Month: May 2009

Modern Principles: Macroeconomics, Economic Growth

In the United States, diarrhea is a pain, an annoyance, and of
course an embarrassment. In much of the developing world, diarrhea
is a killer, especially of children. Every year 1.8 million
children die from diarrhea. Ending the premature deaths of these
children does not require any scientific breakthroughs, nor does it
require new drugs or fancy medical devices. Preventing these deaths requires
only one thing: economic growth.

That’s the opening paragraph of The Wealth of Nations and Economic Growth, Chapter 6 in Modern Principles: Macroeconomics.  Does the opening make you a little bit squeamish?  We hope so–we wanted an opening that would jar students out of complacency and remind them how vital economic growth is to human life.  

Due to its importance, we have more material on growth and development than any other principles text.  In Chapter 6 we lay out the key facts and the basic framework for understanding economic growth.  I think we do an especially good job explaining that the proximate causes of growth, increases in capital, labor, and technology must themselves be explained.  Why do people save?  Why do people invest?  Why do people research and develop new ideas?  It’s these questions which connect macroeconomics to microeconomics and point to the fundamental importance of incentives and institutions.  These questions also foreshadow future chapters on savings, investment, financial intermediation and the economics of ideas. 

For a limited time, you can read Chapter 6 at the link above (and do enjoy the pretty color pictures before you print!).  Tyler and I will be writing more about Modern Principles: Macroeconomics this week; you can also find more information at

Revisiting Irish growth

David Archer, a loyal MR reader, writes to me:

From time to time, you solicit requests for blog topics, and here is my request: revisit the "Irish miracle," a topic you have written about in the past.  …Ireland's G.D.P. will fall more than 10 percent from its peak. In August 2006, you speculated that in addition to favorable demographic factors, Ireland's growth could probably be explained by: FDI, education, and a favorable tax regime as bigger factors. What do we understand about Ireland's growth now that we may not have understood 12 or 36 months ago?

That is a very good question; here are a few points:

1. A small country, especially one with a lot of FDI, can rise or fall more quickly than our usual economic intuitions otherwise might indicate.

2. The U.S. is a big (and growing, relative to the UK) part of Irish FDI.  New York-based financial institutions (and don't forget Deutsche Bank and Credit Suisse do a lot of their business in New York) are more central to the Irish economy, or for that matter to the Canadian economy, than is often realized.

3. The key cause of the crisis was creeping overconfidence and complacency (I was pleased to hear Paul Krugman use refer to complacency in a recent talk of his on the crisis) and this was nearly global, Ireland included.  Irish investors assumed that things were very likely to keep on getting better.  Read Keynes's chapter 12!

4. Scott Sumner's to-the-point analysis blames the many manifestations of banking crises, internationally, on falling AD curves.  My version of this story is less AD centered, and more about the revision of expectations (see for instance commentary from Bryan Caplan), and the revelation that past plans were overconfident and based on false complacency, but Sumner nonetheless makes some good points.

Addendum: Here is a good article on the spread of the downturn to India.

How much should we worry about pandemics?

Brett Stephens isn't that worried:

In other words, despite all the processes of globalization that are
said to be leading us toward nature's great comeuppance, trend lines
indicate we are better equipped than ever to minimize the effects of a

Why? Because wealthier people tend to be healthier people, and
because wealthier societies have more to invest in medicine and
research, and because a higher standard of living tends to correlate
with more personal space. Also, because globalization means information
sharing across boundaries, and rapid adoption of best practices, and
greater transparency.

I say think probabilistically, a concept not prominent in his piece.  A one percent chance of one hundred million deaths is, in expected value terms, one million deaths and that is a big deal.  Probably the United States is less vulnerable than it was in 1918, but how many people would die in China, India and many other locales?  How much disruption to trade, travel, and the world economy would take place?  Even in the United States, our public health systems would break down quickly and render many modern medical advances useless (e.g., when would the Tamiflu run out?).  Having lots of living space is wonderful, but it pays off only if people stay home from work and that means dealing with massive absenteeism.  Not pretty.  Better safe than sorry.

Oddly Stephens never mentions that we are living in a raging epidemic now, namely AIDS, which has run for several decades.  For all the virtues of retrovirals, the modern world was quite slow in combating or even checking the disease and still many people, including U.S. citizens, engage in very risky behavior.  Our collective response was not terribly impressive.  Greater wealth does help, but greater wealth also means we should spend more to limit the problem.

Going back to the flu, I was struck by this passage:

In each of the four major pandemics since 1889, a spring wave of
relatively mild illness was followed by a second wave, a few months
later, of a much more virulent disease. This was true in 1889, 1957,
1968 and in the catastrophic flu outbreak of 1918, which sickened an
estimated third of the world's population and killed, conservatively,
50 million people.

I should add that we're not yet "out of the woods" on this wave, since there is a reasonable probability of sustained human-to-human transmission starting in at least one country.  And a virus which lives in many people is a virus which can mutate.

The main thing we should do — invest in public health infrastructure — is in any case a good idea with many possible payoffs, whether a pandemic comes or not.  It is a better investment of money than pursuing the ideal of universal health insurance coverage.  I might add that one of the better arguments for universal coverage is simply that it could lead to better monitoring of some public health issues.

Advertising markets in everything

I wonder if this idea will last:

A new hot dog stand is being built on the West Side, and when it opens, the people behind the counter could be ex-convicts.

As CBS 2's Vince Gerasole reports, the restaurant is controversial, not because of the felons, but the two words on the outside of the building.

Felony Franks is Jim Andrews' new hot dog stand, currently under construction on a busy West Side corner, decorated with freshly painted wieners donning prison garb and a ball and chain, proclaiming "food so good it's criminal."

The full story is here and I thank John de Palma for the pointer.

China Facts of the Day

In a county in Hubei Province every
office of administration, school and hospital is being required to consume a certain
quantity of cigarettes produced by local firms.  The local government has assigned a quota to each of these organizations and they send out inspectors to look at the cigarette stubs. If the staff
are consuming brands that are not produced by local firms, they
will be punished!

The link (in Chinese) is here.

In other news, the divorce rate is up in Yunnan province due to a house dismantling project. One couple can get one apartment as
compensation for their dismantled house but if they get
divorced, they can get two.  The local cadres
were the first ones to got divorced.

The link (in Chinese) is here.

Thanks to Helen Yang for both of these pointers and translation!

Austrian economics jokes bleg

The Austrians need some good jokes if they're ever going to be taken seriously.

So writes to me one loyal MR reader.  He has a specific and indeed noble reason for wanting these jokes (someday I'll be able to explain but the best jokes will in fact be used publicly).  Although I've been connected to Austrian ideas for a long time, I don't know the jokes.  Nor does Google seem to yield much.

But surely MR readers can deliver in a pinch (Raivo?  Are you there?).  And note that simply listing the name of an Austrian economist you don't like isn't actually that funny.  It should have a punchline something like "I cut off their noses" or "I'm sick and tired of all this bickering about oatmeal," etc.  Puns and limericks are OK too.

I thank you all in advance.

Interview with Robert Barro, on the New Deal and Great Depression

From The Browser, here is one bit:

It’s clear that a lot of the policies that were put into place were
negative, but as to sorting out how important they were, that’s a much
more challenging question.  And I think Roosevelt at the time
recognized ex-post that some of the things he tried were failures and
then his attitude was “OK, it’s a failure I’ll stop doing it.” Which is
actually pretty positive. For example, some of the things he did was
try to organize labor unions and also businesses essentially promoting
monopoly – I don’t think that was a plus.  He was trying really hard to
keep wages and prices from falling with direct influence and that was a
negative. The effect of the expenditure programs is less clear. In the
mid-1930s with the New Deal there was an unusual amount of
infrastructure-type of expenditures. But it’s not actually big enough
to sort out in a statistical sense — to figure out how much it
mattered in terms of the recovery after the trough in 1932-33. I don’t
think we know that that was a mistake, but it’s not clear that it was
all that important.

Barro also offers a reading list on the topic.

More on the new Geoffrey Miller book, *Spent*

Here is a typical bit:

Sexual traits are also well predicted by the Central Six [personality traits]…The highly sociosexual, open, impulsive, and selfish tend to invest more of their time and energy in "mating effort" rather than "parenting effort": they are constantly seeking new sexual partners rather than raising the offspring from existing relationships.  On the other hand, people with "restricted" sociosexuality (the virginal, the chaste, and the happily married) have fewer sexual partners, less infidelity, lower openness, higher conscientiousness, higher agreeableness, and lower extraversion.  They invest more time and energy in parenting effort and less in mating effort.

Miller suggests also that parasite loads of various societies predict (cause?) their openness.  A "mating-primed" man is more likely to express bold taste when asked about his preference in cars.  Mostly I am skeptical of such claims (many of the studies fall apart upon inspection) but still it is worth hearing Miller out as long as you approach the cited results with some skepticism.

I liked this passage:

Some common themes emerge from these slightly whimsical suggestions.  One is that buying new, real, branded premium products at full price from chain-store retailers is the last refuge of the unimaginable consumer, and it should be your last option.  It offers low narrative value — no stories to tell about interesting people, places, and events associated with the product's design, provenance, acquisition, or use.  It reveals nothing about you except your spending capacity and your gullibility, conformism, and unconsciousness as a consumer.

The impish troublemaker in me — and yes I have now been Robin's colleague for over ten years — wonders if indeed that is exactly what people are signaling with those purchases.

Here is my first post on the book.

Is there a silver lining for Mexico?

To be sure, tourism to Mexico is devastated and the country will suffer many economic problems (yes, real business cycle theory still is relevant these days).  But is there any upside?

I hesitate to speak too soon but I'm actually somewhat impressed by how the Mexican government, at least at the national level, has responded.  There have been many failures of Mexican health care systems at local levels but keep a few things in mind: a) some of the problems lie with citizens who won't go see doctors, or who won't go see non-shaman doctors, b) too many Mexicans self-administer antibiotics, and c) when there is so much air pollution it is harder to discover flu cases, especially in the midst of flu season there.  Nonetheless Mexican reporting systems seem to have discovered an unusual flu fairly promptly.

Once the national government discovered what is going on, they acted decisively and without undue panic.  There has been very little denial, a common feature in the early stages of health crises (how long was it until the U.S. government acknowledged AIDS?).  No one is treating the Mexican federal government like a banana republic or a basket case or thinking that the Canadian government would have done so much better. 

Am I wrong?  Could this episode in the longer run bring Mexico closer to the community of developed nations?  Might Mexicans now be more likely to self-identify with a government that is at least partially competent?

Time will tell.