Growthology

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.

Miss the Movie, Not this Review

Tyler Cowen's review of the documentary THE END OF POVERTY is fun, priceless, hopefully an important step forward in the coversation about global development in the public arena, and a piece that I suspect will be remembered for many years. Quoting heavily:

I can only report that The End of Poverty, narrated throughout by Martin Sheen, puts Ayn Rand back on the map as an accurate and indeed insightful cultural commentator. If you were to take the most overdone and most caricatured cocktail-party scenes from Atlas Shrugged, if you were to put the content of Rand’s “whiners” on the screen, mixed in with at least halfway competent production values, you would get something resembling The End of Poverty. If you ever thought that Rand’s nemeses were pure caricature, this film will show you that they are not....

In this movie, the causes of poverty are oppression and oppression alone. There is no recognition that poverty is the natural or default state of mankind and that a special set of conditions must come together for wealth to be produced. There is no discussion of what this formula for wealth might be. There is no recognition that the wealth of the West lies upon any foundations other than those of theft, exploitation and the oppression of literal or virtual colonies.

The history in this movie starts, not coincidentally one may assume, in 1492 with the arrival of Columbus in the New World. The phrase “natural economies” is used repeatedly to refer to the conduct of the since-despoiled noble savages, and we are told that the Europeans destroyed the natural economies of the countries they conquered. Never mentioned is the fact that these so-called natural economies were themselves based on prior conquest and oppression. ...

Most of all, the Robert Schalkenbach Foundation should be ashamed for having funded this movie. The Schalkenbach Foundation was set up in 1925 to promote the thinking of Henry George, best known as the author of Progress and Poverty and advocate of a tax on land. George was a flawed but brilliant and incisive thinker. He understood that wealth needs to be produced, and he also understood the strong case for free trade, most of all to protect the interests of labor. His 1886 book Protection or Free Trade remains perhaps the best-argued tract on free trade to this day; in that book George refutes exactly the arguments put forward by The End of Poverty. Has Diaz, Sheen, Portello or anyone working today at the Schalkenbach Foundation read it? One has to wonder if anyone who has read George could lend a hand to the production of the screed of mistruths and error that is The End of Poverty. I prefer to be subtler, but this movie does not allow it.

Kudos to the American Interest for publishing this (and a few other) great pieces.

And yes, I too was curious about the Schalkenbach Foundation. Calling them out was something of a surprise that certainly catches the attention of places like Kauffman where our support is rarely noticed so openly. I'll be curious to see if and how they reply.

Tyranny Trap: Land of No Growth

This story about North Korean defectors in the Washington Post is riveting (hat tip Paul Kedrosky):

They filter into South Korea at the rate of about 35 a week, usually after months or years in China and an arduous detour through Vietnam, Burma or Thailand. About 15,000 defectors have settled in the South, with 4,000 arriving in the past two years.

Seoul does not encourage North Koreans to defect. But once they arrive, the South Korean government quietly grants them citizenship, gives them an apartment and tries to teach them how not to sink in an education-obsessed capitalist culture.

* * *

A new U.N. human rights report describes North Korea as a place where ordinary people "live in fear and are pressed to inform on each other. The state practices extensive surveillance of its inhabitants. . . . Authorities have bred a culture of pervasive mistrust."

The story references a survey of North Korean defectors published by the Peterson Institute last January, which I just discovered. (Disclaimer: it ws co-authored by one of my dissertation advisers, Stephan Haggard). The conclusion that "When questioned about governance and the economy, the refugees’ collective evaluation of the regime, its intentions, and accomplishments is overwhelmingly negative..." tells us that even the most oppressive state control has not been able to maintain popular support.

Why is North Korea important?

One might argue that the hell that is North Korea is unimportant, a sad reality that some places are just not as prosperous and fortunate as others. But its existence is profound, confirming that an Orwellian state is possible.

It is a haunting place to contemplate, North Korea. The level of poverty may be no worse than the average country in 1500. Perhaps better. However, if human misery is measured by oppression and fear, it is difficult to imagine a sadder place in all of history.

The situation is such not just because there is an absence of prosperity, but because the country is ruled by tyranny in a world of plenty. Visions of plenty are intolerable to impoverished tyrants, and either they give way to change (and economic revolution easily spills over to political revolution) or they intensify their oppression with extreme propoganda and paranoia. Indeed, development economists often speak of poverty traps, but North Korea is a special case. It is a tyranny trap.  And how can we resolve a tyranny trap?

The contrast between two economic philosophies could not be starker than North and South Korea. The North's stagnation confirms in my mind how extreme governance must be to deny the natural experience of economic growth. So often we frame growth as a question of what a soceity can do, when the real challenge is to identify government-sanctioned barriers to growth.

The Limits of Taxation: Cato edition

How high can marginal tax rates rise until the loss of work incentives becomes unbearable?  Unbearable for citizens is one aspect, but the operational aspect is probably the tolerance of governments. Taxes so high that revenues decline?  Unlikely a society can reach that point, unless of course the society is globalized. When high tax rates chase out entrepreneurs, societies will notice. This notion of tax competition is the motivation of Chris Edwards and Dan Mitchell's book  Global Tax Revolution.

Though the book focuses mainly on the mobility of capital rather than labor, Chapter 5 is all about "Mobile Brains and Mobile Wealth." It starts with the surprising fact that "the number of people living outside their country of birth has doubled since 1980, from 100 million to 200 million."

Although the authors hold that tax competition is the driving force in knowledge economy immigration, but much of this chapter is a review of the many factors that favor higher rates of immigration. The fall of communism (which walled in its citizens) is surely one key factor. The new economy with higher rates of churn is another. But the basic forces of globalization - cheaper intercontinental travel and internet communication - are a third force that promises to intensify. Trade agreements and political unions (like the EU) are a fourth factor. Finally, the fifth factor is the policy innovation of immigration "points" systems in places like Australia, Britain, Canada, and New Zealand. Notice how these are English-speaking nations aiming, presumably, for English-speaking (American) brains.

One might read the chapter more as a critique of restrictive immigration policies than tax policies, but the authors turn to the competition among nations for wealthy people. With 31 percent of the world's 10 million millionaires, America has much to lose. But countries like Britain, with light taxation toward non domicile migrants or "nondoms" understand that only a small portion of wealth is inherited. Most wealth is created by first-generation earners / entrepreneurs. Thus, it is not the estate tax which is the most important, or even the nefarious wealth tax, but the most basic tax of all: the burden on current work and investment.

As a throwaway observation, I've long pondered the phrase "capital gains." It's a puzzle to me why gains made from investing in a firm are treated as "capital gains" just the same as gains made from creating that firm. Newsflash: I'm not an expert on this, but I can't help but wonder if an economy encourages more entrepreneurship if its tax code distinguishes between the two types of gains: capital and creative.

Back to Edwards and Mitchell ... the remainder of their Chapter 5 is a stunning world tour. The French state's hunger for tax revenue is appalling and not a little sad. With 300,000 French citizens living in Britain, numerous stories about fleeing young workers, and an internal advisory report to the government in Paris that "10,000 business leaders have left France in the last 15 years," one can't help but shudder. The wealth tax translates into an immediately unpayable burden on successful entrepreneurs whose illiquid firms are valued highly.

Germany, Italy, even Britain have their own weaknesses, but America is one the least responsive to the growing policy competition. The U.S. still has powerful advantages, but it does not seem to realize how quickly they are eroding.

U.S. to Scientists: Get Out!

During the closing decades of the 20th century, roughly 80% of the Chinese and Indians who earned U.S. Ph.D.s in science, technology, engineering, and mathematics (STEM) fields have stayed in the United States and provided a critical boost to the nation’s economy. Perversely, now that China and India are becoming formidable economic competitors, the United States seems inclined to enhance their economic productivity by supplying them with an army of U.S.-trained scientists and engineers. These returnees are spurring a technology boom in their home countries, expanding their capacity to provide outsourcing services for U.S. companies, and adding increasingly sophisticated primary R&D capability in knowledge industries such as aerospace, medical devices, pharmaceutical research, and software design.

One obvious sign of U.S. complacency about these developments is the absence of data to confirm the anecdotal evidence. In spite of all the controversy surrounding immigration policy, the government has not bothered to determine how much immigrants contribute to the economy or to assess the likelihood and consequences of a major shift in their desire to work in the United States in the future. To fill this gap, the Global Engineering and Entrepreneurship project at Duke University has attempted to quantify the role of immigrants in founding entrepreneurial companies and developing new technologies, to understand how federal policies affect decisions about working in the United States, and to assess the competing opportunities in India and China and the other factors that influence life decisions.

With financial support from the Kauffman Foundation, a research team including Gary Gereffi of Duke University, AnnaLee Saxenian of University of California at Berkeley, Richard Freeman of Harvard University, Ben Rissing of the Massachusetts Institute of Technology, and Guillermina Jasso of New York University spent three years conducting multiple surveys of thousands of technology and engineering startup companies, interviewed hundreds of company founders, surveyed more than 1,000 foreign students and more than 1,000 returnees, and made several trips to India and China to understand the on-the-ground realities in those countries.

U.S. immigration policy has been made in an information void. Although our research is far from conclusive, we believe it is fair to say that current immigration policy significantly undervalues the contributions these skilled immigrants make to high-growth segments of the U.S. economy. It appears that immigrants spur innovation in the United States and even help foment innovation by non-immigrants. At present, U.S. technological preeminence is not in question. Furthermore, some degree of intellectual dispersion and circulation is inevitable and valuable to the global economy. The United States cannot expect to maintain its previously overwhelming technological superiority in an increasingly globalized economy. But it takes a rare blend of short-sightedness and hubris to fail to investigate trends in the movement of global talent or to reconsider immigration policies that are not only economically counterproductive but also potentially damaging to U.S. national security.

That's from the excellent essay by Vivek Wadwha in ISSUES.

The Matrix and the Superorganism

On the latest episode of Flight of the Conchords the other night, the prime minister of New Zealand, on a visit to the United States, believes he's living inside The Matrix and, detecting a glitch (deja vu), leaps off a building to escape. This is good TV.

Aside from comic relief, the show's invocation of the Matrix resonated as I read Tim Flannery's interesting review of what sounds like a fascinating book, The Superorganism. In what struck me as a stretch, Flannery sought to analogize the superorganism civilizations of ants to human society, particularly the continued growth of the Internet and global concerns like climate change and economic meltdown.

Humans, perhaps thankfully, are still a long way from building a global superorganism, whether intentionally or not. Even advanced societies do not function in the finely striated ways that ant colonies do, despite the awe-inspiring realization that human societies, like the ants, operate smoothly in the absence of any controlling intelligence.

Yet a reasonable analogy between ants and humans might be the systems that humans build, and I have in mind specifically the global financial system. This seems to be a close approximation of the ant superorganism in that the division of labor is quite deep, the system can often be said to be acting in one unified direction (up or down), there is innovation (ants "invented" agriculture long before humans), and it is marked by behavior in response to discrete signals.

So how does such a superorganism collapse? Here, the story becomes almost entirely human: as Alan Greenspan observed, there was "a flaw in the model that I perceived is the critical functioning structure that defines how the world works." What was the flaw? Every commentator in the economic and financial world has answered this question, but it really comes down to something as old as human civilization: hubris. Probability and risk (really, uncertainty) were distorted, misunderstood, and subsumed within an irresistible superorganism of hubris.

National Public Radio reported the other day that college students, in response to the financial crash and recession, are flocking to a major in economics. This seems understandable, but I can't help wondering: if the current generation of economists utterly failed to suspect something to be a tad askew with the global financial system, will the next generation? (Trained, incidentally, by today's economists.) Given the entirely human traits involved here, perhaps literature or classics or history would be better-advised courses of study? 

Or let's update those staid majors, even. I heard somewhere recently that some college or university now offers a master's degree in the Beatles. Maybe we need one in The Matrix as well.

More immigrants = more growth

Would more high-skill immigrants help the U.S. economy grow?  The research says yes, according to Vivek Wadhwa.  Actually, according to the research: more start-ups, more patents (even by natives), and more jobs. This paper's finding was a big surprise:

Jennifer Hunt of McGill University and Marjolaine Gauthier-Loiselle of Princeton University analyzed long-term changes in a paper published in January titled "How Much Does Immigration Boost Innovation?".

According to their calculations, for every percentage point rise in the share of immigrant college graduates in the U.S. population, the total per capita number of patents for the entire population should increase by an astonishing 6%. Even more important, Hunt and Gauthier-Loiselle found that natives are not crowded out by immigrants, and that "immigrants do have positive spillovers, resulting in an increase in patents per capita of 9%-18% in response to a one-percentage-point increase in immigrant college graduates."