Month: January 2004

What have international capital flows brought us?

Brad DeLong writes:

It is not possible for a card-carrying neoliberal like me to wish for any but the most minor of controls to curb the most speculative of capital flows. Capital markets can get the allocation of investment badly wrong, but governments are likely to get it even worse, and the incentives to corrupt bureaucrats do need to be kept as low as possible. But the hope for a repetition of the late nineteenth-century experience, in which core investors’ money gave peripheral economies the priceless gift of cutting decades off the time needed for successful economic development, has–so far–proved vain.

The full post — worth reading — is a very thoughtful and indeed moving elegy to the nineteenth century. DeLong points out that today a good deal of international capital flows today to the United States, rather than to the poorer countries.

Nonetheless I am more optimistic about the contemporary potential for international capital movements to spur growth. Singapore moved from a run-down port to a wealthy country in a few decades, and the transition was driven largely by foreign investment. Malaysia has faced a rockier road but by historical standards must be judged a success. Most of Africa has stood still or regressed, but clearly domestic policies are the major culprit. The more serious counterexamples have been in the Latin countries, many of which have received significant foreign direct investment, yet without coming close to eliminating poverty.

When it comes to China, we can see the glass as either half empty or half full:

China’s scorecard for attracting foreign investment reads like this: Trying hard, doing well, but could do even better. That is the assessment of a just-published OECD report, Investment Policy Review of China — Progress and Reform Challenges. In 2002, China became the world’s largest recipient of total foreign direct investment (FDI), attracting nearly $53 billion. That performance comes thanks to China’s progress on structural reforms, its accession to the World Trade Organization, and efforts to bring regulations in line with international standards.

So is China a counterexample to Brad’s claim? It depends how we count. It is only one country but of course over a billion people.

It also depends how we understand China. Liberalization has brought foreign investment, which has made its “low-wage-but-much-higher-than-before-wage” factories possible. My post immediately below cites research that finds much of the Chinese progress as coming from the shift of labor out of agriculture. This does not mean that capital flows had no role, since they helped make such a shift possible. We also should distinguish between total foreign investment and the per capita measure: “At $30 per capita, China receives less FDI than other major developing countries, such as Brazil with $195 per capita.” But of course foreign capital flows, and Chinese progress, have been concentrated in just a few regions of China.

What is the lesson? Foreign direct investment needs good domestic policies to translate into significantly higher living standards. When such policies are in place, it is amazing how far foreign direct investment can go. Even small per capita amounts of FDI can have a large and positive impact on individuals’ lives. Foreign capital flows have not lost their magic, but they will not lift all boats either.

How fast did China grow?

From 1978 to 1998 China grew a measured average of 8.0 percent a year, a breathtaking performance. But how fast did the country really grow? And how much did Chinese productivity improve?

Alwyn Young, at the University of Chicago, turned his attention to these questions in his recent “Gold Into Base Medals: Productivity Growth in the People’s Republic of China during the Reform Period,” in the December 2003 Journal of Political Economy. Here is an earlier, on-line version of the paper. Young, who is renowned for his thoroughness and care with data, found the following:

1. Chinese enterprises systematically underreport inflation.

2. In the non-agricultural sector, such underreporting accounts for 2.5 percent growth per year.

3. The main drivers of Chinese growth have been rising economic participation rates, improvements in educational attainment, and the movement of labor out of agriculture.

4. Labor and total factor productivity improvements, in the non-agricultural sector, are 2.6 and 1.4 percent respectively.

The bottom line: The Chinese economy has indeed done well. But once we cut through the mysteries of the numbers, we find an explicable reality. The Chinese growth experience is in reality comprised of “reasonable and comprehensible” numbers, rather than miracles. Young even wonders if the Chinese could not have done better than they did. On one hand, most economies would be delighted with a sustained 2.6 percent rate of labor productivity growth. But on the other hand, China has been moving away from a centrally planned economy. We might have expected even larger productivity boosts, given the incentive benefits of economic freedom. We also can interpret the figures as showing that China has enduring problems, and has not moved as far away from central planning as we might wish.

Using Placebo Laws to Test “More Guns, Less Crime†

My latest paper (written with Eric Helland) has just been published in Advances in Economic Analysis & Policy. If you don’t have access to this journal you can find the working paper version along with many of my other papers on the forthcoming and published papers section of my web site. Here is the abstract:

We reexamine Mustard and Lott’s controversial study on the affect of “shall-issue” gun laws on crime using an empirical standard error function randomly generated from “placebo” laws. We find that the effect of shall-issue laws on crime is much less well-estimated than the Mustard and Lott (1997) and Lott (2000) results suggest. We also find, however, that the cross equation restrictions implied by the Lott-Mustard theory are supported. A boomlet has occurred in recent years in the use of quasi-natural experiments to answer important questions of public policy. The intuitive power of this approach, however, has sometimes diverted attention from the statistical assumptions that must be made, particularly regarding standard errors. Failing to take into account serial correlation and grouped data can dramatically reduce standard errors suggesting greater certainty in effects than is actually the case. We find that the placebo law technique (Bertrand, Duflo and Mullainathan 2002) is a useful addition to the econometrician’s toolkit.

How do consumer reviews affect book sales?

Judith Chevalier and Dina Mayzlin have studied the impact of consumer reviews of books on word of mouth and subsequent sales, here is their NBER working paper, here is another draft. They find the following:

1. Most consumer reviews of books on and are very positive.

2. The reviews at Amazon are longer and more extensive. They are also more critical on average.

3. Better reviews on one site boost relative sales. The use of two sites gives us a controlled experiment to determine that word of mouth does indeed help authors rather than being a mere side effect of higher sales.

4. A bad review hurts you more than a good review helps you.

5. It remains to be seen whether allowing consumer reviews increases aggregate sales or simply shifts around sales to more suitable titles. Even a shifting affect, however, may increase consumer loyalty to the on-line site. If you know that Amazon helps you discover good books, you may be more likely to buy from Amazon.

My advice: I don’t put much stock in how favorable the Amazon reviews are, whether I am buying books, movies, or music. (I am most likely to buy music from Amazon.) This well-known example is one reason to distrust the reviews, although I think bad taste is more common than masquerades. Instead I look at how many reviews have been generated. I take this as a kind of sufficient statistic for how much passion the item has generated. Since I am at the tails of just about any distribution of taste, and since most cultural products disappoint in any case, look for something that creates a spark in people. I then see some chance of finding a product that I truly love. This advice will sometimes steer you wrong, but a little added intelligence will allow you to make the necessary adjustments.

By the way, there is now a whole blog, on how collaborative web enterprises shape society. Clay Shirky writes for it regularly, it is highly recommended.

Thanks to Eric Crampton for the pointer to the article.

The life of a food taster

…professional-eater salaries run the gamut. Since most work in food science or product development, those who taste for a living can be entry-level employees earning between $30,000 and $60,000 or senior execs raking in six figures, according to industry insiders.

In any case, many live the good life in terms of what they get to try, like trained wine drinkers or Godiva’s [products].

But others, like taster Ann Hollingsworth, have tested somewhat less sumptuous foods – in her case, hotdogs and other meats for industry giants like McDonald’s and Sara Lee.

The workload sounds especially appealing:

Generally, tasters are only used for about an hour a day total – often only for a few minutes at a time.

“You can’t just sit down there for four or five hours at a time,” said Caporaso, who has run panels for companies like Baskin-Robbins, Pfizer (when it had a food division), Nestle Carnation and Lipton. “You get fatigued.” [This reminds me of similar arguments I have heard about teaching!]

To preserve her palate (and her stomach), Koen generally only tastes three different pieces of chocolate a day, usually when the company is developing a new product. She also samples competitors’ chocolates.

In some unusual instances Koen will have to taste 50 chocolate pieces a day: “After all that decadence, she usually takes a week-long respite from chocolate eating.”

Just one kind of taster does not suffice:

Food and beverage companies need two kinds of tasters before their products hit the market.

The professionals are either outside contractors or internal food scientists, chefs and product developers trained to analyze flavor intensity, sweetness or bitterness, texture and product consistency. In-house tasters are often used because of convenience, their experience with that food and company secrecy. But they can become biased, which is why some businesses call on outsiders to do some tasting.

Consumer tasters are members of the general public who evaluate whether they love or hate a product, after the professionals have fine-tuned the formula.

There is also such a thing as a super-taster [N.B. I consider myself an unpaid super-taster!]:

…a “super taster” [has] a particularly discerning palate. Super tasters have between twice and four times as many tastebuds on their tongues as the average person and are picky eaters, according to Caporaso.

“Sometimes the super tasters are a detriment because they’re picking up these little nuances in the product that the average consumer can’t detect,” he said.

Life as a supertaster can be especially tough. One individual was told he had the talent of a supertaster, but he declined to pursue the profession. He said he could not stand the idea of having to taste so many random foods, rather than just eating what he likes. Some tasters have had to sample birth control pills and dog food. Here is the full story.

Alex on blogging, writing, and teaching

The Washington Times interviews co-blogger Alex about what makes for a good blog, and how blogging can get students to write better. The article opens with Kevin Brancato, a George Mason University graduate student and the driving force behind As the article points out, blogs are just starting to be used in teaching. Someday I will teach a course where each student is responsible for writing a daily blog. I will evaluate the students by grading the blogs, no other test, paper, or quiz. Usually when I make that sort of claim it means someday soon!

Are we getting happier over time?

The field of happiness studies has moved out of psychology and into economics. It is folk wisdom that money is no guarantee of happiness. And arguably it is happiness that we care about, not wealth. So rather than looking at aggregate wealth, an alternative research strategy asks people if they are happy. This may sound naive, but in fact people’s answers are correlated with their health, how much they smile, whether their friends rate them as happy, and information from brain scans. We should not so hastily dismiss questionnaire evidence about happiness.

Andrew Oswald, of the University of Warwick, is one of the leading researchers in this area. His home page offers a good range of readings in the area. One forthcoming paper of his, for the Journal of Public Economics, addresses the question of whether we are becoming happier or not. He finds the following:

1. Americans as a whole have not become happier over the last several decades.

2. American blacks have become happier over the last several decades.

3. American women have been the biggest happiness losers since the 1970s.

4. Being unemployed has a “happiness cost” of about $60,000 a year.

5. Being black has a “happiness cost” of about $30,000 a year. Both these figures can be interpreted in terms of a low happiness value for extra dollars, rather than a huge happiness penalty for being unemployed or black.

6. A lasting marriage is worth about $100,000 a year in terms of happiness.

7. Happiness is U-shaped with age, with the minimum coming at about 40. (Hey, wait a minute, I am 41 and happier than ever before!)

8. Relative income matters per se.

My take: I find least persuasive #1 and #7. Americans are happier as a whole because they are living longer and have access to much better medical care. Your chance of dying of a heart attack at age 50 is much lower than before. That being said, if you take a pre-selected group living under normal circumstances, they may not come across as much happier as their predecessors from earlier decades. So many of the benefits of the modern world come in the form of avoiding tragedies.

By the way, this excellent book review defends the role of the market in bringing us happiness.

A richer world also makes us happier by giving us better jobs. Read Oswald on how to find a job to make you happy. Here is his advice:

1. Work for a non-profit

2. Be a woman.

3. Be old (he suggests that your earlier failures tame your expectations with age).

4. Don’t get overqualified.

5. Avoid a place where the boss controls the pace of the work.

I’ve got #1 and #5 down to perfection, and I am working on #3.

Thanks to Mark Brady for directing my attention to the paper and the links.

Is risk-aversion bad for you?

It is bad for rats, or so it seems:

…new research published in the Proceedings of the National Academy of Science shows that caution can actually kill you. Sonia Cavigelli and Martha McClintock of the Department of Psychology and Institute for Mind and Biology at the University of Chicago found in a recent experiment that individuals who fear novelty–a condition scientists have named “neophobia”–are likelier to die at an earlier age than those who are unafraid of change. It is the first time, says Cavigelli, that a study has demonstrated that an emotional trait that shows up in infancy can shorten life span.

For this research, Cavigelli and McClintock followed the lives and fortunes of pairs of rat brothers for several years. The scientists chose their subjects by first establishing which of the rats were neophobic. To do this, they placed the young rats inside a bowl in a small room. Objects the rats hadn’t seen before–a rock, a metal box, and a plastic tunnel–were placed in each corner of the room. The rats the scientists deemed neophobic either stayed hunkered down in the bowl or left it only hesitantly, with hunched backs, stilted walks, and bristling fur. The rats who left the bowl quickly to explore the room and the various unfamiliar objects were dubbed neophilic.

And the results? These risk-averse rats showed a consistent pattern of stress throughout their lives and died at earlier ages. What does this mean for people?

A number of parallels exist between humans and their rat surrogates. Neophobia shows up in human infants as early as 14 months of age, and like the rats, fearful children have a faster and stronger hormonal response than children who are not afraid of new situations. It’s also been shown that if you are neophobic at a young age, you tend to remain that way throughout childhood. Cavigelli suggests, however, that individuals may develop strategies to avoid the negative effects of neophobia. “If you are a neophobic-type person, you might avoid any novel situations thereby minimizing that stress,” she says. Staying away from stressful situations could be a form of “self-medication.”…The wear and tear of stress hormones can cause neophobes to get sick more quickly, suggests Cavigelli. So if you know you’re a neophobe–and therefore more vulnerable to any bug going around–you might want to be seek medical intervention promptly in the case of illness.

Although it looks like the neophiles have an unfair advantage, they may not have it as good as it seems. In the experiment, Cavigelli and McClintock played God by controlling the environment of their subjects and essentially creating a safe universe where being brave didn’t get you into trouble. But real life, with its car accidents, plane crashes, and human predators does not always reward the fearless. Human neophiles might also have longer lives if we were all just rats in a cage.

The researchers suggest that it makes evolutionary sense for mothers to have emotionally diverse litters. In other words, there is an evolutionary reason why some but not all teenagers can act like such foolish idiots. See for the full story.


The National Center for Public Policy Research has begun a series of briefs on “What Conservatives Think” in order to “help bridge the gap between rhetoric and reality.” Yes, but in which way are they crossing the bridge? Consider their brief on Reaganomics. It begins, “here are facts about the 1980s” and almost immediately heads off the rails, “from 1982 through 1989, the years President Reagan’s economic policies were in effect…” Hmmm, I thought we were going to get the facts about the 1980s? What happened to 1981-1982? Ah, Reagan’s policies weren’t in effect then – presumably these were the ghostly remains of the Carter years – but then logically Reagan’s policies must have been in effect until at least 1991, right? Apparently not.

The truncation of the Reagan years lets the NCPPR compute statistics from the bottom of a recession to the top of a peak thereby confusing cyclical with permanent gains. Numbers should not be treated as tools for partisan games but it’s especially galling here because the truth is in many ways more creditable to Reagan.

The 1982 recession was a result of Reagan’s policy – the policy to support Paul Volcker in wringing inflation and inflationary expectations from the economy. The 82 recession was terrible but the alternative, another goosing of the money supply, higher inflation, and a delay but not an avoidance of the day of reckoning, would probably have been worse. During the recession Reagan’s approval rating hit an all time low of just 35% but to his credit he stood firm. As a result, the economy fundamentally shifted from a high inflation/high unemployment economy to a low inflation/low unemployment economy. It was the recession of 1982 which laid the foundation for the next two decades of higher productivity and better economic policy.

A Challenge to Readers

President Bush reputedly asked his big-think guys to come up with a new vision to unify and motivate the nation and they came up with … a moon base? It’s so been there, done that. Going to the moon was one of the greatest accomplishments of mankind but I am not inspired by imitation. Are you?

Hence, I issue this challenge to the blogosphere. What’s your big-think idea to unify, motivate and inspire the nation? A moon-base will cost on the order of 200 billion so let’s economize and say that the idea should cost 100 billion or less – a better idea and 100 billion to spare! Ideally, the idea should be mostly free of politics and have a strong possibility of success given that the money is spent. Email me and I will post the best ideas with full credit.

China facts

In 1990 bicycles carried 70 percent of travelers in Shanghai. Now it is no more than 15 to 17 percent. Last month the city government of Shanghai banned bicycles on all major roads. Automobile sales in China are growing at a rate of 50 percent yearly. Bus service is considered to be of good quality and a subway network is being built. Upon completion it will have more miles of track than the subways of New York City. China has 7 of the world’s 10 most polluted cities. Here is the full story.

Why Europe is no longer world leader: one illustration

The New York Times writes of:

…a new regulation imposed by the European Union that reduces the allowable sound exposure in the European orchestral workplace from the present 90 decibels to 85. The problem is, a symphony orchestra playing full-out can easily reach 96 to 98 decibels, and certain brass and percussion instruments have registered 130 to 140 at close range.

The directive – issued last February and intended to protect all workers, orchestral musicians included – specifies a daily “upper exposure action value” of 85 decibels, amid a welter of other provisions. It acknowledges “the particular characteristics of the music and entertainment sectors.” It allows discretion to member states to use averaging, specifying a weekly exposure limit of 87 decibels, and to allow a transition period for implementation.

For me this article had a “jaw hits floor” quality. How about legislation saying that no composer can lose blood, sweat, and tears over a masterwork? Bach, after all, wrote the equivalent of twenty pages of music a day. He likely had some form of carpal tunnel syndrome.

Note that private solutions can alleviate the noise problem. Some orchestras increase the spacing between players. Some musicians use earplugs. Sometimes an orchestra will put plexiglass screens in front of the trombones. Or you don’t have to join an orchestra in the first place.

By the way, the trombones are not the only problem. The piccolo also has a negative effect on hearing.

And what about the United States?

In this country, the Occupational Safety and Health Administration takes a more hands-off attitude toward orchestras than the European Union. “We don’t basically get involved with them,” Francis Meilinger, an OSHA spokesman said. Here, too, orchestras fall under the agency’s general guidelines for the workplace, which allow a 90 decibel level over an eight-hour day, and a 97 decibel limit over three hours. Since American orchestras work relatively short days, and the peaks of sound are merely intermittent, they don’t represent a particular concern in this regard.

Imagine that, the EU having less sense than our OSHA. In any case, it remains to be seen how the measure will be implemented and enforced. Many musicians have announced that they plan to continue playing Wagner, Mahler, and Strauss, regardless of regulatory directives.