Stationary Bandit

The multiplier is unity

At least in the US from 1939 through 2008 says Valerie Ramey.  If you exclude the Second World War, Ramey finds the government spending multiplier to be between 0.6 and 0.8.  The findings make sense because after all purchasing power does not emerge from thin air.  Government spending based on deficits comes from future purchasing power.  And if the spending is done unwisely, then you get less than unity.  (HT: Angus)

What rise in protectionism?

As the worldwide recession unfolded, an increasing number of cries for protectionism appeared.  When times are tough domestically, people often respond by demanding protection from foreign competition to protect jobs.  When everyone does this, things get worse (such as during the 1930s).  A quick skim of the news suggests that protectionism has risen over the past few years.  The Global Trade Alert claims hundreds of instances. However, Dani Rodrik questions whether protectionism has actually risen.  He writes

Moreover, we do not even know whether these numbers are unusually high when compared to pre-crisis trends. The GTA report tells us how many measures have been imposed since November 2008, but says nothing about the analogous numbers prior to that date. In the absence of a benchmark for comparative assessment, we do not really know whether 192 “protectionist” measures is a big or small number.

Given the short time period, it is hard to distill a trend.  He also argues

The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors. Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands.

I agree.  The 1930s have not reappeared.  He claims that “ideas, politics, and institutions” are the reasons for the lack of increased demand for protectionism.  In true Rodrik-style, the welfare state prevented demand from rising.

But the relative docility of rank-and-file workers on trade issues must ultimately be attributed to something else altogether: the safety nets erected by the welfare state. Modern industrial societies now have a wide array of social protections – unemployment compensation, adjustment assistance, and other labor-market tools, as well as health insurance and family support – that mitigate demand for cruder forms of protection.

Social welfare programs diffuse protectionism by reducing the costs of losing a job.  Maybe.  But I wonder if it also a result of human capital accumulation that allows people to change careers more quickly than they could in decades past.   Losing a job then would not have the same expected costs.

Khama is coming

Botswana President Ian Khama will meet with President Obama on Thursday. 

"The two leaders are expected to discuss such issues as sound governance, economic development and the sustainable management of natural resources," a statement from the OP said on Monday evening. It added that HIV/AIDS will also form part of discussions between the two leaders.

The White House has described Botswana as a strong democratic partner in sub-Saharan Africa and a leader on the African continent in the field of conservation and HIV/Aids prevention and treatment.

Hopefully, they will focus on how Botswana transitioned from a very poor country to a relatively wealthy one so as to improve the development prospects of other African nations rather than the other issues.  That is, stress the sources of sound governance in sub-Saharan Africa (here is my take).  The “success” on HIV/AIDS prevention is debatable and conservation is not exactly a priority for many in the developing world- it is more of a developed world issue.  They seem off point for a region that has yet to sustain economic growth for decades.

Quiz of Famous Economists

Here is a quick quiz of famous economists and their contributions.  I finished in 36 seconds.  Maybe I should make it part of the final for my history of economic thought class since they are reading everyone but Becker. I would add questions about John Stuart Mill, Paul Samuelson and F.A. Hayek.  Who would you add? (HT: Marginal Revolution)

Blood Diamonds, Zimbabwe Edition

From the BBC:

Zimbabwe is facing calls to be suspended from the international diamond trade following allegations of brutality by its soldiers.   Rights groups are lobbying members of the Kimberley Process, the body which regulates the trade in rough diamonds, to halt exports from Zimbabwe.

Mugabe needs revenue to stay in power (and maintain his lifestyle) and he has finally tapped the diamond revenues.  I doubt a movie will be made about the situation nor will the American press cover it beyond a brief passing (as of now there is no NYT or WP story).   As the situation continues to deteriorate, one wonders if the South African government will ever say enough is enough.   Or do Mugabe’s freedom fighting days trump his obvious human rights violations?

Two surprising sentences (at least to me)

Steve Levitt and Roland Fryer write

Indeed, in countries like Bahrain and Iran, which are among the worst in terms of gender equality, girls are actually outperforming boys on math, and this is due to relatively strong performance by girls, not an unusually bad showing among the boys.

And also from the same paper

While of course highly speculative, these cross-country data are consistent with the hypothesis that mixed-gender classrooms are a necessary component for gender inequality to translate into poor female math performance, although it is difficult to distinguish single-sex classrooms from Islamic religion in the data.

Read the whole thing as they find many popular hypotheses without empirical support.  The results, as they say, are speculative but very interesting.  The gender gap in mathematics may arise from the mixed classrooms that alter the incentives for learning.  For some reason, the presence of males in the classroom changes the behavior of females.  Does math proficiency signal something negative about females?  I think that is absurd but anything is possible.  Levitt and Fryer do not offer an explanation but what other plausible explanations are out there?

Don't Cry for Argentina

Mary Anastasia O'Grady writes

After more than five years of heavy state intervention in the economy, Argentina is again sliding into recession. Double-digit inflation is spiraling north and the government is running out of money. In response, President Cristina Kirchner is cracking down on the free press. Argentines are wondering if their democracy will survive.

Argentina’s appears on the edge of another economic meltdown.  It is the classic case of demise: public overspending followed by inflation.  In many cases, the political elite do not accept responsibility for their decisions,rather they blame someone else (similar to the meltdown earlier this decade).  For example, the Peronists did not lose seats because of bad policies, they lost because of poor press coverage.  But then again, what do you expect when 45% of the people vote for someone who refused to take part in debates or media interviews during all but the last day of her campaign (see here for biography of the President)?

Fifty Years Ago was a Good Time for UVA Economics

A good test of an article or book’s importance is if it is still worth reading fifty years after publication.  Which economics articles published in 1959 would pass that test? Surprisingly, UVA economists published three papers that pass the test (no other department had that many IMHO).  Ronald Coase’s “The Federal Communications Commission” stands out for its early statement of the Coase Theorem.  Gordon Tullock’s “Problems of Majority Rule” helped begin the public choice approach with its emphasis on vote trading as a way to realize the gains from trade in political markets and its impact on electoral outcomes. Tullock was a post-doc at UVA in 1959 although he joined University of South Carolina that year.  I have always enjoyed James Buchanan’s paper “Positive Economics, Welfare Economics, and Political Economy,” but I do not think it had the impact of either the Coase or Tullock paper.  However, it offered an alternative to Paretian welfare econonomics that remains worth pondering and has received a fair number of citations.

For a place characterized as anarchic, …

Somalia seems to be making economic progress.

A money-transfer company has made a piece of banking history in Somalia - introducing the first-ever debit card in the breakaway region of Somaliland.

The introduction of financial innovations is promising for the country.  Technology continues to enter the “failed” state.  Furthermore, violence in the region is not terribly prevalent.  Maybe anarchy is not that bad after all.  For some more evidence on Somalia’s economic performance since 1991, see here and here.

There was no winner of the…

The Ibrahim Prize for Achievement in African Leadership.  “The prize awards $5 million over 10 years and $200,000 annually for life thereafter to encourage leadership that improves the prospects of people in the continent.”  Why no winner this year is not obvious to me?  Thabo Mbeki was mentioned but he seems undeserving to me.  His positions on HIV/AIDS and Mugabe are reasons enough.  John Kufuor would have been a deserving winner.  A peaceful democratic transition in Ghana is something to celebrate.  Here is one story about the decision.

“Bubblicious Groupthink”

David Brooks writes

Since the masters of finance have been exposed as idiots, the masters of government have concluded (somewhat illogically) that they must be really smart.

He continues with a nice anecdote regarding attempts to remake markets based on the previous presumption.

The effort to cap golden parachutes in 1989 perversely caused companies to increase their golden parachute packages right up to the legal limit. A 1993 law to cap C.E.O. pay led to greater use of stock options and encouraged riskier behavior.

Regulations have unintended consequences.  Attempting to manage risk before it appears is absurd.  It takes time for actual level of risk to appear.  After all, many of the problem loans of today had AAA ratings only a short time ago.  Few people then foresaw the future.  What makes our current leaders think they can predict systemic risk ex ante?  As Brooks argues, self-deception seems the likely candidate. 

My New Favorite Young Philosopher

I came across Jason Brennan while reading “Elements of Justice” by David Schmidz.  I read a few of his papers this week and really enjoyed them.  His critique of voting is one the best I have come across.  Here is the brief summary.

1.    One has an obligation not to engage in collectively harmful activities when refraining from such activities does not impose significant personal costs.

2.    Voting badly is to engage in a collectively harmful activity, while abstaining imposes low personal costs.

3.    Therefore, one should not vote badly.

Voting badly leads to negative externalities.  If most people vote badly, they impose a cost on themselves and others. 

He also has a nice paper on the Rawls’ Paradox.  Here is the abstract:

Rawls’ theory of justice is paradoxical, for it requires a society to aim directly to maximize the basic goods received by the least advantaged even if directly aiming is self-defeating. Rawls’ reasons for rejecting capitalist systems commit him to holding that a society must not merely maximize the goods received by the least advantaged, but must do so via specific institutions. By Rawls’ own premises, in the long run directly aiming to satisfy the difference principle is contrary to the interests of the poor, though it is meant to aid them.  

In other words, adopting policies that focus on maximizing the basic goods to the least advantaged leads to lower economic growth.  Over time, this policy harms the least advantaged because they are worse off. 

Escalating Problems in Zimbabwe

The unity government is falling apart.

Eight months after entering a power-sharing deal with President Robert Mugabe of Zimbabwe, Prime Minister Morgan Tsvangirai announced Friday that he and his party will boycott cabinet meetings and withdraw from dealing with Mr. Mugabe’s party, in the biggest breach yet in the new transitional government.

This, of course, is not surprising.  Mugabe remains a dictator and has little use for Mr. Tsvangirai. 

The catalyst for this step was the jailing Wednesday of Roy Bennett, Mr. Tsvangirai’s deputy agriculture minister-designate, a white farmer who is scheduled to stand trial Monday on three-year-old terrorism charges that his party, the Movement for Democratic Change, says are fabricated.

Politics as usual for Zimbabwe—when times are tough for Mugabe, blame the white farmers.  After all, Mugabe's policies could not be the problem. 

Oliver Williamson and the Socialist Calculation Debate

In his Ely Lecture “The Economics of Governance,” Oliver Williamson wrote

Although bureaucratization is a much ignored condition, Oskar Lange (1938 p. 109) described bureaucratization, correctly I think, as “the real danger of socialism.”

This does not imply that he believes that Hayek and Mises lost the debate to Lange and Lerner as suggested in the comments here.  In his essay “Economic Institutions: Spontaneous and Intentional Governance,” Williamson wrote

Writing in the context of the "socialist controversy", Hayek took exception with the prevailing view that efficient resource allocation, to be realized by applying the principles of welfare economics (mainly, marginal cost pricing), was the key need. Hayek insisted instead that "the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place" (524; emphasis added). Observing, interpreting, and reacting to changes in information are crucial for these purposes. Because much of the relevant information was idiosyncratic, and hence could not be communicated quickly and cheaply to a center, those with local knowledge needed to be empowered to decide upon and make the adaptations. Hayek's solution to the economic problem of society was to use the price system to signal opportunities, whereupon de- centralized decision-makers, who possessed the requisite local knowledge, would adapt. Mechanistic arguments about the efficacy of socialism failed because they neither recognized the real needs of economic organization (for rapid adaptation) nor appreciated that the marvel of the market serviced these needs in subtle, spontaneous ways.

The next sentence reads

I am persuaded that Hayek was substantially correct in his critique of socialism.

As I read Williamson, he is basically arguing that the incentives problems ignored by Lange stem from informational difficulties that Hayek emphasized.  That is, Hayek “won” the debate.

Has HIV/AIDS stabilized in Botswana?

It appears that it has.

The Minister of Health, Lesego Motsumi has announced that the spread of HIV/AIDS has stabilised in Botswana.  Speaking at the I-TECH Kabelano breakfast seminar on Tuesday, the minister said that in 2008, the prevalence rate was 17.6 percent compared to 17.1 percent in 2004. She said this raises hope that the pandemic is stabilising.