Growthology

An Exciting Day

I just received in the mail a copy of Matt Ridley's forthcoming book, The Rational Optimist. I was fortunate enough to be able to attend a seminar last year at which Ridley discussed the book and solicited input and ideas.

Based on that discussion and Ridley's extraordinary intelligence and writing ability, this book will be stupendous, no doubt about it. Check out his blog here; good stuff.

My PBS NBR commentary on the Summit on Entrepreneurship

Last week (April 22), I offered a video commentary on PBS' Nightly Business Report: 

SUSIE GHARIB: For many economies around the globe, start up businesses are the little engine that could, creating jobs and revenues. But you might be surprised where some start up businesses are taking root. Here's commentator Tim Kane. He's senior fellow of research and policy at the Kauffman Foundation.

TIM KANE, SR. FELLOW, THE KAUFFMAN FOUNDATION: Next week, President Obama is hosting a summit for more than 50 countries with sizable Muslim populations and it's a summit on entrepreneurship. Maybe that sounds like small potatoes compared the big nuclear summit the White House hosted last week, but I think it's even more important. World peace will have economic roots. Muslim economies are eager to shift away from oil and they know a startup culture is key. Actually, these countries are already changing. The reality of this century is that economic growth is flowering almost everywhere, not just exotic places like China and Cupertino.

A big reason progress has been so measurable is simple. There's something to measure. Since 2004, the World Bank has been publishing the "Doing Business Report", which compares national economic policies across the globe. And according to the 2010 edition, nine out of 10 Middle Eastern and North African countries made at least one reform making it easier to do business, say start a company or hire a worker, with less regulation getting in the way.

Here's an example. In 2004, it took 42 days to start a company in a typical Middle Eastern country. Last year, 21 days. In the U.S., it took six days. But get this, in Saudi Arabia it took only five days to start a company. In fact, two of the top economic reformers in 2010 were Egypt -- fancy that -- and the United Arab Emirates. Saudi Arabia now ranks as the 13th best place to do business in the world. Who's number one? Let's just say the summit should arguably be held in Singapore, not Washington. I'm Tim Kane.

From "Brain Gain" to Brain Circulation

[Cross-posted from Progressive Fix]

A recent post highlighted the importance of new and young companies to job creation in the U.S., implicitly raising an important question for policy makers: How can we increase the number of startups? Assuming it can be done, such an increase would not solve all of the economic challenges facing this country, but it would certainly help. New companies not only create millions of jobs across all sectors of the economy — they also introduce product and process innovations, boosting overall productivity.

Saying startups are important is one thing, of course; actually designing policies to increase their number is something else entirely. Before making any recommendations, for example, we need to know more about the universe of startups. Are they more prominent in some sectors than others? Does the impact of new companies differ across sectors or geographic regions? Should policy focus on encouraging more new firms, or on enhancing the growth of those already in existence? How would any such policies affect established companies, large and small?

Policymaking around entrepreneurship is evidently not clear-cut as there is still quite a bit we do not understand regarding startups. In the coming weeks we will try to explore these questions and illuminate the world of startups for policymakers. We’ll start with the lowest-hanging fruit of all, though one that may seem like poison to some in Washington: immigration.

It’s commonly accepted that the United States is a nation of immigrants, settled and populated by those fleeing persecution, seeking commercial opportunities in a new land or looking for a fresh start. We have always recognized the important contributions of immigrants to the U.S. economy, from entrepreneurs like Samuel Slater (textile mills) to Andrew Carnegie (steel) to Andy Bechtolsheim (Sun Microsystems) to the laborers and workers who built this country with their hands.

Recently, researchers have begun to paint a broader picture of the economic role of immigrant entrepreneurs. For example, Vivek Wadhwa and his research team have found that, from 1995 to 2006, fully one-quarter of new technology and engineering companies in the U.S. were founded by immigrants. In Silicon Valley, the figure was one-half. These firms constitute only a sliver of all companies, yet contribute an outstanding number of jobs and innovations to the economy.

It makes sense, then, that if we are seeking to increase the number of new companies started each year in the U.S., we might look to immigrants. It turns out that Sens. John Kerry (D-MA) and Richard Lugar (R-IN) are thinking precisely along these lines, introducing the StartUp Visa Act (PDF) in the Senate. This bill would grant a two-year visa to immigrant entrepreneurs who are able to raise $250,000 from an American investor and can create at least five jobs in two years. Without question, such a visa is a good idea and this legislation hopefully paves the way for future actions that would reduce the pecuniary threshold and focus more on job creation.

Quite naturally, however, the promotion of immigrant entrepreneurs arouses suspicion among those on the right who harbor nativist views, and those on the left who perceive progressive immigration policies as a threat to American labor. Such views take the precisely wrong perspective: immigration, as we have seen, is a core American value. Immigrant entrepreneurs, moreover, come to the U.S. to make jobs for Americans, not take them.

Further, many of those who promote immigration as a way to boost economic growth narrowly focus on “high-skilled” entrepreneurs, those who might start technology companies. Clearly, as Wadhwa’s research indicates, such companies are important to American innovation. But we exclude non-technology entrepreneurs at our peril — every new company, including those founded by immigrants, represents pursuit of the American dream. By closing our borders to immigrants in general or welcoming only those with certain skills, we leave out many who will start new firms in other industries. If not in the United States, they will go elsewhere to start their companies and create jobs.

Entrepreneurs are implicit in Emma Lazarus’ poem: “Give me your tired, your poor/Your huddled masses yearning to breathe free.” Entrepreneurs start from nothing and work endlessly to build their companies, expressing their individual freedom through commerce. Why should we want to exclude them from the home of entrepreneurial capitalism?

ADDENDUM: Ben Wildavsky's new book, The Great Brain Race, will be released soon and I highly recommend it to anyone interested in higher education, globalization, and immigration. It is a fantastically written book and, as noted in the title of this post, Ben posits this wonderful notion of "brain circulation." When discussing globalization and immigration and job creation in the very recent past (and, for that matter, still in the present), we have usually spoken in terms like "brain gain" and "brain drain," implying a zero-sum contest between countries and regions. Ben's book makes quite clear that we are moving into a world of brain circulation, wherein people circulate among countries and institutions, starting companies, creating jobs, propagating innovations--adding to the economies of many countries at once. 

The Great Brain Race

My friend and colleague Ben Wildavsky is a senior fellow at the Kauffman Foundation and author of The Great Brain Race: How Global Universities Are Reshaping the World, to be published in May by Princeton University Press. May 12, Ben tells me.

 

Take a minute to read this excellent summary essay Ben recently published in Times Higher Education.

Here is a long excerpt to whet your appetite:

Long known primarily as the world's largest exporter of students, China is now doing much more to build its human capital at home. In addition to expanding the quantity and quality of its own universities, it is forging partnerships with Western universities that operate programmes in China. And it has lured home some academics who left for the West, but who now find appealing opportunities in newly revitalised universities.

Moreover, China is not alone. The yearning to create competitive universities is also vividly on display in Singapore, which seeks to become a world-renowned educational hub and has brought in numerous Western partners, including the Massachusetts Institute of Technology. South Korea, for its part, is creating what amounts to an academic free-trade zone in a 52,000-acre complex near Incheon International airport, playing host to branch campuses of many Western universities.

Nor is academic globalisation confined to Asia. The lavishly funded King Abdullah University of Science and Technology opened in Saudi Arabia last year, seeking to join the top ranks of world scholarship via alliances with the likes of Imperial College London and Stanford University. KAUST is also taking advantage of the new global talent market, poaching its first president, Choon Fong Shih, from the National University of Singapore.

The book's website is www.greatbrainrace.com. It features a book excerpt, a video interview, links to articles adapted from the book, and several online ordering options. The book has already been endorsed by Judy Woodruff of PBS Newshour, Yale president Richard Levin, Sebastian Mallaby of the Council on Foreign Relations, and Andrew Witty, CEO of GlaxoSmithKline. 

The Great Brain Race tells the story of the transformation of the global academic landscape in recent years. Nearly 3 million students now study outside their home nations; globe-trotting faculty hop from the United States to Singapore to Saudi Arabia; Western universities create branch campuses in the Middle East and Asia; and new or rejuvenated research universities in China, South Korea, Europe, and beyond vie with American giants for the top spots in global education rankings.

 

If you didn't know, Ben was once in charge of the annual U.S. college rankings for a major U.S. magazine. He agrees with me, by the way, that the Air Force Academy is the best all around undergraduate education available. So I guess all this global hubbub is about who is number 2, West Point or Annapolis, right?

 

Final note: Ben did not ask or know about this review. He is a great writer, this is a great topic, and I hope you make an effort to read this great book. To put the topic in context: economic growth is, we now know, fundamentally about ideas and the human capital that adopts and invents them. Globalization is about the evolving network of flowing goods, capital, and ideas. And labor. Growth and globalization cross paths in front of every university. Summed up, a central "battle" for 21st century leadership is the competition for brains. Ben Wildavsky's book could not be more important for America's leaders to understand what is at stake in preserving and expanding our prosperity.

Generational Shift? Fiscal Crisis Plus Global Migration Equals ...

What if they had a fiscal crisis, and nobody came? What if the chump generation figures out the Ponzi scheme? Bob Samuelson thinks the fallout will be political:

... As baby boomers retire, higher federal spending on Social Security, Medicare and Medicaid may boost Millennials' taxes and squeeze other government programs. It will be harder to start and raise families.

Millennials [ages 30 and younger] could become the chump generation. They could suffer for their elders' economic sins, particularly the failure to confront the predictable costs of baby boomers' retirement.

Samuelson asks the question in a political context, and that's how most analysts interpret the looming fiscal crisis, as if young voters will punish fiscally irresponsible representatives in Washington. My alternative theory focuses on the context of immigration. Already you may have heard about the millions of illegals who departed the U.S. when the Great Recession dried up job opportunities. A lot of crass nativists might think "Good Riddance!" but I wonder what they'll say when their own children seek greener pastures abroad in 10 or 20 years?

Consider: almost everyone younger than the Baby Boomers expects to get the short end of the fiscal stick. We were laughing about the unlikeliehood of getting Social Securiyt Checks when I was in high school in the 80s. So now that the reckoning is all but unkickable, do the Boomers think their kids and grandkids will just become fiscal serfs?  Think again.

The consequences of U.S. fiscal calamity will go hand-in-hand with globalization. The world is in the early stages of globalization, but already member states in the EU are feeling the effects of combining tax competition with the right of movement. A 2006 BBC report noted that nearly 10 percent of Britons lived aborad, a million in Spain.  Two emigrant types dominate: retirees and workers!  Here's a more recent report from the OECD

... the share of immigrants in the OECD population almost doubled from just over 4.5% in 1975 to 8.3% in 2005. It is also noteworthy that 45% of immigrants living in OECD countries in 2008 came from other OECD countries.

The threat America faces is a world that competes for our greatest natural resource: it's young. If we make the tax climate hellish, the U.S. is going to suffer outmigration as places like Canada, Australia, Brazil, Mexico, Chile realize what an opportunity they have to cream our entrepreneurial talent. If we don't, and let the deficit spiral out of control, the dollar will fall and workers will go elsewhere for value reasons. There's already a migratory tension in Europe, waged primarily with favorable tax treatment for high net worth immigrants.

Go ahead and worry about the fiscal crisis of 2020, and worry about its implications across the generations. Just make sure you worry on a big enough scale. We all know that globalization will deepen, and the national borders that seem so tall and vital today will look more and more like borders among the 50 states of yesterday. Remind me again, how difficult does Texas make it on fleeing Californians to move in to their state?

Why Denigrate Chile? A Tale of Two Charts

Paul Krugman just can't stand the praise being given to Chile's liberal economic reforms of the last 30-40 years, so he is denigrating them. Why would he do that?  He claims the economic liberalization in Chile is nearly mythical, and uses the following chart as his key piece of evidence.  It's scandalously misleading.

 
That chart does not jibe with my own experience following Chile's development, especially in contrast to other Latin American economies. And note the source: Total Economy Database. Why not use the Penn World Tables, or World Bank data? Paul's data says Chileans are just 15 percent wealthier than they were in 1970. The PWT Mark 6.3 indicates they are 161 percent wealthier. So who do you trust: the global standard for cross-country economic comparisons or the Nobel prize-winning NYTimes blogger?

Even my kids know the answer. Just look at the wikipedia entry on Chile's economy, and you'll find this chart:

 
For the record, anyone who travels in Latin America can attest that little Chile's role as a model is not what you might expect. Neighboring nations still like to think of Chile as their poor sibling, and pretend that its economic success does not exist. It's time to take off the rose-colored glasses.

UPDATE: The chart Krugman uses cuts off in 1991, so it's not the data source that's misleading. It's chart trickery with the X axis, a Tufte favorite.

Why Should Complexity Imply Fragility?

Last week historian Bryan Ward-Perkins authored an interesting Financial Times op-ed in which he compared the present recession to the post-Roman Empire economy in the British Isles. Conditions then, needless to say, were "extremely bleak." Part of the reason for this, wrote Ward-Perkins, was that there was such a long way to fall from the advanced Roman economy. Going further, however, he explicitly links the collapse to the level of advancement--no matter what type of wings Icarus wears, he will always fail simply because he flew so high and close to the sun.

"Almost certainly the suddenness and the catastrophic scale of the crash were caused by the levels of sophistication and specialisation reached by the economy in Roman times. The Romano-British population had . . . relied on widespread markets to sustain their specialised production. When insecurity came in the fifth century, this impressive house of cards collapsed."

Well, there you go: an economy can only push Adam Smith so far. Apparent market sophistication--trade, division of labor--will eventually (and, seemingly, inexorably) become a weak structure, vulnerable to the slightest perturbation, upon which it will collapse:

"The more complex an economy is, the more fragile it is, and the more cataclysmic its disintegration can be."

That second clause seems pretty valid: the higher you fly the further you fall. But I think it's actually quite arguable, and the reason is because the first clause, Ward-Perkins' main point that complexity increases fragility, is wrong. It makes intuitive sense, of course, and the house of cards analogy misleadingly reinforces that intuition. The more cards you add, after all, the more fragile that house becomes; everyone knows that.

But a complex economy is not like a house of cards. Much of the complexity research over the last thirty years or so--however you may judge its worth en toto--has demonstrated the robustness of complex networks. And, as readers of Joseph Tainter know (I assume Ward-Perkins has read Tainter), there is little reason to think that a complex society like Imperial Rome, having weathered many different stresses over several centuries, should all of sudden turn to a house of cards because of the very complexity that made it strong in the first place.

To argue that complexity is equivalent to fragility requires you to increasingly argue backwards for why complexity turns from strength to weakness. The ultimate cause for the collapse of complex societies, as Tainter showed, is not their complexity. It may end up being a proximate cause or contributing factor, but not the ultimate reason. The reason, in Tainter's telling, is the marginal returns curve: at some point, a society's investment in complexity may yield diminishing marginal returns. When and if collapse does occur, moreover, it is not necessarily a bad thing; to be sure, it may bring all sorts of negative consequences. But, if the marginal returns hypothesis is correct, then the disintegration of a once-complex society into several simpler constituent parts should reset that curve and yield, once again, increasing marginal returns. People may be better off and, in many cases, actively choose to dissociate from complexity.

It's easy, of course, to argue too far in this vein and rely wholly on the supposed robustness of complex systems as a reason why they should perpetuate themselves. The reason complex systems persist and survive shocks is not their innate robustness; it is that they contain deep wells of potential adaptations (exaptations). It's also tempting to ascribe too much worth to complexity in and of itself. In social science and many of the natural sciences we continue to equate "complex" with "better," "simple" with "worse." The notion of progress up a ladder of complexity is seductive, and underlies the arguments of both avid proponents of complexity and those, like Ward-Perkins, who see the danger in too much sophistication.

Picturing Emissions

Great chart from the WSJ today on emissions from the largest nations.  Which do you prefer: per capita, per unit of GDP, or sum total?

Growthology prefers "per capita," because that's the category where the U.S. ranks highest.
 

Remember When Twitter Overthrew a Religious-Military Dictatorship? Neither do I.

At the height of the post-election protests in Iran last summer, American media were abuzz with glee at the prospect that the paragon of utopian social media--Twitter--might actually play a key role in liberating Iranians from tyranny. We discussed this hyperbole-free topic a few times here at Growthology, but it seems that we now have actual evidence (as opposed to fact-free speculation) as to the role Twitter played. And? Quite small:

"[The study shows that such a tiny proportion of Iranians are on Twitter that any stories about a new movement based on the social network are meaningless."

Oh well.

 

What the Future Will Look Like

Via here.

Entrepreneurship Rates Around (Most of) the World: 2005

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.

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.

Protests = Democracy?

Events in Iran this week have been pretty riveting, true, but let's keep things in perspective: protests are neither equivalent to democracy nor do they automatically lead a country to democracy.

The American media has been breathless in reporting on the newfound power of the people in Tehran, and apostles of the new "social" media see this as sort of the tech version of the Rapture. On NPR this morning, one of the Americans who is commendably allowing Iranians to use his computer as a proxy server to send messages on Twitter averred that this is a turning point in the history of technology and democracy.

It is?

First, on a superficial note, the fact that allegedly doctored photos zip around the Internet doesn't herald a new era of media. Did we really need social media to tell us that Iran is a repressive country?

Second, on a deeper level, this raises that irritating academic debate about what, really, is democracy. As Fareed Zakaria and others have pointed out, there is a major difference between democracy as popular sovereignty, and democracy as constitutional limitations on the scope of government. The latter, "liberal" democracy, is what by and large characterizes the West. The former, "illiberal" democracy, too often gets mistaken for complete democracy. 

The election protesters in Tehran are rightly being hailed for their courage: Iran's illustrious history has been tarnished by repression. But what is it we in the West expect to come out of the protests? Popular sovereignty expressed through mass assembly can often be the enemy of liberal democracy (see Revolution, French or Africa, twentieth century). Let's say, in the end, Moussavi ends up assuming office: do we really believe this will cease all friction between Iran and the West? The Iranian public, if polls can be trusted, largely supports the nuclear program as an expression of prideful nationalism. And it's far from clear how the balance of power among the clerics, military, and "other" politicians stands, or how it is shifting.

There is little doubt that Ahmadinejad has been disastrous for the Iranian economy: per capita income is around $12,000, but this largely reflects oil and gas revenue, and most observers agree that it is unsustainable and unaccompanied by actual economic development. (The separate debate about the relationship between level of income and democracy sort of falters in cases like this.) But it's not clear that the necessary economic reforms will inexorably follow from the fissures of freedom now appearing.

In any case, we should cheer any challenge to oppressive authority. But let's not assume, or pretend, that this represents any sort of triumph (yet) of social media, of democracy, or economic development.

China and the World

Menzie Chinn's graphs of China's GDP growth is quite good.  Since 1980, China's GDP has grown from 0.3 Trillion interntational dollars to a projected 10T in 2010. The U.S. GDP grew from 3T to 14T over the same time.

So, while it's good news that China seems to be rebounding in terms of growth, due in part to the implementation of a substantial stimulus package, one has to keep in mind how big the Chinese economy is (in USD, 8.8% of world GDP, compared to 12.4% in International dollars).

One can't help but notice that the Euro area was roughly equal to the U.S. in terms of overall GDP when it was created (Menzie marks it as 1991), but now is 15-30 percent below, entirely due to slower growth.

Caplan's Bet: Europe stays different

Bryan Caplan is willing to bet ("one meeelion dollars") that the U.S. unemployment rate will recover and remain significantly lower than the European average over the next ten years. I'm tempted to agree. 

Normally, this would be a no brainer, if all we were doing was betting whether U.S. labor policy is superior to European policy at employing its labor force near capacity. But what Bryan is really gambling is that the U.S. policy will remain superior. That's a political bet, not an economic bet. (He, author of the Myth of the Rational Voter, should know better!)

What are the odds that the U.S. raises its minimum wage again?  What are the odds that a bailout of California happens? And if so, that other states become more reckless? What are the odds of card-check legislation that chills entrepreneurship? What are the odds that technology allows entrepreneurs to circumvent labor law by building up virtual companies of independent contractors?  What are the odds that Justice Sotomayer casts the deciding Supreme Court vote ruling virtual business forms unconstitutional?

Either Bryan has more faith in American democracy than I do (unlikely), or he's much more risk loving than I am (surprisingly likely).

Up From Poverty (Schramm on Economic Development)

I'd like to recommend this essay by Carl Schramm, published recently in the Claremont Review of Books and freely available at RealClearMarkets.

Formal development theory can be said to have rested on three assertions—all of which should have discredited it. One was that ethno-cultural characteristics limited the likely spread of modern capitalism. The leading books of the time clearly show that the academic establishment was certain that (say) Hinduism and Confucianism operated as impenetrable bars to economic growth. At best, India and China (if even mentioned!) could hope for subsistence futures, though social disintegration was held to be more likely. The second was an unswerving focus on natural resources as the key to growth. This unreconstructed colonialist worldview—extract what you can and send it home, or at least abroad—drove the construction of massive public infrastructure (in large part to move material to port), littering poor countries with projects that to this day look like incongruent artifacts of western economies that never emerged. Finally, and most tellingly, development theory aggressively argued that economic growth was possible only in the absence of population growth; raising indigenous agricultural production to levels high enough to sustain high birth rates was assumed to be impossible. This tenet above all should have been suspect even at the time. It was already well known that, between 1820 and 1920, the population of Europe increased at an unprecedented rate—while Europe enjoyed rapid economic expansion.

...

The principles of liberal democracy have made sustainable economic development a possibility for the whole world going forward. The application of creative talent by the individual in the context of commerce—once found only in liberal democracies—is now seen as necessary even inside socialist regimes. The rediscovered insight that entrepreneurs bring forth expanding welfare for all is so powerful that growth has regained its rightful place as a legitimate goal of economic theory.

Grey Shoots

I've started referring to myself as a "Depressed Bull."  I still have faith in the long-term growth prospects of America and the world. I still believe that entrepreneurial capitalism will prove itself the fairest, most propserous system of economic organization. Yet every day, I see more signs of the unprecedented severity of the current recession. And the mainstream/political media seems relentless in its quest for green shoots. Just contrast the top story in today's WSJ ("World Economies Plummet ") with today's WaPo ("Wider Confidence Lifts Economy From Winter's Deep, Dark Freeze"). Gag. The political cheerleading is embarassing to journalism. The financial reality is sad and serious.

Here's why the mainstream press probably can't get a grip on the economic story.  It's too slow.  I can hear the editors talking over drinks, "It's already been half a year since the Wall Street meltdown, right? Madoff's in jail, right? Can't we find a new angle on this?"

Imagine if the world's economies were a Hollywood special effects chase scene which ends in a fiery pileup. The globalized interesection of trade and finance and banks and people (think cars and trucks and semis and pedestrians) is going through a multi-year slow-motion crash. Naturally, the press wants to know when things get better. But how can we know when whole vehicles are still skidding across the pavement?

Alex Tabarrok's "Future of Growth"

Video of Alex Tabarrok's talk at TED. My favorite points:

• "How do you get more ideas?  More idea creators. ... Today less than 1/10th of 1 percent of the world's population are scientists and engineers."

• "We will see an Einstein in Africa in this century."

• "$200,000 ... this is a rather modest prediction."

The Tabarrok thesis is that global growth in per capita income is accelerating. This is a big, big deal ... the 0.1 percentage point increase in the growth rate every decade for the last 2 centuries has already destroyed most of human poverty, and Alex is showing how growth will finish the job in this century. By the way, the 0.1 per decade acceleration is my rule of thumb projection, so don't slam Alex if you think it is stupid, although I suspect he would agree with me. The data tell this story; it is not make-believe.

Analysis: Naturally, I loved Alex's talk and highly recommend it.  But I am always stunned at the kind of reaction that optimistic economists get, and I felt it again when I read many of the comments at the TED page.  For example, Jake Koethler writes, "The third world will never be developed to the extent that the rest of the world is. There aren't enough natural resources to sustain that level of development." I have been trained to impressed by lines on paper representing big abstract things like GDP per capita. But this is not natural. So Jake may be right, but I suspect he is falling for the instinctive zero sum fallacy. Division of labor disproves the limits to growth on one level, but Jake would probably say that labor is not the limiting factor here. Resources -- oil, gold, steel, agricultural capacity, water -- are the limiting factors.

I'm not sure I can disprove in this post the notion that limited stocks of any one thing limiting to overall prosperity, but it is clearly a powerful article of faith among many super smart people. Hopefully, we optimistic economists can make a convincing case that there is ultimately only one resource constraint: GDP per capita. A simple explanation: it is not the country with the most gold that dominates the world, rather it is the country that is the most productive. Every other thing's economic value derives from its balance of scarcity that ultimately rests on human demand. Because something is finite does not mean it can limit what is theoretically limitless, especially because all finite resource can arguably be reused. The execption is oil, but that's just one form of potential energy, and the sun is a lot bigger.

Those who believe in the resource constraint problem are logically arguing that too much growth causes slower growth. That reasoning is difficult to reconcile.

This may all seem trivial, but many beliefs about modern conflict hold fast to the principle of finite resource constraints. They see competing groups fighting for water, and deduce that water is a source of conflict. But poor people don't want water; it is just a proxy for what they really desire, which is prosperity.

Is Ireland a Cautionary Tale?

Paul Krugman is warning that America may go the way Ireland if its not careful, pointing to that country's current economic crisis as a symptom of excessive economic freedom. His essay is a clear case of revisionist history, and as my Irish grandmother would have said, "Shame on him."

First, the context. The Economist says Ireland is in "a deeper recession than any other euro area country. The economy probably shrank by 2.5% in 2008 and may contract by another 6.5% this year. Unemployment has jumped from 5% to 10.4%, a faster rise even than in America." Further, the government may have worsened the crisis with poor policy choices. Krugman, for those just tuning in, thinks that nationalizing banks is a much better course of action than bailing them out of toxic assets. That's what Ireland did when it faced a banking crisis last year, which arguably failed, and it's what the Obama administration is essentially doing now. 

Krugman may be right about nationalization; I share the same skepticism of bank bailouts and toxic asset purchases. That's not the issue. The problem with Paul Krugman is that he can't resist using a free-market straw man to make his point. Red Flag! Foul! Bad Journalism! Here's the offensive Krugmanian paragraph:

How did Ireland get into its current bind? By being just like us, only more so. Like its near-namesake Iceland, Ireland jumped with both feet into the brave new world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the third freest economy in the world, behind only Hong Kong and Singapore.

Boil this down, and he is saying that economic freedom is the same as "unsupervised" laissez-faire markets, with the implicit judgment that this is dangerous. Krugman is preaching cartoon Keynesian economics, as if having state enforced contract law and property rights were somehow equal to no law. Not to mention, glibly asserting that free trade is bad and high taxes good.

Specifically, Krugman is taking aim at the Index of Economic Freedom, which most readers know that I directed in 2006-07 including a major refinement in its methodology with the 2007 edition (this chapter with Bill Beach from the 2008 version is online). And it's true, reforms in Ireland since the mid 1980s catapulted that nation from one of the least free to one of the most free places on Earth. This policy shift coincided with one of the starkest economic miracles ever.

The "Celtic Tiger" story is much different than development miracles in the Third World, say in Asia or Latin America. Those places were untouched by modernity in some sense. But Ireland was the opposite: a stagnant economy surrounded by modernity. Indeed, no country was closer to the birth of the Industrial Revolution in Britain, and yet it had still not received the diffusion of its benefits. None. So in a very powerful way, Ireland is the ultimate case study in the story of bad policy as a barrier to growth.

Let's examine the facts. First, consider Ireland's economy right now. Here is the full text of the "Economy Overview" from CIA's World Factbook page on Ireland (updated 9 April 2009):

Ireland is a small, modern, trade-dependent economy. GDP growth averaged 6% in 1995-2007, but economic activity dropped sharply in 2008 and Ireland entered into a recession for the first time in more than a decade with the onset of the world financial crisis and subsequent severe slowdown in the property and construction markets. Agriculture, once the most important sector, is now dwarfed by industry and services. Although the export sector, dominated by foreign multinationals, remains a key component of Ireland's economy, construction most recently fueled economic growth along with strong consumer spending and business investment. Property prices rose more rapidly in Ireland in the decade up to 2006 than in any other developed world economy. Per capita GDP also surged during Ireland's high-growth years, and in 2007 surpassed that of the United States. The Irish Government has implemented a series of national economic programs designed to curb price and wage inflation, invest in infrastructure, increase labor force skills, and promote foreign investment. In 2008 the COWEN government moved to guarantee all bank deposits, recapitalize the banking system, and establish partly-public venture capital funds in response to the country's economic downturn. Ireland joined in circulating the euro on 1 January 2002 along with 11 other EU nations.

Want to know the in-depth story of Ireland?  Ask the Irish. In 2006, I authorized the publication of a Heritage report written by Sean Dorgan, the Chief Executive of IDA Ireland since January 1999. Dorgan shows that the decades of nationalism, massive government social programs, and protectionism were simply abject failures. Only when Ireland slashed its corporate tax rate to 12.5 percent - one of the lowest in the world - did its economy boom. But before thinking about what worked, step back and consider what did not:

The role of the state also increased during the 1960s. Public expenditure grew from 32 percent of GNP in 1960 to 42 percent in 1973. Social services and education, in particular, expanded with the state. ...

Between 1980 and 1986, total government expenditure grew from 54 percent to 62 percent of GNP, and public debt increased from 87 percent to 120 percent of GNP while annual budget deficits exceeded 10 percent of GNP.

And then the party Fianna Fail won the 1987 general election and began "a pro­gram of severe cuts in expenditure." Reform after reform was emboldened by growth, which kept the critics on their heels, if not silenced outright.

The same story told by the Heritage/Wall Street Journal Index is also told by the World Bank's Doing Business Report. It's a story that shows with data that government spending to make economies grow is an empirical failure. The story of economic freedom explains how to fight global poverty. And it's pretty clear that Paul Krugman does not like that story. While the current market and government failures deserve scrutiny and correction, we have to be wary of ideologues like Krugman who will use the crisis to smear all pro-growth policies (and other ideologues who will smear all government solutions). The only way to do that is with the perspective of history.

Using purchasing-power-parity data from the latest IMF World Economic Outlook, Ireland had per capita GDP of $6613 in 1980.  That means the typical family of four had $2000 a month to survive on. By 1996, that number had tripled. In 2007, it peaked at $43,414.  All of Krugman's fury boils down to the fact that GDP per capita in Ireland fell in 2008 to $42,780. It may drop further, maybe below $40,000, but it is criminal to suggest that Ireland should return to its auld ways.