Category: Current Affairs

NY Times Wrong on Iraqi Gun Ownership

In March, Neil MacFarquhar of the New York Times asserted that guns were easy and legal to obtain in Saddam Hussein’s Iraq. The NRA has long argued that guns are a bulwark against the police state so Slate’s Timothy Noah challenged the NRA to explain “how Iraq got to be, and remains, one of the world’s most repressive police states when just about everyone is packing heat.” Noah later rejected reader explanations of this apparent paradox, including the possibility that MacFarquhar was wrong, and “reluctantly” concluded that private gun ownership is not a bulwark against a police state.

Today, however, John Tierney of the New York Times reports that “Mr. Hussein, never one to tolerate competition, forbade private citizens to carry weapons, effectively outlawing the security industry.”

Clearly, the New York Times is wrong. But where does the truth lie?

You can always resell it

Why not just give gifts of money? Prudence of Slate tells us that norms are changing, and that more people are finding cash gifts for weddings acceptable. The couple that posed the initial question put it as follows:

So they think it’s “tacky” to ask for money? Well, we think it’s worse to make people spend precious time getting gifts we don’t need or want.

Amen, says this economist, whose best wedding presents from this last May often were the gift certificates. I might add that co-blogger Alex and his wife gave us a very useful gift certificate for a framing shop.

One economic estimate suggested that Christmas gifts alone involve a “deadweight loss” of $4 billion. I’ve never been convinced by this number, gifts help people sort out how well their friends and loved ones understand them, and create new lines of communication, surely this is an offsetting benefit. And sometimes a surprise or show of affection, as embodied in a gift, is simply more fun. Nonetheless gifts are a form of signalling, and very often people invest too much effort in the signal, just to be higher in the pecking order. I hope Prudence is right about the change in norms.

Addendum: I read the following in the Weekend Financial Times: “In 1979, Karen Davis started a hickory-baked ham company in Marieta, Georgia, and on opening day her parents gave her a porcelain pig for good luck. Over the next two decades, she estimates that she got 400-500 pig gifts. “Pigs aren’t my thing,” she says, though she did warm to the piggy banks.” See the article for other examples of dubious gifts.

Storming the MarginalRevolution

We at MarginalRevolution are committed to providing regular fresh content on a daily basis. That being said, we live in Northern Virginia, a big storm is coming, and Governor Mark Warner says we might lose electrical power for a while. I don’t expect blogging problems, but on the off-chance that you don’t hear from us for a short while, keep faith, we will be back as soon as conditions permit.

Why does the middle class feel so poor?

I’ve just read The Two-Income Trap: Why Middle Class Mothers & Fathers are Going Broke, by Elizabeth Warren and Amelia Warren Tyagi. This book has received a good deal of popular press.

Having children is a big part of the financial burden, Americans have been spending less on appliances, food, and clothing. Housing prices are the real killer, especially if the family has children. Good schools and safety are becoming increasingly hard to buy. In real terms, families with children paid 79 percent more for housing, comparing 1983 to 1998.

Having just overpaid for a house, to put my stepdaughter into a good school district, I can sympathize with this argument. But I don’t understand the core logic as a more general claim. The authors claim that this financial predicament is affecting very large numbers of middle class Americans. At the same time we are told that good schools are increasingly hard to come by. Which is it? If there are a small number of homes with good schools, not too many people can be overpaying. If there are a large number of such homes, good schools cannot be that scarce, and the bidding war should not be so fierce.

I nonetheless recommend the book to stimulate your thoughts. It also argues for anti-usury laws, claiming that debt-ridden families will make rash decisions and overborrow at excess rates. You might recall Adam Smith made a similar claim over two centuries ago.

Iraq and the Marshall Plan

According to some estimates, we will spend $20 billion on Iraqi infrastructure over the next year, half of Iraqi gdp (don’t take Iraqi gdp statistics too seriously!). Andrew Sullivan has been asking how our assistance to Iraq compares to the Marshall Plan of postwar Europe. Here are some answers, drawn from a 1985 piece I wrote “The Marshall Plan: Myths and Realities,” click here for an on-line summary, the piece appeared in Doug Bandow’s U.S. Aid to the Developing World.

The Marshall Plan did not ever exceed 5 percent of the gross national product of the recipient nations. In the case of Germany, note that we were taking more out of Germany, in the forms of reparations and occupation cost reimbursements (11 to 15 percent of West German gnp), than we were ever putting in. Then throughout the mid-1950s, Bonn repaid half of the aid it had received. Note that German economic recovery followed from liberalization and reforms, which predated Marshall Plan aid.

In 1949-50, our Marshall Plan aid to France was roughly equivalent to French military expenditures abroad in Indochina and North Africa.

Of the European nations, arguably Belgium recovered from World War II most rapidly, and this happened before Marshall Plan aid kicked in.

At the end of World War II, the Austrian economy was one of the most desperate in Europe. Austria received high per capita aid sums, but the economy stagnated. Austria later recovered, when it improved its monetary and fiscal policies. Marshall Plan supporter Franz Nemschak wrote: “The radical cuts in foreign aid in the last year of the Marshall Plan and the stabilization tendencies in the world economy forced Austria to make a basic change in economic policy.” Greece received high per capita aid as well, but had a poor recovery.

The lesson for Iraq?: Simply spending money won’t get us there. See these Rand Corporation figures, showing that per capita aid does not correlate obviously with the eventual success of a reconstruction. The key question is whether the Iraqis can build healthy institutions. Walking away is not the answer, but don’t feel good just because you see more money being spent.

Addendum: I have scanned the whole essay and put it on-line.

Why the EU won’t become a federal government

I was struck by Larry’s Siedentop’s words from today’s Financial Times (subscription required):

…the new member states will be very assertive once the formalities of enlargement are over. We can expect an unapologetic defence of national interests, a suspicion of encroachments from Brussels and an intense dislike of what might be called lurking double standards in the EU…It will be a pluralist vision rather than a unitary one, a preference for something more like a confederation than a federation. For behind the quasi-federalist form projected for Europe that is promoted, at least intermittently, by France, such countries detect a wish to give the EU some of the attributes of a unitary state. Their contribution could decisively shift the balance of the debate away from that particular vision.

The beast isn’t starving

I caught a lot of flak from conservatives when I wrote in an op-ed that the so-called Bush tax-cuts were a fraud. If spending isn’t cut then in the long run taxes can’t be cut either. Since spending has gone up under Bush, all he has done, I argued, is to raise our future taxes (at precisely the wrong time too given the coming fiscal problems created by demography) . Conservatives complained that I missed the strategic beauty of the Bush plan. A tax cut, they said, will keep spending down, it will “starve the beast.” Well Bush is now asking for another $87 billion to fight the war in Iraq, employment is down everywhere but in the federal government where it is higher than under Clinton, and Bush is already touting how his administration is responsible for the largest increase in Medicare in its 38 year history. Apparently, on the Bush diet you can eat all you want and still lose weight.

Globalization and poverty: a debate

The Cato Institute offers an on-line debate on globalization and poverty, here is the last installment. Johan Norberg, author of In Defense of Global Capitalism, takes on Robert Kuttner, of The American Prospect. I am closer to Norberg’s market orientation, but Kuttner gets the better of this exchange. Norberg needs to concede a clear role for government in development, in producing public goods and basic infrastructure, and emphasize that most developing countries today don’t have strong enough markets or anything close to it. That debate he could win.

Should we be surprised that the Cancun WTO talks failed? and other major news sources use the word “collapse.” The rich countries won’t give up their agricultural subsidies, some of the poor countries won’t open up their investment and procurement rules.

A recent IMF Working Paper, “The WTO Promotes Trade: Strongly but Unevenly,” by Arvind Subramaniam and Shang-Jin Wei (not on-line) provides an account of the longer history. In the early days of WTO (GATT), developed nations used the institution to reduce their average tariff barriers from 27 to 4.5 percent. Since that time the institution grew and deteriorated in quality: “our result is a more damning indictment of the WTO than even that in Rose [the link is from me, of course, not the authors of the paper]…He found that membership in the WTO had no significant effect on trade. We find that membership has a significantly negative effect on trade…”

It is the developing countries that drive the negative result. The authors emphasize that the result is not statistically robust, but in any case this is hardly a ringing endorsement of WTO.

Addendum: The paper is now on-line.

Sweden rejects the Euro

The margin is decisive, so far it looks like 56 percent against, 42 percent for, read here for one early account of the voting.

It is a tough call, but I think the Swedes did the right thing. Mostly the Swedes feared that the fiscal discipline of the EU will curtail their welfare state, but I don’t think this should have been the main issue. The Netherlands, another small country, has created a generous welfare state (albeit with some spending cuts), prosperity, and relative fiscal responsibility, all under the rubric of the EU. In the long run it is hard to see the EU curtailing Swedish spending more than international capital markets and other competitive pressures would. And it remains to be seen how binding the EU fiscal requirements will prove, after France is violating them.

What is really the advantage if Sweden had adopted the EU? Price competition would have become more intense, as buyers would have an easier time comparing prices across countries with only a single currency unit (admittedly this violates various economic theories, which suggest people “see through” the monetary unit, but it nonetheless seems to be true, noting that in the short run prices get bumped up before later falling). That counts as a real gain, but on the other side the Swedes would have given up the ability to control their own monetary policy.

The Swedes have a history of pursuing a monetary policy independently of Western Europe. The Swedish depression of the 1930s was milder than for the rest of Europe, in part because Sweden broke with gold, devalued, and avoided a disastrous deflation, for one treatment read here.

Supposedly the Swedes don’t now have the “proverbial seat at the table,” but as more countries adopt the Euro, how much is this worth anyway? They decided to keep a whole table of their own, albeit a much smaller one. Does anyone really know how the European Central Bank will operate over time, as more members join, or if a crisis hits? Some critics charge that foreign investors will now stay away from Sweden, due to exchange rate volatility, that would be one factor on the side of Euro adoption.

Perhaps it will prove most important that the Swedish government supported the change, and voters didn’t cooperate. Swedes usually have great trust in their government, more than we are accustomed to seeing in the United States. This may signal a break between Swedish elites, who often have closer ties to Europe, and many Swedish voters. The consequences of today’s vote will likely include more than just macroeconomic policy.

Liberalization of capital markets

How much does liberalizing capital markets spur economic growth in developing countries? It depends on what kind of country you look at, according to a recent paper by Kenneth Rogoff, formerly chief economist at the IMF, also Professor at Princeton.

He suggests that financial integration should be “approached cautiously.” Many of the benefits kick in only after countries have achieved a particular level of financial integration. Improvements in integration, starting from low levels of integration and development, often have increased the volatility of consumption. Trade integration is associated with faster increases in health and infant mortality, but financial openness is not.

Rogoff sees four problems with financial integration for poorer countries: investors engage in herd behavior, investors engage in speculative attacks on unsound currencies, the risk of contagion, and governments may use financial globalization to overborrow. Financial integration can, in principle, bring great benefits but it is not always used responsibly.

We should take these results seriously. Rogoff is a highly respected economist and he has no starting bias against market globalization. Read his open letter to Joseph Stiglitz, which offers a good statement of his overall perspective on global markets.

Did you know that Rogoff had an earlier career as a chess grandmaster? Read the story he once wrote for Seventeen magazine on this time in his life.