate view from one of Tom's favorite authors can be found here.

UPDATE: Pynchon presents a timeframe, which gives the lie to Easterly's claim:

But it's important to remember that the target even of the original assault of l779, like many machines of the Industrial Revolution, was not a new piece of technology. The stocking-frame had been around since 1589.

*Credit where due, he refers to them here as "victims."

Labels: Economic Development, history repeated, literature

by Ken Houghton

IOC's Rogge employing 'silent diplomacy' with China-Tibet protests

King Kaufman at Salon, of all people, gives the lie to that claim, while Richard Sandomir of the NYT proves that there are still signs of life there.

But why is it the sports beats that deal with the international issues, with others discussing the situation only when French Prime Minister Sarkozy threatens to boycott the Opening Ceremonies?

Labels: Economic Development, FDI, Journamalism, sports

by Ken Houghton

From David Warsh's Knowledge and the Wealth of Nations:

During the administration of the first President Bush, [Larry] Summers became chief economist at the World Bank, then, after Bill Clinton was elected, rose steadily through the Treasury Department ranks, eventually becoming the youngest treasury secretary since Alexander Hamilton, and finally president of Harvard University. His old friend Andrei Shleifer moved to Harvard from the University of Chicago in 1992 to lead a U.S. mission to Moscow on behalf of the U.S. Agency for International Development. His deputy, J. Bradford Delong, moved to Berkeley, wrote a textbook, and started a widely-read blog.

After finishing the book, I'm not certain that Warsh doesn't believe that DeLong didn't make the best choices of the three. (Nor would I be inclined to argue with that conclusion.)

Labels: Brad DeLong, Economic Development

by Ken Houghton

A couple of days ago, the NY Fed announced that it is closing its Buffalo branch.

There's probably a difference between "bribing people to stay there" and packing the truck for a Hallowe'en exit. But the later hardly sounds as if it were "pursu[ing] policies that help Buffalo’s citizens," unless that help is to convince them, as well, to move out.

Labels: Economic Development, FRBOperations, Optimal Resources

by Ken Houghton

I'm late with this—just finishing five days of flu—but can someone please explain how Brad DeLong, Tyler Cowen, and McMegan, to name three, have decided that there is a new country called "Northern Mexico"?

For some strange reason, I can't find it on the Penn World Tables. And certainly that trio would never cherry-pick data.

Labels: Brad DeLong, Economic Development

by Ken Houghton

Brad DeLong spares no love for Fidel Castro's country (and almost less for Chris Bertram), and expands on this in Comments:

Wrong comparison: Cuba in 1960 is like Costa Rica, northern Mexico, Puerto Rico, or Portugal. The fact that we today think of Cuba as in the same basket as Guatemala, Haiti, or the Dominican Republic is Castro's doing, and is worth thinking about.

As a thought-experiment, following is some data from the Penn World Tables 6.2. First, a comparative table of Cuba against the other Caribbean countries (click to enlarge):

Notes: I start in 1970 because that's where the PWT data does for Cuba, Haiti, and Puerto Rico. Haiti only has data through 2000, and the divisor on gains is adjusted accordingly. (Anyone wishing to argue that Haiti experienced massive growth from 2000-2003? I didn't think so.)

No one would pretend it has been all growth. Indeed, it's messy, although per capita GDP grows.

And a fairly steady investment price level since ca. 1988 (or, if you prefer, since around the fall of the Berlin Wall):

None of this is to pretend that Cuba has been all bread and roses. But romanticizing the Bautista regime ("Cuba in 1960 is like Costa Rica, northern Mexico, Puerto Rico, or Portugal") does very little good.

Labels: Economic Development, Politics

by Ken Houghton

Ricardo Hausmann body-slams the absurd Fed actions and silly stimulus package.

Returning to a sustainable path is good for the US and the world economy over any horizon that assigns some value to what happens after 2008. Sustainable growth is not the consequence of an unsustain­able consumption boom but of the progress and diffusion of science, technology and innovation – which show no sign of slowing down.

An efficient adjustment to the US over-consumption imbalance (and Chin­ese under-consumption) in a way that does not hurt longer-term growth should be based on compensating for the decline of US consumption with an increase in domestic investment and in consumption abroad. It should not be based on giving the US consumer more rope with which to hang himself.

My HELOC is now 151 bp below my mortgage. Time to draw down again, especially given other circumstances. But at least I know this is unsustainable in the long-term.

(Via Dani Rodrik), who pulled the most damning quote.

Labels: Dani Rodrik, Economic Development, FRBOperations, monetary policy, Politics

by Ken Houghton

Thorsten Beck is smarter than I am. But he appears to be surprised by something I would consider intuitive:

Fourteen percent of firms in this sample rely exclusively on informal finance and the percentage goes up as corruption, complexity of taxation (but interestingly not tax rates) and property registration increase. [emphasis mine]

Why would this be confusing? Tax rates may change, but they are fairly stable for planning ROI. Confusion—additional uncertainty—makes rudimentary ROI calculations more problematic (if not more difficult).

It seems evident that, at the margin, a firm would feel more secure making an investment decision based on a known, say, 30% effective tax rate than making a decision that depends on subsequent rangling, even if the most probable effective tax rate is slightly lower than 30%).

What am I missing?

Labels: Economic Development, investment strategies, Tax Incentives

by Ken Houghton

I believe in the Efficient Frontier, and I believe in the Edge of the Universe, but I don't believe they are coterminous (spelling corrected).

Labels: Economic Development

by Ken Houghton

NYT article #1 (United States, early in the process):

Those efforts, and others across the country, reflect a growing sense of urgency among educators that the primary goal of many large high schools serving low-income and urban populations — to move students toward graduation — is no longer enough. Now, educators say, even as they struggle to lift dismal high school graduation rates, they must also prepare the students for college, or some form of post-secondary school training, with the skills to succeed....

By contrast, many urban and low-income districts, which also serve many immigrants, are experimenting with ways to teach more than the basic skills so that their students can not only get to college, but earn college degrees. Some states have begun to strengthen their graduation requirements.

“This is transformational change,” said Dan Challener, the president of the Public Education Foundation, a Chattanooga group that is working with the area public schools. “It’s about the purpose of high school. It’s about reinventing what high schools do.”

NYT Article #2 (India, further in the process):

Sixty years after independence, with 40 percent of its population under 18, India is now confronting the perils of its failure to educate its citizens, notably the poor. More Indian children are in school than ever before, but the quality of public schools like this one has sunk to spectacularly low levels, as government schools have become reserves of children at the very bottom of India’s social ladder.

The children in this school come from the poorest of families — those who cannot afford to send away their young to private schools elsewhere, as do most Indian families with any means.

India has long had a legacy of weak schooling for its young, even as it has promoted high-quality government-financed universities. But if in the past a largely poor and agrarian nation could afford to leave millions of its people illiterate, that is no longer the case. Not only has the roaring economy run into a shortage of skilled labor, but also the nation’s many new roads, phones and television sets have fueled new ambitions for economic advancement among its people — and new expectations for schools to help them achieve it.

That they remain ill equipped to do so is clearly illustrated by an annual survey, conducted by Pratham.... The latest survey, conducted across 16,000 villages in 2007 and released Wednesday, found that while many more children were sitting in class, vast numbers of them could not read, write or perform basic arithmetic, to say nothing of those who were not in school at all.

Among children in fifth grade, 4 out of 10 could not read text at the second grade level, and 7 out of 10 could not subtract. The results reflected a slight improvement in reading from 2006 and a slight decline in arithmetic; together they underscored one of the most worrying gaps in India’s prospects for continued growth. [emphases mine]

The boost in high school graduation rates was the revolution that sparked the 20th century U.S. economy.* If you want a bigger piece of the pie, you don't stand still. Otherwise, you end up with the Indian economy—skills short, training deprived, and unprepared to take the next step.

*It is certainly true that the destruction much of the established non-US infrastructure from 1939 to 1945 helped set the table for the post-WW II boom—but it is even truer that it is only because the U.S. was prepared to take advantage of the opportunity (unlike, say, in 1918) that it worked as well as it did.

Labels: Economic Development, education, human capital

by Ken Houghton

If you're inclined (as I am, no matter what I said earlier) to accept the old Winston Churchill declaration that "It has been said that democracy is the worst form of government except all the others that have been tried," then it becomes necessary to explain why democracy, in the British sense especially and the U.S. sense in large part, largely developed on the backs of colonization (extracting excess rents from people due to asymmetrical information at best, brute force at worst).

Mark Thoma points us to Eric Rauchway's review of Power and Plenty, and lays out the rules:

The logic of counterfactualism is simple, though it remains surprisingly controversial: If you want to say what's good and bad in history, you can't just apply your judgment, but must rather explain what the better or worse alternative might have been. It's not enough to declare that (say) the United States shouldn't have taken the Philippines; one has to argue that had the U.S. refrained, a better x would likely have happened and the worse y would not have. The counterfactualist argues not from absolutes, but from costs and benefits. Ferguson, for example, used the method to argue that the world was better off for the British Empire. (The crude version: You wouldn't want to get colonized by Germany, would you?)

Read the whole thing, but the money quote (for the current subject) comes here:

Even if elements of this story seem familiar, Findlay and O'Rourke tell their tale exceptionally well and give lively attention to alternate possibilities: What should have happened, according to theory? What could have happened, in the realm of plausibility? They find they can cede little to neoliberal economists: Power was generally necessary to secure plenty. "Adam Smith and his liberal followers to the present day, however, would, and have, argued that much of this [state] expenditure was wasted, unnecessarily crowding out more productive private investment. The assumption of course is that the markets and raw material supplies ... would have existed regardless"--which, history suggests, they would not have. Had your empire not secured them, your neighbor's would have, with lasting bad consequences to you. [emphases mine]

If I'm reading this correctly, the only way that economic growth thrives in a democracy is by exploiting an underclass, either directly (colonies, slavery) or indirectly (answering the age-old question of why tropical foods are underpriced).

The other way that worked for a while in the United States (and may still be) is expansion of human capital. The 20th century growth is the story of two things: a three-fold increase in high school graduation rates and the moving of women into the work force* (the latter paralleling but lagging the move from labor-intensive agrarian populace to manufacturing, to be certain).

But there are only so many women, and only so much education that can be viewed legitimately as "investment." Perhaps greater returns are realised from other forms of governance?


*It also reduced the Pigouvian Paradox—the man who marries his housekeeper reduces GDP, even though her efforts on his behalf likely increase.

Labels: Democracy, Economic Development

by Ken Houghton

We (by which I mean Brad DeLong and Tom, but possibly not Chris Dillow or I) believe that economic growth thrives best in a democracy, or at least a democratic republic.* Strong institutions, respect for the rule of law, avenues of redress, all that rot.**

Marshall Jevons notes the imminent death of Suharto (the man whose rule began with Mel Gibson getting a hard knock in the eye), and asks the obvious:

Here's someone who has embezzled huge amounts (15 to 35 billion) of money from state coffers, still loved by the people? Does it really truly reflect the view of the Indonesian people? What lesson can development practitioners learn from it?

With all the talk of Second-Best Institutions, is it possible that Not Being a Democracy is a better choice for economic growth?

*I would prefer to believe it, but do not see the supporting evidence. I can't speak for Chris Dillow's preferences.

**Of course, this requires one to presume that, for instance, 11 Sep 1973 never happened, except to create a Miracle(tm). But I sidebar, if not digress.

Labels: Brad DeLong, Democracy, Economic Development, Politics, the rule of law

by Ken Houghton

Dani Rodrik has posted a link to the paper that went with his AEA presentation referenced here.

So my comments are on hold not only because I'm spend too much time working and in doctors's offices, but also because he may have addressed the major issues.

Labels: Dani Rodrik, Economic Development

by Ken Houghton

Ignoring that our luggage was lost and my IRS interview tonight may have to be done in tennis shoes and two-days-worn clothing...

1. Ed Glaeser (having presented what seems to have been a fascinating paper) responding to the question "Why didn't you include the current Iraq war in your discussion?" by noting that he stopped with Vietnam because "we have the LBJ tapes as evidence." And noting the point to which many of us return: It's possible that this entire cf is because GWB believes Saddam Hussein really did try to kill his father.
   
   
2. Dani Rodrik (following a presentation by William Easterly) by declaring that his presentation should be though of as "Easterly on Prozac"—and then proving it by attempting to embed YouTube clips into his presentation.*

More on the Rodrik presentation later.


He was sadly unsuccessful. I encourage everyone to go over to his blog and ask him to post the links. And while you're there, read this post, which dovetails nicely with that presentation. UPDATE: Dani Rodrik has posted those links, and summarized his presentation here.

UPDATE 2:Felix Salmon piles on, as it were, adding a clip via Infectious Greed to the mix.

Labels: Dani Rodrik, Economic Development, Economics, Iraq, PortfolioMarketMovers

by Ken Houghton

As noted previously, I spent the post-July 4th weekend at Readercon in Burlington, MA. And while the panel discussing Karen Joy Fowler's work was adequate (as noted below, this is mainly due to Maureen of EOB fame, the other panelists, and the participation of Ms. Fowler herself), I can honestly say that the other panel I moderated, "See It Like Saruman: Reconciling Fantasy and Progress" was well worth hearing. And you may well get a chance, as it is one of two panels of which the convention team plans to post an audio recording.

The panel participants were Judith Berman, John Crowley, James Morrow, and Michael Swanwick. (The panel begins with my reading an excerpt from this essay (PDF), so it also included a de facto cameo by The Most Dangerous Perfesser.)

It was, in part, an economics panel, and—though I managed not to use the phrase "creative destruction"*—the sense of utility leading to choices, and the overriding theme of changing perspectives due to the Enlightenment, development, and the categorization of Karl Marx's work as "a Utopian Fantasy" probably makes it worth your attention from that perspective.

The Megan McArdles among H. economus will be horrified that we "didn't think everything through."** The rest of the world knows that Tolkien didn't either:

History is written by the winners. That explains why Tolkien never mentions that the destruction of Fangorn Forest and other efforts towards industrialization by Saruman significantly raised the standard of living for the wild men of Dunland, in fact creating (for the first time in Middle Earth) a comfortable middle class. While there is a natural opposition between the romantic and pastoral ideal embodied in traditional fantasy and the Enlightenment ideal of progress (especially in its modern industrial and technological modes), we don't believe they are completely incompatible. What works of fantasy have attempted to accommodate both? What interesting new direction might the heroic fantasy novel be taken if the true positive effects of modernization were acknowledged?

Anyone else wonder why the ten rules of Heterodoxy *** (see Figure 2 at bottom) are essential, especially when discussing Macroeconomic issues?****


*This is not really a Good Thing.
**English translation: share her obsessions. What is the price of eggs in Bolivia, again?
***Max presents a, er, more effusive version here.
****I personally don't consider it coincident that the Nation piece on Heterdoxy closes with George Akerlof's AEA keynote address, since it is Akerlof's discussion of the effect of informational asymmetries that is given short shrift in introductory Economics courses, despite having occurred a couple of generations ago.

Labels: Economic Development, Economics, heterodoxy, sf, Social Science

by Ken Houghton

The glorious Naked Capitalism makes an economist's heart flutter with talk of convergence:

Like.com, a search engine company that uses image recognition software to find pictures on the web, took the step of closing in India after seeing the wages of top-level engineers in some cases rise close to US levels....

In the next few months, Like.com would have had to lift the salary of one of its Bangalore engineers to 75 per cent of the US level, even though the same engineer earned only 20 per cent as much as an equivalent US-based worker two years ago, Mr Shah said.

The plural of anecdote is certainly not data, but this datum implies (rounding down) that wages in Bangalore have been rising at a rate of about 65% per year faster than US wages. (From 20% of x to 75% of x' over, rounding up, about 2.5 years.)

Since no one is talking about India's hyperinflationary economy, the apparent conclusion is some combination of (1) Bangalore is a relatively insignificant part of the Indian economy, (2) the rising tide there not only isn't lifting boats, it's increasing income inequality, or (3)the requirements of Like.com are so different from all the other companies hiring workers that only a very select few Bangaloreans are capable of working for the company, even though it has no trouble hiring U.S. workers.

Maybe the earth really isn't as flat as Tom Friedman claims. Or maybe we need India to stop being a representative democracy.*

UPDATE: Just to be clear, FX rates don't explain anything near the magnitude of the change, as Yahoo! makes clear:



*The link between this last sentence and the first two possibilities is left as an exercise to the reader.

Labels: convergence theory, Economic Development, Income Inequality, Naked Capitalism