Month: October 2006

Markets in everything: African dictator edition

Hmm…I had just been thinking about related ideas:

Sudanese billionaire Mo Ibrahim (of Celtel fame) has created a $5 million dollar cash prize for Africa’s most effective head of state.

year the winning leader will, at the end of his term, get $5m (£2.7m)
over 10 years and $200,000 (£107,000) each year for life thereafter.
"We need to remove corruption and improve governance," Mr Ibrahim said.

…The Mo Ibrahim Prize for Achievement in African Leadership will
be launched in London on Thursday… It will be available only to a
president who democratically transfers power to his successor.  Harvard
University will do the measuring to see just how well the president has
served his or her people during their term in office.

Here is more, and thanks to Pablo for the pointer.  The prize sounds too small, relative to the lure of corruption, but I see no reason not to try this idea.

How good is the Nordic model?

Jeffrey Sachs has written a new paper on the Nordic model, extending his Scientific American article in praise of the welfare state.  It is listed as "not for quotation" so I won’t.  I agree with much of the paper, but I would emphasize a few propositions more:

1. Many ideas and innovations are international public goods.  This will make the Nordic model more sustainable over time.  Swedish society doesn’t have to be that innovative, although of course sometimes it is.

2. Societies differ a great deal in their innate level of cooperativeness.  This is a key to making the Nordic model work.  I wouldn’t try the Swedish model in France, much less in the United States.

3. The Nordic countries generally take a light hand in regulation, capital income taxation, and many of the public welfare programs pay people to work and not to sit at home on their behinds.  In fairness to Sachs, he does mention these points.  Furthermore given the extensive subsidies to child care, which encourage female labor force
participation, the high marginal tax rates do not discourage labor supply as we might at first think.

4. Government policy is often most usefully thought of as endogenous.  Higher levels of cooperativeness, and lower levels of corruption, mean that people will choose more government.  The government they get will work better than government works elsewhere.  The point is not that all choices are efficient, but rather there is a selection bias in the data we observe on government size and performance.  Nordic welfare states are large, in part, because they work relatively well.

5. The long-term consequences of a slightly lower growth rate are in any case troubling, no matter how well a society works at any moment in time.

Here is my previous post on the Nordic model.  Here is a post on Swedish stagnation.  Excerpt: "I’ve been to Stockholm several times and loved it.  That being said, how
attractive will this model remain when it offers only half of the per
capita income of the United States?"

Department of Hmm….

In the last quarter, Nokia sold 88.5 million phones to Apple’s 8.7
million iPods.  If the Finns can convince just a fraction of buyers to
spring for music phones rather than iPods, they’ll trounce Steve Jobs
and co.

Read more here.  "Trounce," of course, is a tricky word.  Is the mark-up on cell phones as high?  Would they cut into the iPod market or appeal to different buyers?  Would content suppliers leave iTunes or just sell to both markets?  Here is a good, short piece on the roots of the iPod appeal.

How did the British occupy India?

Kevin Drum writes:

…today’s colonials fight back.  Britain occupied India with a tiny force
because the Indians mostly let them, and on the rare occasions when
they rebelled the British (like all the other European colonial powers)
felt free to crush them in the most brutal manner imaginable.

No matter how we compare American and British brutalities (we dropped many bombs on Vietnam), I place greater stock in the railroad (later the car and bus) and the radio.  In the early days of British control, most Indians couldn’t get within shouting distance of a fight if they wanted to.  The Brits had only to control some key garrisoned cities and some trade routes.  Local rulers did the rest.  Radio, which spread in the 1920s, told people what was going on and cemented national consciousness.  Those technologies heralded the later end of colonialism, with WWII hurrying along the new equilibrium.

Might some future technology might render colonialism more likely (NB: I am not saying "more desirable")?  Extreme surveillance is one possiiblity, but this appears far off for poorer locales.  More likely is simply that rich countries buy the loyalty of some (smaller) poor countries, as the French seem to have done with Martinique.

If the world’s very poor countries stay in Malthusian traps, how long will it be before wealthy philanthropists can try to "adopt a country"?  Measured Haitian gdp, for instance, is only a few billion dollars a year (TC: don’t ask about the storms!).  Yes many countries have laws against foreign investment and land ownership, but at some point a correct strategy can put the money to good use.  Can an entire corrupt government simply be bought out?  Just how much money, and what kind of plan, would a private philanthropist need each year to turn Haiti around, or at least bring it to the standards of Martinique?

Can a destructive storm increase measured gdp?

Say Katrina comes along and knocks down some hotels, which are then rebuilt.

We all know the "broken window fallacy" — this sequence of events is not good for the economy.  But under what conditions will it increase measured gdp?

Under one view, the money spent rebuilding the hotels would otherwise have been spent buying shoes or something else.  Measured gdp should not go up.  See Alex’s comments below for more along these lines.  (But note that Alex’s fifth paragraph makes a mistake.  I am not just "buying a new CD," but rather a new CD is being produced, generating income, in the analogous example he sets out, just as a new hotel is being produced to replace the old one destroyed by the storm.  He doesn’t come squarely to terms with how new output ever increases measured gdp.  A second factual but not theoretical point is that most Katrina refugees are now earning more elsewhere.)

An alternative approach invokes the assumption of "gross substitutability," or more prosaically that new production attracts a greater expenditure than the relevant alternative.  (Addendum: We also can speak of the velocity of money rising.)  New production in general raises measured gdp.  If a new hotel is built, why should the "gdp consequences" of that production depend on whether the lot had always been vacant, or a previous hotel on that lot was destroyed by a storm?

A further complication is that the hurricane destroys wealth.  The loss of hotels induces negative income effects, which probably will lower measured gdp in other sectors of the economy.  Natural disasters are not a good way to build up gdp in the longer run.

Many factors are at play.  Will we consider Keynesian effects through a possible employment increase for rebuilding, or intertemporal substitution effects through a temporary boost in labor supply in repair industries?  If the repairs dig into future productive capacities, short-run gdp is more likely to rise than long-run gdp.

Will natural disasters increase measured gdp in the short run, once we consider expenditure switching effects?

Your thoughts?

A Natural Disaster Does Not Increased Measured GDP

It’s common to be told that a problem
with the GDP statistic is that natural disasters increase measured GDP. Sadly, even some textbooks say this but as a
general matter it’s false. The broken
windows fallacy is a fallacy for measured as well as real GDP because the money
spent on new windows would have been spent on other goods and services.

Imagine that you are your friends are going to see a jazz
concert but on your way to the concert you have a little disaster, a fender
bender. Instead of seeing the show, you
and your friends have a miserable time waiting for the tow truck to come to
have your car fixed. Spending on the tow
truck and the auto repair counts as
GDP but it does not add to GDP
because it is counter-balanced by a decrease in spending on jazz, wine and cheesecake. Nothing Tyler says (see above) about
gross substitutability changes this fact.

Consider a bigger disaster, the 9/11 attack. First, the point already mentioned, the
resources used in the cleanup count as GDP but don’t add to GDP to the extent
that they would have been employed on other projects. Now it is true that some of the workers could
work overtime which they otherwise would not – this would tend to increase
measured GDP more than real GDP since leisure is not measured in the national
income and product accounts. Even this
factor, however, must be balanced against the overwhelming fact that the
destruction of the twin towers meant that tens of thousands of the most
productive people in the United States were forced into unemployment or death. Since GDP can also be measured as the sum of wages, rents, interest etc.
the immediate effect of all the unemployed and dead was to reduce GDP. Similarly, Hurricane Katrina has destroyed
more jobs in New Orleans than it
has added (and not all the added jobs represent real additions) hence the
Hurricane reduced measured and real GDP.

Also it is not true, as some sources claim, that destroyed
resources don’t count in the NIPA statistics – firms and the government count at
least some (but not all) destroyed resources as depreciated capital and thus measured Net Domestic Product automatically decreases with a disaster.  (n.b. corrected from earlier where I had said GDP instead of NDP).

Tyler asks “if a new hotel is
built, why should the gdp consequences depend on whether the lot had always
been vacant or a previous hotel on that lot was destroyed by a storm?” Answer: it doesn’t. In neither case can you assume that GDP goes
up. GDP is analogous to an individual’s
expenditures on goods and services. If Tyler buys a new CD does that raise Tyler’s
expenditures? Not if it doesn’t raise
his income. If all you did to measure
GDP was to count new hotels, new shopping malls, new spending then you would
far over-estimate GDP. GDP is a net
concept you have to count all expenditures precisely because some of the new
spending is offset by reduced spending elsewhere in the economy. It’s only after you have totaled that you can
calculate the increase in GDP.  (Note also Tyler’s error, if the new CD doesn’t represent a net increase in expenditures it can’t increase income on net either.)

If you follow through on the false logic you will
find yourself saying crazy things like crime increases GDP because of the money that people spend on locks. Of course, locks count as GDP but if people
weren’t buying locks they would be buying other goods so locks don’t add to GDP. GDP measures production it doesn’t measure
how production contributes to happiness.

There are plenty of problems with the GDP statistic and Tyler and I agree
that it’s conceivable that through a Keynesian effect or intertemporal substitutability
of labor that GDP could rise from a natural disaster but for this to work is
has to outweigh all the effects that I have listed and this is unlikely. Thus what we should teach our undergrads is
that measured and real GDP falls with a natural disaster.

New Yorker article on microfinance and Yunnus

Here is the link.  The second half of the article is more interesting than the first; here is one short bit:

Omidyar and his colleagues say that the biggest obstacle to
commercialization of the sector is philanthropic capital. They say that
it distorts the market–not only by filling channels that might
otherwise draw commercial investors but also by keeping unsustainable
programs alive.

How to be a good referee

Here are my tips:

1. Assume that no referee reports are truly anonymous.  It is fine to be critical but always be polite.

2. Unless it is immediate junk, read the paper once and return to it a week later with deeper thoughts and a fresh mind.

3. Your report should not assume that the editor has a working knowledge of the paper in his mind.

4. Respond within a month.  First it is considerate to the author.  Second, the less "fresh" the task is, the more painful it will be.

5. A properly critical and useful "accept" report is harder to write.  Don’t look for excuses to quickly reject a potentially good paper.

6. The editor might have chosen you as referee for a reason.  You need not go along with the editor’s grand plan or desired outcome, but be aware it may exist.

7. Don’t check the references to see if you are cited.

Here is a short article full of good advice.  Here is the longer piece (which I have not read) on how to publish in top journals.  Thanks to Elaine Hawley for the pointer.

Barkley Rosser, a frequent MR commentator who has sent me JEBO papers to referee, may comment on this post but not on my adherence to these standards, especially #4.

The Queen

One of the few must-see movies of the year.  In addition to its dramatic virtues and superb acting (read Matt’s review), it offers economics, public choice, and political philosophy.  The moviemakers appear to understand Thomas Schelling on focal points and convention, "showing that you care" theories of signaling, David Hume on public opinion, and Michael Oakeshott on tradition, among many other ideas.

When should the government report future liabilities?

The FASAB has asked that the United States government start including future Medicare and Social Security liabilities in current budget deficit figures:

Monday, the Federal Accounting Standards Advisory Board released a proposal in which the government would have to account for the cost of future Social Security payments year by year as people build up entitlements.

Seen in advance of its release by the Financial Times, the switch in accounting practices would be an international accounting anomaly, as most other governments treat social insurance as a political commitment to pay future benefits rather than a financial liability, the newspaper said.

The FASAB is made up of six independent members who support the proposal and three opposing members from the U.S. Treasury, the White House Office of Management and Budget and the Government Accountability Office.

Here is an FASAB press release.  Here is a longer story.  Of course the reported deficit would go up by hundreds of billions of dollars a year.

Under rational expectations, this purely nominal change should be neutral.  In the abstract, more transparency in government is desirable.  Over the longer run, government would treat promises of future benefits more like expenditures and subject them to greater critical scrutiny.   

More practically, if these benefits are counted in the current budget as liabilities, it will be politically harder to cut them in the future.  However it might not be harder to tax them, which is one but not the only way of cutting them.

If you think that tax hikes are the way to address our crushing future financial burden, you should favor this proposal.  If you prefer spending cuts, it is a harder call. 

I don’t doubt that financial markets would quickly adjust to the new levels for announced deficits.  Most voters might not ever know the difference — how many of them could name the size of the deficit right now?  But this change would draw the attention of the informed public to our future fiscal and demographic problems.  How much faith should we have in these people, relative to what our government will do on its own?

I am inclined to take a chance on this one, but I don’t think it is a simple call. 

By the way, the government is not obliged to accept this directive, but there is a great deal of precedent for following FASAB recommendations.