Growthology

Rereviewing a book

My goodreads.com friend, Chris Prottas, just posted this interesting review of William Easterly "Quest":

Recently went back and re-read this book. As other reviewers mentioned, I am curious to see what Easterly would say of this more optimistic earlier work, but regardless this text is an excellent, accessible history of economic development in the 20th century. Easterly explains the progression of economic thought and the fate of the 'latest and greatest' foreign aid ideas spurred by ever changing growth theories.

Contrary to some of the spurious one-line reviews below, this book is definitely not the work of a laissez-faire ideologue. Easterly is, however, quite critical of the aid establishment's record (though, once again, optimistic about the potential for aid as poor gov'ts grow increasingly competent and decreasingly corrupt).

Easterly is concerned with economic growth, and he adroitly explains how aid of all shapes and forms has largely failed to positively impact development. If you'd like to see some of the good aid has done, you will have to look to improvements in quality-of-life, not the subject of this book, which can be found in Charles Kenny's draft "The Success of Development." How much credit should go to NGOs and how much to commercial firms who lowered the price of living well through technological innovation is up for debate, but it's important to remember that Easterly is talking specifically about the aid establishment's impact on economic growth.

Highly recommended, along with White Man's Burden, Daron Acemoglu, Douglas North's new book, Dani Rodrik's articles, and yes -- some Collier too! (Just ignore Sachs)

Makes me wonder what books I go back and re-read again and again. Easterly's Quest is one of them. I love to reread sections of old econ textbooks, to be honest. Sometimes for information I have forgotten, but more often for a nostalgic reflection on how my eyes see the text in contrast with how those words felt the first time they hit me. I never studied Mankiw's textbooks, but I taught them, so those feel a little different than the nostalgia of a Samuelson or Granger or Varian or Mas-Colell or Alpha C Chiang. Krugman's popular titles I've reread dozens of times. For fiction, I confess to rereading Memoirs of a Geisha as well as all the novels of Vernor Vinge. Just this weekend, I reread Stephen King's The Stand for the second time, last being in the summer of 1980.

Top five novels:

The Last Ship
Memoirs of a Geisha
A Sense of Honor
The Foundation
The Might Avengers (collected works, 1977-82)

Is It a Free Future?

I haven't read Chris Anderson's "Free: The Future of a Radical Price," but I have been thinking about the Jobs of the Future, as you know. Thankfully, Virginia Postrel has read it for me, and I trust her insights more than my own. Here's what she says: (bolding added)

Unlike tangible commodities like T-shirts or plastics, most digital content doesn’t generate much new demand as its price falls toward zero. Even with no admission fee, videos, blog posts and online games soak up users’ time, and time has a hard limit. So as the supply of cheap content expands, it can’t simply fill ever-growing closets (or garbage dumps). Instead, the competition for time and attention becomes ever fiercer, and the market ever more fragmented. Any given producer will find profits elusive, especially since it’s so easy for amateurs to enter the market.

Faced with collapsing business models, today’s journalists-in-denial rail against Anderson’s message. Free contentcannot be the future, they say, because content is valuable. Fixed costs must be covered. We have bills to pay. The problem, they argue, is that we’re giving our work away. ...

The book is certainly good advertising. “Free” is a successful business speech between two covers, pleasant, upbeat and full of anecdotes and bullet points. ...

But what about the competition? What about the time-saving, risk-lowering, beloved alternatives somebody else is offering free? Opponents of the free-content argument too often reject the idea that free content is the future simply because they don’t want it to be true. Even Anderson himself equivocates, flinching at the implications of almost limitless competition.

After all, the last thing a business author wants to suggest is that we’re entering a new age of amateurism. But there are hints throughout the book that the future of this radical price is to be found in the past, when satisfying work was what one did on the income provided by less satisfying toil, or by investments, patronage or marriage. “Doing things we like without pay often makes us happier than the work we do for a salary,” Anderson writes, adding, “No wonder the Web exploded, driven by volunteer labor — it made people happy to be creative, to contribute, to have an impact and to be recognized as expert in something.”

“No man but a blockhead ever wrote except for money,” Samuel Johnson said, and that attitude has had a good two-­century run. But the Web is full of blockheads, whether they’re rate-busting amateurs or professionals trawling for speaking gigs. All this free stuff raises the real standard of living, by making it ever easier for people to find entertainment, information and communication that pleases them.

Business strategy, however, seeks not only to create but to capture value. Free is about a phenomenon in which almost all the new value goes to consumers, not producers. It is false to assume that no price means no value. But it is equally false to argue that value implies profitability.

Anderson asks about the implications of price trending towards zero, not the value. I've been thinking about the implications of productivity trending in the other direction. Agricultural production is rising because two factors are trending: output (quanitity and quality) is rising over time, while labor (L) input is declining over time. Other factor inputs are rising, right? Ag capital (K) and technology (T). And if you think of ag capital is simply a comination of technology and hardware, then the only real change is an increase in T replacing L.

Is there a real trend toward zero for labor inputs? Maybe not, but does it matter? The difference between 90 percent of the population working in the fields and 2 percent working in the ag sector is about the same as 90-to-0. There remain 88-or-90 percent of the population with time on their hands.

Now if you posit that the price of content and material things are similarly trending down towards, if not to, zero, the larger implication is hard to fathom.  People pay lower prices for things and it takes fewer people to make those things. There is a massive amount of value being generated and consumed, but few people making the value who get paid in bulk. What does the remaining mass of people DO? Makes me think this whole idea of human progress is like a magic act where the magician makes himself disappear.

What assorted links am I reading?

One of the things I like best about the web is the ability to keep track of what my friends and fellow bloggers are reading. That's why I've been a big fan of goodreads.com, and also why I have been keeping tabs on the reading habits of Publius, a loyal growthology reader.  Publius, oddly enough, is a person whose identity is unkown to me, but I know of his(her?) books and reviews!

Another feature I like is the "What I'm Reading" posts by Tyler Cowen and Paul Kedrosky. Actually, I think it is the "Assorted Links" type of post that I am most fascinated by. So pithy. Actually, I was having this talk with new blogger Donald Marron a couple weeks ago, and he also wants to learn how to semi-automate the links post. I tried to write a few by hand / the old fashioned way / copy&paste&youknowthedrill a few times, but it was quite slow.  Is there some kind of software add-on these bloggers are using to generate those posts?

It could easily be the case that Paul and Tyler are just hyper-productive.

Anatomy of an Entrepreneur, in pictures

Vivek Wadhwa is at it again, this time through a slideshow at Business Week that digs into his study of the same name for the Kauffman Foundation. Findings include:

• More than 90 percent of the entrepreneurs came from middle-class or upper-lower-class backgrounds and were well-educated: 95.1 percent of those surveyed had earned bachelor’s degrees, and 47 percent had more advanced degrees.

• Seventy-five percent of the respondents ranked their academic performance among the top 30 percent of their high school classes, and 52 percent said they ranked among the top 10 percent. In college, 67 percent of the founders ranked among the top 30 percent of their undergraduate classes, and 37 percent ranked their performance among the top 10 percent.

• Founders tended to be middle-aged—40 years old on average—when they started their first companies. Nearly 70 percent were married when they became entrepreneurs, and nearly 60 percent had at least one child, challenging the stereotype of the entrepreneurial workaholic with no time for a family.

Cali-sized Opportunity Costs

In the wake of a crisis-induced budget deal endorsed by Republican Gov. Arnold Schwarzenegger and passed Friday by a Democratic-controlled Legislature, Californians can look forward to drastic cuts in higher education enrollment and increased student fees and tuition, significant reductions in health coverage for the working poor, an end to cost-of-living increases for government workers and teachers, elimination of state support for immunization programs, reduction of welfare payments, and the closure of as many as 50 state parks.

California, meet opportunity costs. This is price paid for all of the overspending of the last few decades, including such goodies as overpaid prison guards, bloated bureaucracies, gerrymandering, fat teacher contracts with all kinds of time off and protection for the worst teachers. It is sad and shameful.

Lou Cannon calls it the "Dimming of the Dream" but isn't really rather the "End of the Illusion." The situtation reminds me of Stein's Law: "If something cannot go on forever, it will stop." He concludes his piece with a yearning for leadership. Odd, since it was the reform movement that instituted term limits in California. There are no long-term leaders in the Golden State, just temps.

What California may need more than anything is leadership -- of the kind that Pat Brown and Ronald Reagan and Pete Wilson provided as governors and that legendary Assembly speaker Jesse Unruh as well as Moretti and Willie Brown brought to the Legislature. That at least is the opinion of longtime lobbyist Steffes, who was legislative liaison for Reagan and a constructive participant in the welfare-reform bill negotiated with Moretti. "Reagan and Moretti and all the others had plenty of flaws, but they came to Sacramento to do something," said Steffes. "Where are the leaders now? Who is willing to say I'll risk my office for something I believe in?"

 

The answer to these questions may be that California's leaders are gone -- and with them the dream that made this state such a special place.

U.S. Still Melting Jobs, Let's Count The Ways

Job losses continue to mount in jaw-dropping magnitudes, and with today's weekly jobless claims report coming in so far above the 400k rule of thumb (566,000 seasonally adjusted moving average, 580,944 unadjusted) imply that the next BLS employment situation will be a stunner. Here are some bullet facts I am processing:

1. The Federal Reserve's Ben Bernanke forecast a peak unemployment rate of 10.1 percent. (a mistake he will probably regret). Unemployment could easily surpass that level, and soon. Here's a few reasons why ...

2. New $7.25 Minimum Wage. Friday, July 24 is the day of a forced nationwide increase in the price floor for labor in the U.S. That's tomorrow. It is the third big increase in 24 months, and the timing could not be worse. Federal price controls are ineffecitve in general, but this one is certain to drive up joblessness among the most vulnerable, certainly more than most models anticipate because employer balance sheets have such little flexibility now. Consider it a punch from the U.S. Congress right to mouth of unskilled labor in America. Who says Congress can't time it's economic policy with precision?

At Bench Warmers Bar and Grill in the southeast Kansas farming town of Chanute (pronounced sha-NOOT), owner Cathy Matney has decided to let some of her dishwashers go rather than pay all 22 of her employees more.

3. Induced Labor Rigidity. During last night's presidential press conference, President Obama suggested the labor market is likely to recover slowly:

And I'll be honest with you: New hiring is always one of the last things to bounce back after a recession. 

He may honestly believe that, but the statement is untrue. The "jobless recovery" is a recent phenomenon. Historically, labor markets are flexible and responsive, especially in the U.S., but after the 1991 and 2001 recessions, employers were abnormally slow to grow their workforces. Why? A popular 2003 Fed study theorized structural change was one root cause. The international evidence points to rising labor market (i.e. doingbusiness data). More rigid labor rules make employers averse to hiring, as does uncertainly about policy changes. It seems fair to say the U.S. has been constantly meddling with labor market rules in recent decades. Indeed, the entire effort to reshape health care is intertwined with employer-sponsored health insurance. Uncertainly over health reform will inevitably chill hiring, I would venture to say that reforming health care during a recession is akin to extracting a lung tumor while the patient is having a heart attack.

4. Speaking of timing, the stimulus bill may not get dollars into the economy until next year, but it is chock full of new labor rules (see 3 above) that take effect immediately. Not only does ARRA extend unemployment benefits for many weeks, but it requires new and controversial rules be adopted by each state taking stimulus funds. UI for part-timers? It's just another brick in the barrier to recovery. The knife in the back of federalism is just icing on top.

Add everything up, and count me skeptical of a turnaround in jobs. When I saw Chairman Bernanke make the 10.1 unemployment rate peak estimate, I just cringed. I dislike the political attacks on Bernanke, and have a ton of faith in him. But if that projection turns out wrong - and I am confident it will - he will lose credibility.

Two or Three? How many cheers for capitalism?

Peter Leeson evaluates the evidence for capitalism as a development strategy:

My findings are straightforward. The two cheers for capitalism view is wrong. Although many relationships in the social sciences are unclear, capitalism’s relationship to development is not one of them. Unless one is ashamed of unprecedented increases in income, rising life expectancy, greater education, and more political freedom, there’s no reason to be a milquetoast defender of capitalism. This is what sprawling free markets have meant for countries that became more capitalist over the last quarter century. On the other side, there’s no evidence that countries that eschewed the global trend toward freer markets and embraced substantially greater state control performed better on any of these indicators. On the contrary, they performed demonstrably worse. I also find that the two cheers for capitalism variant that desires markets, but “within reason,” is wrong. There is no evidence for a Lorenz curve-type relationship between capitalism and development. Rather, this relationship is linear. Maximal capitalism begets maximal development.

The paper has an educational and entertaining section on the theory of why capitalism works. The soapbox effect gets in the way of the meat of the paper, especially its position early in the text, but I do think it is a very worthwhile section for students. Later parts of the paper are even better. Here, for example, is a nice summary of why exploring income covers most other issues of interest:

Income is highly and positively correlated with pretty much every positive development indicator one can think of (for example, access to a clean water source), and highly and negatively correlated with pretty much every negative development indicator one can think of (for example, infant mortality). There are exceptions. But this strong tendency militates against depicting many of these relationships. Once the relationship between capitalism and income is established, for most purposes it becomes redundant to examine the relationship between capitalism and improved access to a clean water source, infant mortality, and so on. If the reader wishes to verify this for herself, she is encouraged to plot the data and see.

At bottom, this paper uses measures of economic freedom to show correlations with substantive progress. You have to admire Leeson's persistence and share his frustration with the ideology that manifests in the American university mindset which refuses to acknowledge the third cheer.

Back to the (Sessile) (Corporatist) Future

Sometimes you read something and you almost can't believe that it is a serious attempt at an idea. Such was the case when I perused Michael Lind's recent essay, "The Case for Goliath." To briefly summarize: bigger is better.

In a twist on the stale discussion of regulation v. deregulation argument, Lind proposes that the United States should seek to resurrect what he calls "utility capitalism," characterized by cartels, regulated oligopolies, and higher prices. His rationale is that such a system--particularly in finance, automaking, aerospace, energy, and much of the nontradable service sector--would restore middle-class prosperity and promote innovation. The latter would occur, according to Lind, because large, oligopolistic companies have more incentives to invest in innovation. (He predictably relies on Schumpeter's famous capitalism-to-socialism prediction, but apparently someone failed to tell him that Schumpeter's prediction was actually semi-ironic. Thomas McCraw discusses this well.)

There's really not much to say here except, wow. Lind proposes, for example, that we should consolidate the domestic auto industry down to one national champion to enhance global competitiveness. Wait, is he saying that the bankruptcies of GM and Chrysler came about because we had too many auto companies? As it happens, I read Lind's essay shortly after reading Jonathan Zittrain's intriguing op-ed in yesterday's Times in which he highlighted the threats to freedom and creativity of bigness on the Internet. The dangerous irony touched on by Zittrain, one that Lind would do well to keep in mind, is that the world-changing Web 2.0 innovations we all like to think are propelling us into a glorious world of individual creativity are highly dependent on a handful of extremely large companies like Google and Microsoft. You don't get the globe-spanning impact of Facebook and Twitter without Google's ginormous server farms.

At any rate, there are really three small points I wish to make regarding Lind's piece. First, he either badly confuses or purposefully conflates the monopoly power of dominant firms (a bad thing) and the temporary monopoly profits that serve as the reward for entrepreneurs and the incentive for persistent innovation (a good thing). There is a big difference.

Second, in support of his cumbersome-is-best argument for "utility capitalism," Lind says, "Most of the major breakthroughs on which the modern technological revolution depends took place before the era of deregulation--and often in the labs of monopolistic corporations like IBM, AT&T, and Xerox." True, but you really shouldn't stop reading history in the 1970s: Bell Labs did not use the transistor to launch the semiconductor revolution; Xerox PARC did not take the graphic user interface and launch the PC revolution. These inventions would not have been breakthroughs but for the work of entrepreneurs who worked outside the confines of large companies. This is the recurring pattern of economic history.

Finally, there is this: "The fact that such unfunded regulatory mandates would drive many small service-sector enterprises out of business might be a blessing, not a curse. After all, what is the point of celebrating job creation by small business if thejobs are awful and unstable?"

Well, you know, JOBS. 

(Two of my points here--regarding the Internet and job creation--are not to gainsay the importance of high-growth firms. This, in fact, is an as-yet incompletely worked out area--the tripartite tension among new, young firms, the rapid growth of a handful of them, and their transformation into large companies. A subject for another day.)

Twitter: The Fastest-Aging Technology in History

I am apparently the last person on the entire planet to hear about this: 15-year-old Matthew Robson has made quite a splash with his pithy observations on the communication habits of modern teenagers. In light of our recent discussions here on Growthology, I found the conclusions about Twitter quite interesting, as well as the evident but unsurprising difficulties the executives at Twitter are running into.

So if teenagers don't use it, and if, as I read somewhere, most people abandon Twitter after a month, how in the world will we ever organize democratic protests in the future? Oh, right, the old-fashioned way: social media has an irritatingly ironic way of obscuring our collective memory. 

This Seems Familiar . . .

Readers might recall that Scott Shane, professor of entrepreneurship, is now blogging at the New York Times. Scott has a good post up today calculating survival rates of new establishments from the Census Bureau's Business Dynamics Statistics that the Kauffman Foundation helps fund. He calculates that, through expansion and recession, roughly half of new businesses survive to age five.

It's an interesting and surprising statistic. Of course, I liked it better the first time when it was published in a Kauffman Foundation report. So much for original research and acknowledgement of the actual original calculation.

{Update: Professor Shane emailed me after the above post and lamented that I had overlooked a chart on survival rates, using different data, that he included in his book.}

A Few Thoughts on Tyler Cowen's New Book

[Another guest post from Charles Johnson, one of our summer interns.]

Tyler Cowen's new book, Create Your Own Economy: The Path to Prosperity in a Disordered World is one of the more engaging books I've read recently. It rests comfortably in the niche between books about behavorial economics and social technology. Careful readers of this blog will note that Tyler Cowen was a participant in the Kauffman Economic Bloggers Forum in February. We prepared videos of the participants. You can see him on video discussing blogging here. Cowen is a seasoned blogger at his blog, Marginal Revolution. 

The thesis for Cowen's new book is that technology is allowing many of us to become autistic-like in our processing of information and consumption of entertainment and culture. We've moved into a "bits" culture where we can constantly be orienting and re-orienting our culture. This remix culture is evident in everything from iPods, to blogs, to delicious, and to Facebook. In a way, I took this part of the book as a kind of demonstration that we can all become renaissance men because the costs of such renaissance have plummeted. We don't need Jefferson's library when we have a worldwide web with easy information at our fingertips. 

Cowen's book can be read as an appeal, that, for the sake of society at large and the individuals in particular, we should embrace neurodiversity, or the different ways in which our brain is wired. (You can hear him discuss the book in an interview with John J. Miller of National Review here.)

I was struck by this paragraph about autism and the foundation of companies. We know that dyslexics tend to have high rates of firm creation. (See here for more details). But what about autistics? 

Here Cowen points to the work of Simon Baron-Cohen, who is a researcher of autism at the University of Cambridge. (Simon Baron-Cohen created an AQ test -- or autism quotient -- that you can take here to see if you might have autistic-like tendencies.) Cowen recounts that Baron-Cohen believes that there may be a lot more autistic high achievers than most people realize. On p. 24-25, Cowen writes about some of these high achievers. [The bolding is mine.] 

Craig Newmark, founder of the web forum Craigslist, has written on his blog that his history as a "recovering nerd" is connected to Asperger's. It is perhaps no accident that autistics are known for their attachment to lists as a means of processing, recording, and ordering knowledge. Bram Cohen, creator and former CEO of BitTorrent, also describes himself in terms of Asperger's syndrome. He founded the company at age twenty-nine and BitTorrent has been a pioneer in exchanging digital information over the web; one of his key insights was how BitTorrent could break up files into smaller bits and send through the bits rather than the whole file at once. Cohen mastered three programming languages by the age of sixteen and his work on BitTorrent is regarded as brilliant. The best-known example of an autistic high achiever is Temple Grandin, a woman who has pioneered commonly used improvements in animal treatment and slaughterhouses; her unique cognitive perspective has helped her understand when animals are afraid and how they can be made to feel more secure. 

I've yet to see a scientific paper or serious clinical discussion of the autistics who hold political office, work in Hollywood, start web 2.0 companies, or run major U.S. corporations or hedge funds.

If Baron-Cohen is right that there is the huge reserve of highly successful autistic achievers, I wonder why there hasn't been some kind of online, Craigslist-type sorting website that seeks to place autistic people with the things in which they specialize or some kind of wider texting that seeks to identify and help autistic people find their niches.  

I came upon this idea when I was spending time with my next door neighbor, who has Asperger's. He has an obsession with clocks and with taking them apart and putting them back together. Imagine the societal benefit if he could be placed with a clock making company. 

Indeed, if I could fault Cowen's book for one thing, it's that it doesn't take the ideas he's advocated and move towards policy. Still, perhaps policy is not one of those things for which Dr. Cowen is wired and I ought to respect his neurodiversity. 

The Paul Collier School of Economic Development Goes Rambo?

[Today we happily welcome a guest post from one of our perspicacious interns, Charles Johnson.]

Dr. Kane's blog post about Easterly and the U.S. Army has gotten me thinking about how the military's Keynesian, supply side approach might fall short. 

Aside from Dr. Kane's paper, there's considerable evidence that security can help an economy recover. A paper out of Claremont McKenna and the U.S. Military Academy used the Law of One Price and examined a basket of 255 goods across Iraqi society to get a sense of whether or not the surge worked at reducing price disparities and hence promoting economic growth. Here's what they found, via (the sadly defunct) Odd Numbers blog.

1. The dispersion of prices in Iraq has been roughly twice the level of price disparities in the United States or Japan. 
2.  Regions with the largest U.S. military presence, which presumably brings greater security, saw the least amount of price dispersion. 
3.  And most importantly, price dispersion fell by about 11 percent after the surge started in February 2007, but picked up again after the surge ended in November, though at a slower pace.  

But where does one draw the line between security and costly occupations? 

Paul Collier, a development scholar out of Oxford, believes that U.N. peacekeeping forces can do best, but only if they are given ten years or more worth of money from the international donors. (Let's leave out, for the moment, the tremendous sexual abuse of children by peacekeeping troops overseas.)

Collier is a subscriber to the young male theory of violence and so he favors spending lots on infrastructure and getting the young men jobs so that they don't go killing each other, which sounds familiar when compared to what's been going on in Iraq. Collier says that it is foolish to expect conflict-emerging nations to compete on the international stage because they rarely have a comparative advantage. 

In this TED Talk at the State Department, Collier explains that post-conflict reconstruction is so very difficult and that donors should give money so to keep the state apparatus on life support. What's needed, he argues, is Accountants Without Borders, that tracks the money from donors and makes sure that it's all allocated properly. But Collier, just as in his book The Bottom Billion is foggy on when taxation should kick in and when aid money should exit, an essential component of becoming a responsible, modern state. To his credit, he mentions that it's foolhardy for local governments to finance the unfunded liabilities of a growing state, so, instead, he wants donor governments to finance it. 

Collier implores policymakers to be patient, something which policymakers are notoriously reluctant to be. Most Western governments don't last for 10 years and an open-ended commitment to post-conflict reconstruction "budget support" might be seen as a blank check. Worse yet, as Dambisa Moyo, herself a student of Colier's at both Harvard and Oxford, notes in her book, Dead Aid, there becomes little case for government when your government doesn't provide any public services. (See her interview with Peter Robinson at Uncommon Knowledge.) What Africa needs, she argues, is a reverse of the Boston tea party: Taxation and Representation. Otherwise, it should just elect aid agencies if they are to provide the public goods. 

Despite the clearly better track record of U.S. occupations and economic growth, I'm hesistant about efforts such as the U.S.-development enterprise fund.

It seems to be dead from its inception for much the same reason that much of the aid money is destined for waste. Bill Easterly is right to pan it for being a kind of social engineering. Put simply, how would the U.S. government (and the Congress which designs the program) know what's best for Iraqi market needs? (Heaven help the Iraqi industries that seek to compete with congressionally-connected U.S. firms!)

Advocates point to the USAID involvement in Eastern Europe post-Berlin wall, but here granting that Eastern Europe made the transition to a market economy due to USAID enterprise funds grants too much. One of the few countries that triumphed in the most communist era, was tiny Estonia that ignored much of the wisdom of from USAID and the IMF. Its Prime Minister, Mart Laar, credits Milton Friedman's book, Free to Choose, with much of the genesis of the reforms success. He claimed that it was the one book on economics he had ever read. Laar instituted a flat tax, repealed protectionist policies, and his economy took off and ushered in the flat tax revolution that's sweeping the world.

One of those countries that now has a flat tax is Iraq. Iraq's economy, erstwhile run by the big government-Keynesian Baathists, is now doing quite well for itself. Its 45% tax rate that sought to soak the rich has been reduced to a 15% flat tax. Its currency continues to appreciate favorably. Its oil revenue and surplus grew in 2008, according to GAO. Why doesn't Iraq use this money to fund an enterprise or sovereign wealth fund? Why must the U.S. Congress pick winners and losers in Iraqi entrepreneurial ventures? 

 

Critics could take comfort that the $250 million proposed for an American-backed Iraqi investment is a drop in the bucket in the larger market for enterprise-capital inflows into emerging-market. But they might take heart in these figures, provided by Roy C. Smith's "Enterprise Capital in Emerging Markets" in The Independent Review: 

 

Total enterprise capital raised or deployed in emerging-market economies increased from $517 billion in 2001 to $1.57 trillion in 2006. These essentially private transactions greatly exceed sovereign-government financing totals for the years indicated. . . . 

Enterprise-capital inflow into emerging-market economies has tripled in the past six years, and wherever it has gone, it has had an important effect on economic growth. Indeed, as shown by the experience of Russia, India, and China, the ability to attract relatively large quantities of capital for private investment has made possible exceptional economic-growth rates, despite the many difficulties and imperfections in these countries’ investment climates.

Enterprise capital now appears to be far more effective in generating growth in developing countries than foreign aid and loans from multinational development agencies or from individual countries’ robust government- allocated national economic development efforts, which for nearly fifty years were regarded as the world’s best solutions for ending poverty and distress in theThird World. These “solutions,” however, did little to generate the rates of economic growth needed in the Third World o alleviate the poverty and distress.

Easterly and others have pointed out how aid money can tend to crowd out foreign investment. Perhaps the best thing the U.S. could do with respect to Iraq's economy is leave well enough alone and let the security and capital inflows do their magic. 

--Charles Johnson

Math Professor Says Teach Stats Over Calculus

Arthur Benjamin of Harvey Mudd College, a very selective science and math school in Claremont, CA, gave a short three minute talk at TED about why statistics ought to be taught over calculus in America's mathematics curriculum. (Full disclosure: The Kauffman Foundation helps to fund TEDTalks.)

Several popular books in recent years have stressed the point that Professor Benjamin makes. Nassim Taleb's Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and Ian Ayres's Supercrunchers: Why Thinking-by-Numbers Is the New Way to Be Smart being the more outstanding and readable examples of this larger trends.

Firms, too, have taken note. Jonathan Rosenberg, Google's Senior VP of Product Management, in a YouTube talk at his alma mater, says that students should aspire to be "data samurais." 

Given this importance, there ought to be some kind of Hippocratic oath for statistians. While failing to do calculus properly can result in a poorly built bridge, failing to do statistics correctly can lead to horrible policies that create perverse and oftentimes completely opposite incentives.

Professor Benjamin is right: It would do wonders for our education system if people understood what a standard deviation is and how to find a mean.

Social Innovation

Last week President Obama hosted an event at the White House to highlight innovative programs in the nonprofit sector. The President acknowledged that in areas like education and health, the government can only do so much: "So if anyone out there is waiting for government to solve all their problems, they're going to be disappointed." 

The White House now has a $50 million Social Innovation fund and will look for programs that are as impressive and effective as those highlighted by President Obama. This includes Geoffrey Canada's Harlem Children's Zone, HopeLab, Bonnie CLAC, and Genesys Works. 

The "social" modifier is one that gets loosely tossed around all too frequently, but in many different areas, particular education and health, we are seeing the rise of hybrid organizational forms that seek to fill the lacunae between market and government. This is yet another instance of people seeking new ways to solve old problems, symbolizing the "pioneering spirits" the President praised that always push us forward. 

Bill Easterly vs. the Army

Can the U.S. military help economic growth in Iraq? Afghanistan? Africa? I've been pondering this question for some time. There seem to be a half dozen interesting articles and online debates all of a sudden. But let me start by confessing that I have looked at the historical data. Here's the abstract of a working paper I co-authored with Garett Jones:

The necessity of military force in providing security for nation-building is a common assumption among policymakers and international affairs experts, but there has never been an econometric analysis of the impact of troops on growth. We use a newly constructed disaggregated dataset on the deployment of U.S. troops over the years 1950-2000, and discover a positive relationship with host country economic growth, robust to multiple control variables.

My friend Dan Rice co-authored a WSJ oped today with John Nagl (both West Point grads and Iraq vets). Full disclosure: I am on the advisory board of Rice's Marshall Fund.

American counterinsurgency doctrine recommends that the majority of effort be spent on economic development and governance, not on direct combat operations. To date, however, we have not followed our own advice: The U.S. still spends more than 90% of its investment dollars in Iraq on troops, equipment, weapons and logistics.

True, as security has dramatically improved, U.S. commanders on the ground have expended more than $4 billion in emergency response funds to provide Iraqis with jobs such as street cleaning, repair and garbage collection, and on essential services such as medical care and water treatment. But this pot of money was never intended to create long-term jobs, and commanders are restricted from investing the funds in private-sector enterprises.

As we withdraw from Iraq's cities we must seek to replace our bases with businesses. An enterprise fund for Iraq is a good way to start the process of achieving victory through economic development.

I'm sure Bill Easterly would be skeptical of the Rice-Nagl proposal. He would probably claim that it makes the classic aid mistake of pushing investment. Indeed, Easterly very recently panned the Army Stability Operations Field Manual, touted among some as a Petraeus achievement in counterinsurgency strategy as opposed to conventional seek and destroy:

My usual MO is to ridicule such documents. But my wells of satire are starting to run dry after years of deployment against utopians like Jeffrey Sachs and Paul Collier. More in sorrow than in anger, I see the utopian social engineering craze might affect actions of people with guns. I am sad for Iraqis and Afghans that the U.S. Army is operating in their countries guided by such misguided ideas.

I tend to agree with Easterly that investment funds will flow into impoversihed regions - without an aid push - if the environment is right. And I have mixed feelings about the Field Manual. But I wonder if Easterly is painting with too broad a brush. Can we rule out effort to get the environment right? Some thoughts:

1. There are many different opinions in play in international development, so this is not a simple issue of two ends of a spectrum. Here is an online debate with articles by Collier, Easterly, and others at the Boston Review.Paul Collier diverges from others in the aid universe by calling for an expansive kind of intervention. Easterly, I believe, represents a camp that is skeptical of almost all development efforts. Others share his skepticism of internationalist (e.g. UN, IMF) efforts, but favor American/Western direct interventions. I assume President Obama is in this latter camp, along with many active duty soldiers and myself. Yet even within the military, there are many opinions about how to effectively defeat an insurgency.

2. Easterly is an Africa expert. But is he overapplying the failures of Africa and the futility of aid there to a broader lesson against any kind of intervention?

3. Isn't the real question whether the continued presence of U.S. troops in Iraq will help that country's economic institutions develop? It is discouraging that measures of institutions like the WSJ/Heritage Index of Economic Freedom are unable to score Iraq or Afghanistan.

4. What is up with Africa? Why is that region, in sharp contrast with the far East, stagnant despite the billions of dollars in aid and attention over the last 60 years? Take a look at the book Dead Aid by Dambisa Moyo, an African woman.

Jobs Update: Unhappy Times are Here Again

Interesting data on the U.S. employment situation today. The payroll number (-467,000 jobs in June) is bad enough that it should chill the chatter about green shoots, mainly because it is no longer "less bad" than the month before. (Vanity "I told you so" link here).

I'm sorry I can't offer my usual picturing employment chart. New MS Excel software is not allowing me to screen capture the graphic. (Curse you, Steve Ballmer!)

And yet, I still want to share an update on the severity in the change in the unemplyment rate down to the last decimal point. According to the BLS, "Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.2 million, and the unemployment rate has risen by 4.6 percentage points."  That represents a 0.1 increase, right? Not so bad.  But if you look at the 3-decimal change, it is a 0.150 increase. This, actually, is the "less bad" story worth noting, since unemployment rates tend to decelerate very quickly in a turnaround, based on historical behavior of the series.

Let's update the comparison of this recession to the double recession of the early 1980s

U.S. UNEMPLOYMENT RATES AND CHANGES IN 2 RECESSIONS
2007-        1980-                                    
9.507        10.750      Peak (so far)                 
4.902        6.271        Recession Start        
4.380        5.606        Trough
4.605        4.479        Change from NBER Start (so far)      
5.127        5.144        Change from Trough (so far)  

What this means is that (1) it is now the worst postwar NBER recession in terms of increasing unemployment rate but (2) not quite the worst in terms of the rate defined by the time series trough, barely. If initial jobless claims continue to come in over 400,000 per week, I would not be surprised at all by another half-point jump in July to a rate over 10 percent.

Political analysis. David Leonhardt really nailed a great article in the NY Times ("A Forecast with Hope Built In").  Way too much optimism by White House economists:

To make the case for a big stimulus package, they released their economic forecast for the next few years. Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year. We now know that this forecast was terribly optimistic. 

Ironically, the harshest critics of Obama are also overly optimistic. The White House wants to believe the stimulus is working. The critics want to believe the stimulus wasn't necessary because the economy is getting better already. Both are probably wrong. The stimulus is, in fact, poorly timed for relief in 2009, but the recession will unfortunately last long enough that the timing problem be moot.  There's still the question of effectiveness, and it will be interesting to see how that debate plays out for the next 18 months ... or more.

Forgive the typos. My keyboard is on the fritz. (Ballmer must be watching!!!)

That's Why We Need More Entrepreneurs

Scott Shane recently joined the New York Times as a blogger for the site's new You're the Boss blog and in his most recent post used a series of charts to show that the United States is actually becoming less entrepreneurial than we would like to pretend.

Professor Shane, a professor of entrepreneurship, has been an outspoken skeptic of entrepreneurial capitalism, casting doubt on the extent and benefits of entrepreneurship. His latest line of research concerns genetics and entrepreneurship, identifying "the influence of genetic factors on the variation across people in opportunity recognition." This, Professor Shane purports to demonstrate, is heritable and independent of environment, as are occupational choices in general, such as teacher or manager or self-employment. (For a critique of opportunity recognition, see this recent paper: Download Creative Discovery Innovations June 2009.)

Notwithstanding potential sampling errors, the heritability of personality traits is a breeding ground for questionable claims. As the eminent Samuel Bowles has pointed out, "data from modern economies suggest that personality influences individual success, but the effects are quite modest." Moreover, "the correlations between parental and offspring measures of personality are strikingly low." The world periodically endures genetic determinism fads, and they rarely end well. 

Plus, if entrepreneurship is solely determined by genetic inheritance, why even have professors of entrepreneurship? 

In his latest post, however, Professor Shane is onto something: whether measured by the number of new employer firms started each year or the number of new establishments, the rate of entrepreneurship has fallen over the past two or three decades. Shane uses Census data that the Kauffman Foundation has helped fund, and I published charts on the falling establishment entry rate in a recent paper. And the share of Americans working in giant firms (those with more than 10,000 employees) has slowly but steadily risen in the past decade.

But there are a few points Shane fails to make. As one of his commenters notes, there has been a rebound in new firm and establishment creation since 2002. One of the datasets only runs through 2005 and when new Census data are released in August, we should know whether or not this rising establishment formation trend continued. With regard to new firm creation (nb, employer firms, not self-employed consultants or personal services), Shane's data run only up to 2007. But the Kauffman Index of Entrepreneurial Activity showed a slight uptick in new firm creation 2008. It will also be interesting to break all of this down by industry.

So what does this mean? We've actually seen a steady increase in the number of new firms started over the past few years. Shane's point is that while absolute numbers may increase, they fail to keep pace with population growth and so the rate, firm starts per capita, actually falls. That's right. But this only highlights the crucial need for more new firms, for more entrepreneurs. As we've noted before, using that same Census data, looking back over the past thirty years, if we had taken startups out of any given year, net job creation for the overall economy would have been negative in most years. No new firms, no new jobs. No one can escape, moreover, the great lesson of economic history that entrepreneurs are disproportionately responsible for radical innovations.

But the message is much broader than this: the real source of economic growth lurking in here is firm growth. This signals market success, generates jobs, and brings with it increasing returns to ideas. So even if the rate of entrepreneurship fluctuates on an annual or decennial basis, this doesn't mean that there aren't entrepreneurial firms growing to scale during that time. This, in fact, is precisely the pattern we would expect to see: a high rate of new firm creation followed by a period of falling entrepreneurship as firms fail, consolidate, and grow. This will (or should, provided barriers to entry are kept low) be followed by yet another period of high rates of entrepreneurial activity.

Children's Literature as Economics 101

Adam Smith should have published his magnum opus as a children's book. Or, more realistically, all macroeconomic and microeconomic professors, in a crisis-precipitated moment of soul-searching, should include some children's literature on their syllabi. 

Two of the most venerable names in children's book publishing are Little Golden Books and Richard Scarry. It recently occurred to me in the course of bedtime reading with our boys that two titles in particular do a remarkable job of explaining how the economy works.

The first, I'm a Truck, is the seemingly mundane tail of a long-distance freight truck on its journey from the big city to a port. Along the way the truck, Big Blue Bill, offers his readers a brief overview of how things like produce and milk and new cars and all manner of cargo reach consumers. We have fresh milk because we have trucks like Polar Bear Pierre to distribute it for us. Gustavus Swift would be proud.

But it is the second book I have in mind that truly matches Adam Smith insight for insight into things like the division of labor. This is Richard Scarry's What Do People Do All Day? (A side note: good question Mr. Scarry!) The book is four decades old by now, so some of the scenes are rather dated, yet if you want your child to know (or if you simply wonder yourself) how wealth is created, this books beats the facile fifth column lemonade stand story often used to illustrate the evils of big government. 

Farmer Alfalfa, for example, brings his corn crop into town and sells it to the local grocer. With this money, Farmer Alfalfa is able to buy a new tractor and a new suit from the local tailor, who, as a rabbit, has a large family to support. The grocer and tailor, in turn, use their goods and money to make their own profits. And so the cycle of specialization, buying, selling, and wealth creation propagates itself. 

Happy reading.