Category: Economics

Max Sawicky and I square off on taxes and spending, here is the link.  Here is one short bit from Max:

The other connotation of "surrender" here is surrender to the market, or to the fates. It is surrender to amorality, since market outcomes have no positive ethical qualities. Choices are determined by endowments, and endowments — the wealth and social status resulting from the accident of birth — are a matter of pure luck.

Addendum: Sawicky says impossible, Greenspan says inevitable.

Addendum II: here is the WSJ.com forever permalink, the one above expires in thirty days.

Few if any wealthy countries are breeding fast enough to replenish their populations without immigration.  So Matt Yglesias asks about the macroeconomics of population decline: how different would things be?

First we must distinguish between an aging population and a smaller population, although outside of wartime the two usually go together.  Most people who die are old, and most people, when they are born, are quite young (duh).

An aging population brings dissaving, slower growth, less innovation, and a worsening of the government’s fiscal position.  Whether the stock market adjustment means ongoing lower rates of growth, or a one-time adjustment of prices is a complicated issue (I’ll bet on something in between).  The biggest question is whether the economy is throwing off enough surplus to buy off the relevant interest groups and keep growth relatively untrammeled for the next generation.  The Western European economies are running a huge test of this proposition but so far they are failing.

That all being said, we must keep in mind the relevant alternative.  If it is more young people, great.  If it is shorter lifespans, give me aging.

A smaller population will bring lower land prices and lower aggregate values across the board.  I don’t worry much about the transition path, given how slowly the changes usually come; plus monetary policy can make up for some of the nominal rigidities.  When it comes to assets such as land, it is again complicated to what extent we will see ongoing lower rates of return and to what extent we will see one-time adjustments in prices.  (Ask what is anticipated when, how liquid the market is, whether you can
sell short, whether the asset has carrying costs, and whether anyone must own land for consumption reasons in the interim, while prices are falling.)

Small populations can in principle do quite well; just look at Singapore or Ireland.  Free resource movement will allow the region to reap increasing returns at the world level.  That being said, the biggest drawback of a smaller population is the brute fact that you simply have fewer people around.  To me that is a tragedy of foregone opportunity.

The bottom line: At least for countries with reasonably well-functioning institutions, we should be happy when the birth rate is higher.
 

Tony Blair recently established a Public Diplomacy Strategy Board, an outgrowth of his earlier ”Cool Britannia” campaign, to improve perceptions of the country abroad. And in November, the Persian Gulf state of Oman signed a contract with the marketing firm Landor Associates to develop and sell ”Brand Oman.”

”All nations need to compete for a share of the world’s attention and wealth, and that development is as much a matter of positioning as anything else,” Anholt wrote in 2003, ”so it makes perfect sense for governments to do everything possible to ensure consistency of behavior in every area.” He even recommends that countries appoint Cabinet-level branding ministers. ”I’ve visited a great many countries where they have ministers for things that are far less important than branding,” he says.

Read more here.  Here is the excellent Grant McCracken on Nike’s recent "curation" branding.  Alex Wipperfurth’s new Brand Hijack argues that if you are marketing your brand, you must understand how your customers (and others) will take over and control the process.  If you don’t believe him, just ask Kazakhstan…

Addendum: Speaking of branding, Yana is in the running for "Neighborhoodies of the Week" (individually customized T-shirts), please vote for her.  It takes but a second, she is second from the left (with the "Do You Hate Me? T-shirt), click here to vote.

Read Tyler’s post below for more reactions to Sachs’s The End of Poverty.  Here are some key grafs from William Easterly’s review.

The piecemeal reform approach (which his book opposes) would
humbly acknowledge that nobody can fully grasp the complexity of the
political, social, technological, ecological and economic systems that
underlie poverty. It would eschew the arrogance that "we" know exactly
how to fix "them." It would shy away from the hubris of what he labels
the "breathtaking opportunity" that "we" have to spread democracy,
technology, prosperity and perpetual peace to the entire planet.
Large-scale crash programs, especially by outsiders, often produce
unintended consequences. The simple dreams at the top run afoul of
insufficient knowledge of the complex realities at the bottom. The Big
Plans are impossible to evaluate scientifically afterward. Nor can you
hold any specific agency accountable for their success or failure.
Piecemeal reform, by contrast, motivates specific actors to take small
steps, one at a time, then tests whether that small step made poor
people better off, holds accountable the agency that implemented the
small step, and considers the next small step.

…[Sachs] seems unaware that his Big Plan is
strikingly similar to the early ideas that inspired foreign aid in the
1950s and ’60s. Just like Sachs, development planners then identified
countries caught in a "poverty trap," did an assessment of how much
they would need to make a "big push" out of poverty and into growth,
and called upon foreign aid to fill the "financing gap" between
countries’ own resources and needs. …Spending $2.3 trillion (measured in
today’s dollars) in aid over the past five decades has left the most
aid-intensive regions, like Africa, wallowing in continued stagnation;
it’s fair to say this approach has not been a great success. (By the
way, utopian social engineering does not just fail for the left; in
Iraq, it’s not working too well now for the right either.)

Meanwhile, some piecemeal interventions have brought
success. Vaccination campaigns, oral rehydration therapy to prevent
diarrhea and other aid-financed health programs have likely contributed
to a fall in infant mortality in every region, including Africa.

…the broader development successes of recent
decades, most of them in Asia, happened without the Big Plan — and
without significant foreign aid as a proportion of the recipient
country’s income….

Success in ending the poverty trap," Sachs writes, "will be much easier
than it appears." Really? If it’s so easy, why haven’t five decades of
effort gotten the job done? Sachs should redirect some of his outrage
at the question of why the previous $2.3 trillion didn’t reach the poor
so that the next $2.3 trillion does. In fact, ending poverty is not
easy at all.

Jeff Sachs says yes.  Daniel Drezner offers excellent links, background, and context.  Here is one summary of Sachs’s view:

Africa,
through no fault of its own, is trapped. Held back by geographical
impediments like climate, disease and isolation, it cannot lift itself
out of poverty. What Africa needs, then, is not more scolding from the
West. It needs a ”big push” — a flood of foreign aid — to boost its
prospects and carry it into the developed world.

Sachs’s article in this week’s Time is maddeningly vague — "Commit to the Task" and "Adopt a Plan of Action" count among the policy recommendations.  But how far will $150 billion go?  By Sachs’s own count, over one billion people live in extreme poverty; the next billion up would count as very poor under any Western standard.  Round down grossly to a billion and you have about $150 per head per year to play with.

My take: No way.

I’ll start with two admissions.  I have been an admirer of Sachs, and I don’t think all foreign aid fails.  But $150 billion a year won’t get us very far.

Let’s say you had ten years’ worth of contributions upfront, and invested the whole $1500.  You would be very very lucky to reap 10% a year.  That is a flow of $150 in yearly living standards.  It will buy some fertilizer and mosquito nets but it probably won’t up returns above the ten percent level. When the East Asian countries made beneficial social investments they grew at about ten percent per annum and that is a best case scenario. 

Then come the traditional problems of foreign aid.  Not only is there wastage in aid administration and poor spending patterns, but many essential services simply are not there to be purchased.  Infrastructure requires complementary goods — tractors need roads, and vice versa — which means that the early stages of growth are slow and cumbersome.  Furthermore very poor communities often try to convert their aid into consumption by refusing to perform maintenance on the new capital stock.

I’ll count per capita income of $1000 a year (roughly Guatemala or Morocco) as "no longer very poor."   Given this number, I’ll guesstimate that Sachs’s plan would eliminate severe poverty for about five to ten percent of the one billion very poor, provided the money is spent in concentrated fashion. 

Should I be reminded of James Glassman’s Dow 36,000?  Sooner or later the claim will likely be true.  With (or without?) an extra $150 per capita per year, most poverty will someday end.  But when?

OK, you can’t judge a whole book by a Time magazine summary, especially not when it is by a thinker of Sachs’s caliber.  So I’ve ordered The End of Poverty, and I will pass along any further impressions once it arrives.  In the meantime, it looks as if Sachs is overselling on behalf of a noble cause. 

Whatever we are going to spend fighting international poverty, I would spend on freer immigration, keeping in mind that ongoing remittances will kick in over time.  We also could send a small military mission to Darfur, and focus our aid on one "doable" country or region.  I am a believer in demonstration effects; get it right once, and the world will beat a path to your door.

Addendum: Matt Yglesias offers his views, and William Easterly’s review is very critical of Sach’s policy suggestions.

Now it is bottled water for your dog or cat:

Jason, a spaniel-retriever mix, is now the chief product tester for…PetRefresh for finicky critters nationwide…

It’s also costly to slake a pet’s thirst from bottles. With the average 60-pound dog drinking a liter of water a day, that’s a roughly $400-a-year habit at $2.29 per 2-liter bottle of PetRefresh.

The company is now selling about 50,000 bottles a year.  And Jason, by the way, is no longer drinking from the toilet bowl (in fact the water tries to mimic some qualities of the ever-loved toilet juice, poochies like coolness too).  That is from Friday’s Wall Street Journal, and thanks to Courtney Knapp for the pointer; here is the link, here is her blog.  NB: The product is also considered safe for people.

Addendum: Jacqueline Passey (whose excellent blog relates the gripping and  dramatic story of her life) sent me this NPR article and clip about music and songs for your dog.  Apparently dogs don’t like percussion, or the word "no" in songs.

Julio Rotemberg.  OK, so being tenured at Harvard Business School is not the same as lost in the woods.  But you don’t hear enough about him in the economics profession, when in fact he is one of our most creative thinkers.

My favorite Rotemberg paper is "A Theory of Inefficient Intrafirm Transactions," American Economic Review, 1991.  It is poorly written and the model is clumsy but I love the idea.  Firms do not exist to lower transactions costs, rather they usually raise transactions costs (price aside, wouldn’t you rather go buy a new computer from a retail outlet than try to order one through your purchasing department?).  An asset is brought into a firm when an entrepreneur sees that the asset is currently underpriced.  The firm buys the asset to capture future rents, but don’t expect ex post transactional efficiency to result.  That being said, it makes sense to allow this process to continue, given the absence of serious alternatives to market bidding, however imperfect it may be.

Rotemberg’s paper on altruism explores the idea that you often feel altruism for your co-workers, but you rarely feel altruism for your boss.  This will limit the degree of hierarchy; furthermore some firms may fear inter-employee altruism, knowing that it will be used against them.  His paper on fairness constraints on market pricing is a brilliant, sprawling mess on a vitally important topic.  Why do firms hold poorly publicized temporary sales?  They want one group of customers to think the firm cares about their welfare, while those who buy after the sale ends feel no regret at paying the higher prices.

Here is a previous installment in this series on Brian Loasby.

Simon World, written by an Aussie in Hong Kong, is a good place for keeping up with China and the rest of Asia.  Here’s an interesting post on the accuracy of Chinese economics statistics and did you know that Hong Kong Disneyland will open in September?

Randall Parker offers his two cents on transhumanism; Anthony Evans responds to my recent worries about plagiarism.  Thanks to Kail for the pointer.

$2.97, and here is the full story. Note the accompanying discussion of how Wal-Mart can make it hard for companies to develop a premium image and price.

Thanks to Scott Sameroff for the pointer.

I’m against the bankruptcy reform not because I think that one side or
the other is getting shafted, but because I think that easy bankruptcy
is one of the great unrecognized strengths of the American economic
system. Easy bankruptcy is what frees people to be entrepreneurs, to
take risks without fearing that one wrong move will destroy them
forever.

Jane Galt has much more, read it.

Matt Yglesias asks:

What prevents the supermarket (or drug store) market from being
consolidated into three or four (or five, or whatever) big truly
national chains? Basically, these places are all the same anyway.
There’s no local character embedded in the Giant brand. Why not reap
further economcies of scale by merging?

He notes that many chains operate only in parts of the country:

We’ve got Duane Reade in New York, along with CVS and Rite-Aid. Here in
DC there’s CVS and a little Rite-Aid, but no Duane Reade and no
Walgreens. I’ve seen Walgreens in Long Island, but not in NYC, DC, or
Boston. I infer from Phoebe’s post that they exist in Chicago. In
Florida there’s a chain drug store called Eckerd, which I noticed they
also have in the Norfolk area. In New York, supermarkets are
D’Agostino, Gristedes, or Food Emporium. Here in DC, they’re Safeway or
Giant. In Norfolk, I saw Food Lion, which I’d heard of because of the
famous lawsuit, and which I also saw when I went to the Outer Banks.
But none of the supermarkets I know from the NYC or DC markets. In the
Boston area, the only supermarkets I saw were Star Market…[TC: what about Wegmans?  Get a car!]

I can think of a few reasons for "incomplete" chains:

1. There is an optimal chain of control and monitoring is costly.  Think of successful companies as based on some fixed factors, such as an excellent CEO.  The value of that factor can only be spread so thinly, which limits the size of the chain.

2. Privately-owned companies offer significant advantages, both on the regulatory front and in terms of coherent control.  You don’t have to please the shareholders with a good quarterly earnings report each period.  Yet privately-owned firms will have a harder time finding the capital to expand.

3. Competing often depends on region-specific skills.  Even if the interior of a Giant is  homogenized, success will depend upon contacts with local distributors, a good pool of local workers, good working relationships with local governments and zoning boards, and so on.

4. Path-dependence matters.  Most suburban areas have room for only so many supermarket brands.  The ones that started first — for purely historical reasons — have a continuing competitive advantage.

5. Many local chains are simply local brand names belonging to a larger national chain with different names across different regions of the country.

6. What are the big advantages of consolidation anyway?  Most of the advertising is local not national.  And to the extent the underlying wholesale markets are competitive, large purchases won’t get you much of a bulk discount.  This, by the way, is one reason why Wal-Mart will decline as trade with the Chinese becomes increasingly common.

…nearly 24% of responding [journal] editors encounter one case of plagiarism in a typical year. In addition, the survey reveals that less than 19% of responding journals have a formal policy regarding plagiarism. Moreover, there is a great deal of variance in what is considered plagiarism and what an appropriate response to plagiarism should be. A majority of editors believe that the economics profession would benefit from a professional code of ethics.

Here is the paper.  I believe I have been plagiarized twice during my career, each time by a well-known economist.  Not word-for-word copying, but rather using a borrowed idea –and the major idea of the paper — rather directly without attribution.  (In each case the instance was pointed out to me by somebody else as well, so I am inclined to dismiss the possibility of self-delusion on my part.  Plus in each case I know the plagiarizer had access to the paper.)  In each case the plagiarist took an unpublished paper and improved upon my original idea.  In neither case did the plagiarist gain anything concrete from the action, nor have I suffered any real net harm.  I am not convinced that the welfare consequences of economic plagiarism are very large, but arguably there is an ethical case for devoting more attention to the phenomenon.