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)?

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.

The Civilizing Effects of the Hajj

David Clingingsmith, Asim Ijaz Khwaja and Michael Kremer collected some data from Pakistan on the impact of the pilgrimage to Mecca.  Here is the abstract:

We estimate the impact on pilgrims of performing the Hajj pilgrimage to Mecca. Our method compares successful and unsuccessful applicants in a lottery used by Pakistan to allocate Hajj visas. Pilgrim accounts stress that the Hajj leads to a feeling of unity with fellow Muslims, but outsiders have sometimes feared that this could be accompanied by antipathy toward non-Muslims. We find that participation in the Hajj increases observance of global Islamic practices such as prayer and fasting while decreasing participation in localized practices and beliefs such as the use of amulets and dowry. It increases belief in equality and harmony among ethnic groups and Islamic sects and leads to more favorable attitudes toward women, including greater acceptance of female education and employment. Increased unity within the Islamic world is not accompanied by antipathy toward non-Muslims. Instead, Hajjis show increased belief in peace, and in equality and harmony among adherents of different religions. The evidence suggests that these changes are more a result of exposure to and interaction with Hajjis from around the world, rather than religious instruction or a changed social role of pilgrims upon return. [my emphasis]

In other words, Malcolm X’s statement that “There were tens of thousands of pilgrims, from all over the world…We were all participating in the same ritual, displaying a spirit of unity and brotherhood that my experiences in America had led me to believe never could exist between the white and non-white…[W]hat I have seen, and experienced, has forced me to rearrange much of my thought-patterns previously held, and to toss aside some of my previous conclusions” has large sample empirical support.

Bhagwati on the Crisis

Jagdish Bhagwati challenges Joseph Stiglitz’s analogy that the current worldwide recession is analogous to the fall of the Berlin Wall.  For Stiglitz, the decline is due to neo-liberal policies gone awry.  Bhagwati, on the other hand, sees things differently.  First, he reads the recent evidence of economic liberalism as poverty reducing and welfare enhancing. 

we need not apologize for liberal policy in terms of its effects on overall prosperity, on poverty in poor countries, or on the wages of the poor in rich countries. To compare an interruption of this remarkable progress to the collapse of the Berlin Wall is like drawing a parallel between a tsunami and a summer storm that brings rain and a rich harvest to parched plains.

Second, he also doubts claims that markets undermine morality.

How does one react then to a phenomenon like Bernie Madoff? Does it not represent the corrosion of moral values in the marketplace? Not quite. The payoffs from corner-cutting, indeed outright theft, have been so huge in the financial sector that those who are crooked are naturally drawn to such scheming. The financial markets did not produce Madoff’s crookedness; Madoff was almost certainly depraved to begin with. The financial sector corrupts morality in the same sense that the existence of an escort service corrupted Eliot Spitzer. Should we blame the governor’s transgressions on the call girls rather than on his own flaws?

And finally, rent-seeking caused the crisis.

One of the seminal moments occurred when the heads of the big five investment banks, among them future Treasury Secretary Hank Paulson (then CEO of Goldman Sachs), “persuaded” the SEC to impose no reserve requirements on their lending….

But why did the SEC agree to this demand? Answering this question takes us right into the role played by governmental failure, not “market fundamentalism,” in creating the crisis. Senator Chuck Schumer, whose Wall Street PAC contributors come with his political territory, is known for having indulged in Japan-bashing, then India-bashing, and now China-bashing. This time around, though, he bought into the argument that Wall Street would lose out to London if the demands of the investment banks were not met. So, he played a crucial role in the “race to the bottom” that was central to the crisis.

This is just some of the points worth pondering from Bhagwati’s essay.