Category: Economics

Phrase of the day

“The non-governmental sector.” At yesterday’s UNESCO meetings, I heard it at least fifteen times.

Yes I know the term has a (supposedly) legitimate use, but you will never hear it from my lips. How about a sentence like this?:

…non-governmental organizations have made and are increasingly making important contributions to both population and development activities at all levels. In many areas of population and development activities, non-governmental groups are already rightly recognized for their comparative advantage in relation to government agencies.

It’s nice to know that we are good for something!

The bottom line: Tomorrow I fly home.

Private Militaries

Believe it or not, the private British firm, Global Risk International, “a more bespoke approach to the security industry,” operates the 6th largest military force in Iraq. Overall there are some 15,000 private military contractors in Iraq. In addition to more mundane tasks like feeding the troops they protect convoys and train the Iraqi police, paramilitary and army. The four Americans brutally killed earlier this week were employees of Blackwater Security Consulting who also serve as bodyguards for Paul Bremer.

In the United States, private military firms (PMFs) are similarly pervasive. Over the past 10 years the US has spent more than 300 billion on private forces including a contract for the operation of the computer and communications systems at NORAD’s Cheyenne Mountain base, where the U.S. nuclear response is coordinated. Brookings’s Peter Singer notes:

PMFs now provide the logistics for every major U.S. military deployment, and have even taken over the Reserve Officer Training Corps (“ROTC”) programs at over two hundred U.S. universities; that is, private company employees now train the U.S. military leaders of tomorrow.

I have drawn from Peter Singer’s book Corporate Warriors: The Rise of the Privatized Military Industry as well as several of his papers at the Brookings Institution. If you are in need of a small island nation, here is list of private military firms.

Crude extrapolation: debt to gdp ratios

What happens if we extrapolate current trends to 2050? What will debt to gdp ratios look like around the world? A few estimates:

1. For 25 major OECD economies, the ratio will rise to 47 percent by 2010 and 139 percent by 2050. Most of these countries would risk eventual downgrading to junk status.

2. In 2050 Japan would have the highest debt to gdp ratio, namely 718 percent. The Czech and Poland would have the next most serious problems.

3. Among the current Eurozone countries, Germany would fare the worst with a ratio of 307 percent. The ratio in the US would be 158 percent.

4. For purposes of contrast, Great Britain, right before WWII, a fiscally pressed time, had a debt to gdp ratio of 188 percent.

5. The countries with the smallest future ratios include Luxembourg, the UK, Sweden, Spain, Ireland, and Australia. Those countries have more favorable demographics and smaller burdens from their pension systems. Those ratios lie in the range of 40 to 60 percent.

6. The fiscal impact of aging far outweighs the costs of German unification.

OK, this is crude extrapolation. But keep in mind that social security benefits are often fixed by law or politically hard to alter. Growth rates might improve, but on the other hand longevity could increase.

The estimates are from Standard and Poor’s, reported in The Financial Times of 1 April 2004, “Sovereign Ratings Under Threat.” Sorry I have no permanlink from this antiquated Parisian computer terminal but it is subscription only anyway.

Addendum: Alex suggests I could have titled the post “r>g,” don’t worry if you don’t get the joke.

Econ Journal Watch

The inaugural issue of Econ Journal Watch has just been published (I am an advisor and have a paper in the first issue). EJW publishes comments on articles appearing in economics journals. Other journals also publish comments but they are rare and generally restricted to pointing out logical or mathematical flaws in a chain of deductions. EJW, in contrast, seeks to take on the unrealistic assumptions, omission of relevant facts, and phony claims of relevance that pervade many economics articles.

EJW also has a number of recurring features such as “Do Economists Reach a Conclusion?.” Papers in this section test Truman’s quip about needing a one-handed economist. In the first issue, Rick Geddes looks at the postal monopoly and Mark Thornton at drug prohibition. When attention is focused on those economists who have actually studied the issue and reached a policy conclusion both authors find a surprising consensus in favor of reform.

Lots of other interesting material. I’ve put this one in our permanent list of resources (left hand side bar).

How Now, Dow

The Dow Jones Industrial average will be dropping AT&T, Kodak and International Paper. Welcome Pfizer, Verizon and AIG, an insurance group. Verizon was once part of AT&T which is something like Ken Griffey, Sr. being benched in favor of his son, Junior. Reuters reports that it has happened before:

Both Verizon and SBC Communications Inc., added in 1999, were among the seven companies carved out of AT&T in an antitrust ruling in 1984. Mr. Prestbo said this is the third instance in which descendants have taken the place of broken-apart parent companies to represent their respective industries in The Dow. ExxonMobil Corp. is a combination of two descendants of Standard Oil Co. (New Jersey), broken up in 1911. Boeing Co. and United Technologies Inc. trace their lineage to United Aircraft Corp., which was split in 1934.

The Dow Jones average started in 1896 with 12 stocks. Only General Electric is still around in its original name from those halcyon days, a tribute to GE (though it has dropped out and come back as this nice historical summary from the Motley Fool points out) and the dynamic nature of the American economy.

Japan’s trade with China

I don’t trust the figures, but did you know that China’s per capita income has been estimated at $890 a year, circa 2002, well under that of Guatemala ($1670) or Morocco ($1180)? Guest blogger Russ Roberts cites a slightly higher and more recent figure of about $1000.

That being said, how might you expect growing trade between China and Japan to affect the Japanese economy? The wage differential for semi-skilled labor is about a factor of twenty. Russ also cites worries that trade with China will weaken or impoverish the United States.

Here are a few simple facts:

1. In 2003 Japan’s trade with China, including Hong Kong, rose by nearly a third to $162 billion.

2. Exports to China leaped 40 percent in this same year.

3. A few years ago accepted wisdom was that trade with China would destroy Japan’s manufacturing base. Now observers say that “Even Japan’s “old economy” industries, such as steel, pulp, chemicals, shipbuilding and construction equipment, have been handed a new lease of life.” (Financial Times, March 30, “Crossing the Divide” ($)).

4. Trade with China is widely viewed as bailing out Japan, which was otherwise stuck in more than a decade of virtually zero growth. Japan buys cheap Chinese inputs, and supplies the Chinese manufacturing boom.

5. It is estimated that only about 20 percent of Japanese and Chinese products compete in the same markets. For the most part the two countries produce complementary goods.

The information is from the Financial Times article cited, here is a related link with some roughly comparable statistics.

My take: Won’t any facts convince individuals of the merits of free trade? Surely if any set-up would lead to falling wages in Japan, trade with China should do the trick. In reality it has been a godsend to the Japanese economy. That being said, the Japanese should expect more volatility. In the long run I am bullish on China, but I expect a bubble to burst within the next five years. Has any country made the climb into modernity without a collapse along the way?

Labor Standards and Bicycle Helmets

Robert Samuelson writes in today’s Washington Post (registration required) that China, though in many ways an abominable economic landscape is a lot like the US 100 years ago. He argues that while growth is a messy thing, there is hope for the future in China, and recent progress is encouraging. He notes (citing the World Bank as his source):

†¢ From 1978 to 2002, the average annual per-person income rose from $190 to $960. It’s probably now above $1,000. (The U.S. figure: about $36,000.)

†¢ Life expectancy increased from 61.7 years in 1970 to 71 in 2002.

†¢ Adult illiteracy fell from 37 percent in 1978 to less than 17 percent in 1999.

†¢ Infant mortality dropped from 41 per 1,000 live births in 1978 to 30 in 1999 (the U.S. rate: about seven).

As the election heats up, we’re going to hear a lot about labor and environmental standards and how we need to level the playing field in trade. China remains a very poor country. It cannot afford the luxury of our standards of today any more than America could have afforded them 100 years ago when the average work week was 67 hours (down to 34 today) and the work place was a much more dangerous place.

One way to see this is to think about bicycle helmets. Where are more bicycle helmets worn–Chicago or Shanghai? Manhattan or Mexico City? More are worn in Chicago and New York. Don’t people in China and Mexico know that it’s dangerous to ride a bike in traffic without a helmet? I suspect they do. It’s just too expensive. Poor people are better off foregoing the helmet, keeping their kids in school a little longer and doing the best they can to avoid being hit by a car. Making the Chinese have factories as safe and clean as ours is like forcing them to wear bicycle helmets. It’s a bad deal for them even though there are benefits.

Politically incorrect paper of the month

African-Americans make up a larger proportion of students than teachers. Many educators say that as a result African-Americans students suffer because they lack role models and white students suffer because they lack diversity. In a newly published paper (working paper version), Thomas Dee (Swarthmore College) supports some but not all of this story. Using data from Tennessee’s Project Star, a very important experiment in which K-3 students were randomly assigned to small and regular sized classes, Dee finds that black students improve when they have black teachers. So far so good. Dee also finds, however, that white students improve when they have white teachers. Uh, oh. There goes the diversity is good for everyone story.

Dee is quick to point out that we don’t understand why students perform better with a teacher of their own race. If it is a role-model effect then why would white students perform poorly with black teachers – surely there are enough white role models to choose from that one more or less isn’t going to have an effect on the self-esteem of white students. Another theory, with some support from other studies, is that teachers spend more time helping students of their own race. Note that if it is the latter then better teacher training, to overcome natural biases, could improve the effectiveness of both white and black teachers.

The cite for the paper is Dee, Thomas S. 2004. Teachers, Race, and Student Achievement in a Randomized Experiment. The Review of Economics and Statistics 86(1): 195-210.

Tax and Spend

On my way in to work today, I heard a snippet of a President Bush speech on C-Span radio. “Tax and spend is the enemy of job creation,” he said.

That’s probably true. Unfortunately for the President, if tax and spend is the enemy of job creation, so is “borrow and spend,” the President’s recent formula.

The size of the budget and what it’s spent on is more important than how it’s financed. There are really only two choices for financing–taxes today and taxes tomorrow. Borrowing just means taxes tomorrow. The President likes to describe tax cuts as letting people keep more of their own money. I like that idea. Unfortunately, I agree with my hosts Tyler and Alex that the current administration has raised our taxes by increasing spending. So ultimately we’re keeping more of our money today and expecting to give back even more tomorrow.

Ironically, Bush has raised spending in what I would guess is a labor intensive way. By expanding homeland security, a lot of workers have been drawn into public employment rather than the private sector.

Last month’s job growth was “small” and almost all of it was in the public sector. That’s most likely a result of government spending pulling people into public sector jobs rather than the private sector.

This Friday is a big day for Bush and Kerry. The job numbers for March will be released. If they are weak again, Bush will have to keep talking about home ownership being up.

Microsoft, bundling and all that

Brad DeLong argues that he has been harmed by getting IE for free with Windows.

Remember the days when there was not one single dominant browser that came preinstalled on 95% of PCs sold? Back then there was ferocious competition in the browser market, as first a number of competitors and then Netscape and Microsoft worked furiously to upgrade their browsers and add new features to them….Progress in making better browsers was rapid, because browser-makers wanted to make a better product and any new idea about what a browser should be was rapidly deployed to a large enough user base to make it worthwhile for web designers to try to use the new feature.

But why was competition in the browser market so furious? Hmmm… couldn’t have been because each firm knew that the winner would be a monopoly, could it? The alternative to Microsoft winning the browser war was not competition between many firms but a different dominant monopolist. Focusing on the economics, i.e. without getting into arguments about which firm was the better innovator etc., is there any reason to prefer one monopolist over another?

The double monopoly problem, first explained by Augustin Cournot in 1838, suggests that Microsoft might be the better monopolist. The double monopoly argument says that if two products are going to be monopolized its better if they are monopolized by one firm than by two (or more). The reason is that the single monopolist will take into account complementarities between the two products. The better the brower, for example, the more operating systems Microsoft will sell and vice versa. Separate the two products and you lose this added incentive to lower price and/or improve quality. (If you know the tragedy of the commons argument, the double monopoly problem is the same thing with the customers serving as the common resource).

An unappreciated aspect of this argument is that the reason that Microsoft might make the better monopolist is the same reason it will likely win in any battle with a stand-alone competitor. Microsoft has more to lose from losing and more to win from winning than does the stand-alone and will therefore put more resources into winning. This explains why the European directive requiring Microsoft to sell two versions of its operating system, one with and one without the media player, is pointless. Microsoft will simply sell the two versions at the same price – then which one would you choose?

Aside: I also think that Brad doesn’t appreciate enough the power of potential competition. Low marginal costs and ease of distribution in the software market mean that one of the now relatively small competitors to IE could grow very rapidly. Microsoft knows this and cannot rest on its laurels/behind (your choice). Consider how rapidly the browser substitutes known as RSS readers are growing.

Buckley visits Galbraith

William F. Buckley drops in on John Kenneth Galbraith whom he says absurdly is “the most influential U.S. intellectual of the 20th century.” The two old friends then proceed to have a rather doddering conversation.

Buckley asks, “What is it about Bush’s policies that makes them unworthy of conservative benediction?”

“Their ignorance,” Galbraith responds.

“What is Bush ignorant of?”

“Ricardo, for instance.”

Score one for Galbraith.

Later, however, Galbraith delivers what he sees as a crushing blow. “There is not one member of the faculty of Harvard University who is pro-Bush.”

Score several points for Bush!

Actually, it is not even true, Greg Mankiw is Bush’s CEA chair.

The creative commons

Larry Lessig has followed his principles and put his new book, Free Culture, online for free with full rights to redistribute, copy, or otherwise reuse or remix so long as you do so for non-commercial purposes and credit Lessig. Some enterprising bloggers have already taken advantage of the license to record each chapter in MP3 format. Surprisingly, the Lessig book is being simultaneously published by Penguin, which seems like a big risk for them – and having told you where you can get the book for free, will you now buy it at Amazon earning us our vigorish?

I haven’t read Free Culture yet but Lessig’s earlier book, The Future of Ideas, was excellent. Believe it or not, the Future of Ideas, is an argument for the virtue of the commons based upon insights from Austrian economics. A strange but compelling combination.

Addendum: Read Russell Roberts interviewing Larry Lessig here.

Bastiat’s house is for sale

The Dufaur de Gavardie de Monclar family, who jointly own Bastiat’s property in Souprosse, inform us that they have reluctantly decided to put it up for sale, as no one member of the family is able to purchase it. It consists of a fine 17th century manor house, with early 20th century alterations, approached via a long tree-lined driveway, a barn and an outbuilding, all set in grounds of 28,000 m².

The main house has a surface area of 200m², on three levels, that is 600m² of living space. The barn, with a timber-frame roof of outstanding architectural interest, has a surface area of 400m² and consists of three levels. The outbuilding is a house on two levels, with a surface area of 100m².

The whole property is for sale for 426,900 euros.

Here is the link, thanks to the Mises blog for the pointer. Here is a short biography of Bastiat that also contains links to many of his works. Perhaps I will stop by the house to pay my respects.

Who are the most influential businessmen in history?

Joel Mokyr offers his list:

Matthew Boulton (1728-1809) †¢ Powered Industrial Revolution (Marginal Revolution’s first post was on Boulton and his friends.)

Andrew Carnegie (1835-1919) †¢ Carnegie’s Steel Built America

Walt Disney (1901-1966) †¢ Mega Media Blueprint

Henry Ford (1863-1947) †¢ Democratized Transportation

Edward H. Harriman (1848-1909) †¢ Proto-turn-around artist

Henry J. Kaiser (1882-1967) †¢ Fathered the HMO

Ray Kroc (1902-1984) †¢ Founding Father Of the Fast-Food Nation

William Lever (1851-1925) †¢ Invented “The Brand”

Henry Luce (1898-1967) †¢ Mass Media Pioneer

J. P. Morgan (1837-1913) †¢ Saved Wall Street

Alfred Nobel (1833-1896) †¢ Invented Dynamite, Holding Company

John D. Rockefeller (1839-1937) †¢ Spawned Global Energy Industry

Meyer Amschel Rothschild (1744-1812) †¢ International Financier Pioneer

Alfred P. Sloan (1875-1966) †¢ The Perfect Organization Man

Gerard Swope (1872-1957) †¢ Wove Capitalism’s Safety Net

Sakichi Toyoda (1867-1930) †¢ Smarter Machines Sage

Sam Walton (1918-1992) †¢ Perfected Mass Retailing

Aaron Montgomery Ward (1843-1913) †¢ “No Store” Retailer

Thomas J. Watson Jr. (1914-1993) †¢ Wired Corporate America

Josiah Wedgwood (1730-1795) †¢ Invented Celebrity Endorsements

A good list, but it fails to reflect just how much business has transformed our society. How about Zukor, Laemmle, Fox, or Cohn, some of the early founders of Hollywood? You could add the Medici, the unknown father of double-entry bookkeeping, or how about Gutenberg for that matter?

Here is the complete article. Thanks to Lynne Kiesling for the pointer.