Tuesday, November 18, 2008

Freakanomics

I think Freakanomics was an appropriate last seminar reading for our Econ class, as the author takes economic reasoning and brings it to bear on other situations in ways not normally used by economists. This is an excellent lesson for us, as going forward, as PPE majors, I think most of us hope to do exactly this in our lives. Good choice Blomberg!

Anyway, the book has a lot of interesting cases. I think we all know the abortion one from Elliott's class. I found myself particularly interested this time by the chapter on cheating, with Sumo wrestlers and teachers. I thought that it actually connected well with Elliott's class of all things. Basically, one of the things that I have learned is that individuals will act on incentives presented towards. I guess this would be obvious... so maybe college was a waste of time...

Just kidding. Anyway, combining this idea of how incentives lead sumo wrestlers and teachers to cheat with some of the stuff we learned in Elliott's class, I think the fundamental problem of humanity comes into play. Individuals act on individual incentives presented towards them, but individual action (driven by individual incentives) is often not good for a population as a whole. I suppose this is a Nash Equilibrium of sorts. For example, teachers have an incentive to change their students scores because it is beneficial to each individual teacher. However, as a group it hurts them in a variety of ways. All of them cheating makes it more likely they will get caught (15 of them got fired), it makes it so the kids will still be behind the next year, and society overall is worse off from this practice. This is the same when it comes to population growth. It might be individually beneficial to have more children in developing countries, as they will make more money for the family and support the parents in old age. But for the society as a whole this hurts with overpopulation.

Conclusion: the essential challenge of society is to mold individual incentives such that they lead to outcomes that are collectively (not just individually) beneficial.

Eugenics at its finest

By far the most interesting chapter to me in Freakonomics, is the chapter on abortion. Abortion, no matter how you stand on it religously or politically is eugenics at its finest. I am a strong believer that a childs future success, well being, and integrity have a lot to do with how the child is raised. With that being said, the ideal parent for raising a successful child with a high self esteem, are parents that really want a child, want to start a family, have thought about all the obligations of having a child, and then intentionally get pregnant then raise their kid. On that same note, the people who wouldn't be the ideal parents are the people who got black out drunk at a party and forgot to use a condom, people who are not going to stay together after the woman gets pregnant, and people who have not thought about all the obligations a child entails and are not financially prepared to bring such an expensive thing into this world (a child).

What does abortion do? Abortion allows many of the would be parents who are not the "ideal parents" get rid of their baby, before it becomes a baby. Abortion leaves a higher percentage of "ideal parents" having children then if abortion is illegal. While this does not affect the crime rate today, it does eliminate that child who will car jack you 22 years down the road. Abortions today lower crime rates 15-25 years in the future as the children who would be growing up in the broken home with their life trajectory looking at being a crack selling foot soldier, are not being born. I don't think any woman should ever be told that she does not have the choice to do what she wants with her body. It's her child, it should be her decision, and propositions like the one in California making woman under 18 get parents consent for an abortion are dangerous as if that prop were to pass then many more teenagers would be having kids and those kids would be the one's who are going to key my Maserati 15 years down the road.

2008 Election: White vote consistent with polls

Although there were a lot of things that interested me in Freakonomics that I would like to mention here, I was extremely curious to see how the white vote faired on November 4 for President-elect Obama compared to the Gallup polls leading up to the election. This interests me because of Levitt and Dubner's assertion that voters lie too, stating that "Might white voters lie to pollsters, claiming they will vote for the black candidate in order to appear more color-blind than they actually are?" (77). That being said, I took a look at the polls. According to CBSnews that referenced a Gallup Poll, Obama was projected to win 44% of the non-Hispanic white vote (http://www.cbsnews.com/stories/2008/10/24/politics/politico/main4544827.shtml). On November 4, 2008 exit polls showed Obama winning 43% of the non-Hispanic white vote, showing that perhaps the white people did not lie when asked by the pollsters prior to the election. There are many other amazing things about the closeness of the projected verses actual numbers, showing that our nation really believes in President-Elect Obama, despite his race. (thank goodness it is about time!!!!) I think this election, given the great margin by which Obama won, would also confirm Levitt and Dubner's argument that "the amount of money spent by the candidates hardly matters at all"(9).

The study of economics is everywhere!!! :-D

Thursday, November 6, 2008

Presentations

December 2: Hillary, Nina, David
December 4: Jordan, Matt, Max
December 9: Akta, Erik, Kyle
December 11: Marco, Sarah, Nathan

Water World

In my opinion, the section Jefferey Sachs wrote about water is the most mind blowing chapter of his entire book. The idea as to what to write about for Jefferey Sachs’ book hit me during my 25 minute post football practice hot shower. Living in a well off part of California, people can’t help but take water for granted. When push comes to shove I believe the saying “money makes the world go round” takes the back seat to “water makes the world go round”, because you do not need money to survive, but water is essential. If my family disappeared, if someone stole my identity and liquidated all of my assets, and all of my possessions were destroyed, I could still survive, my life expectancy probably wouldn’t even drop much from a setback like that. I would still probably make it into my 70’s. However, you put a million dollars in my pocket and leave me in the dessert without water… I have three days maximum to live. Water is the most essential resource on the planet, nothing else comes close and in the midst of our daily showers and easy lives, it is really hard to appreciate the value of water. What is even more intriguing is that such a precious and scarce resource is relatively free in most developed countries.

When one starts realizing how precious water really is he or she might begin to feel guilty about their hour long shower or massive squirt gun fight, but an interestingly enough, household usage of water accounts for barely 10% of waters usage. However, this makes perfect sense as one can only drink so much, shower so long, or flush the toilet so many times. Where the water is used the most is through agriculture. If I don’t have water to drink I am dead in under a weak and if I don’t have water to use for agriculture within a society, I am dead within a month. It’s hard to really fathom the harshness of the situation, but with water the stakes are high. While oil is the lifeblood of our economy, water is the building block of all life period. Due the scarcity of clean water and the constant damage to water sources, I would not be surprised if many wars in the future were fought over water. The number one way to get someone to take up arms is to threaten their survival if they don’t and if someone doesn’t have water or a reliable source, what can be more threatening than that? What seems scariest of all is the water crises in the Middle East and in Asia. As it is, those places are already hot spots of conflict without bringing security of clean water into the picture. While Sachs addresses the seriousness of the situation, I do not believe he correctly identifies the severity. It seems that if he gave the topic of water more thought, it might be what he concludes is the absolutely most important environmental, economic, and social issue to address out of all of the world’s problems. As it is the Middle East and Asia are two huge powder kegs of conflict and anything to aggravate a situation is serious and what is more aggravating than the fear of losing a safe water supply? Considering how crucial water is and how futile one would feel even if they had all the power in the world, but no water, if any nuclear power had a water supply at risk, there is no saying how desperate a nation or a faction might become…

Sachs addressing fertility rates

Of course coming off of last semester's extensive look into fertility rates and population growth, I feel as if we have an unfair advantage in poking holes in Sachs in comparison to his average reader (of course by the same note I guess we could say that about most of the authors we read :). I find Sachs discussion of fertility very familiar from the pro-government policy people we read. However, as a result the same arguments remain. Referring back to Lant Pritchett's paper entitled, Desired Fertility and the Impact of Population Policies, I would like to introduce the most compelling argument in my mind against government fertility policy focused heavily, primarily, or exclusively on the "fertilization" stage of fertility rate. Sachs and other like minded scholars repeatedly bring up accounts of service recipients saying how were it not for the provision of contraceptives they would have an over abundance of children just like their parents (Sachs 181). In response Pritchett provides significant data based evidence showing that mothers consistently bear children at numbers equal to or close to the number of children they desire to have. The failure of government policy programs focusing on contraceptive distribution supports this conclusion well.
All is not lost for Sachs though. He briefly mentions the shift in focus in 1994 at the International Conference on Population and Development to more actively promote, and push to the forefront, policies providing an array of sexual and reproductive health services (safe pregnancy, delivery, control of spread of STDs). This push makes perfect sense in the grander scheme of what we actually know to affect fertility rates (by way of affecting desired fertility): decreasing infant mortality. Such health oriented services would surely decrease infant mortality rates thereby causing mothers to have a decreased need for larger broods in the hopes that some make it to adulthood. A look at demographic shifts over the past several centuries supports this logic as Sachs presents such evidence himself. His only failure in this is linking these two explicitly, instead of saying, "oh look so they decided to change their focus and now it's being used in the Millennium Promises, great they are working to do change." I would have liked a further elaboration of the connection between fertility rates and the current and good policies being implemented and how they differ from older ideas.

Agree Purport Motivate Act Change?

Sachs’ dig on Easterly, who makes a “phony” charge, is convincing and harsh. So much of what produces change has to do with the attitude of leaders and how they choose to reflect or inflate or state the facts. It is a clash of attitudes and therefore a difference in reported facts between the two authors which makes for comparing them difficult yet entertaining. By focusing on the successes of foreign aid efforts, Sachs does a necessary good for people who tend to follow examples—which in my opinion is everyone. Though Sachs rejects the market view as being able to solve nagging problems such as carbon emissions, the economist in him is helpful when calculating the numbers to put Easterly’s arguments to shame. Easterly’s arguments are overly Washington-specific. There are examples such as Japan where aid was given and at least small successes took place.
There have been complaints that Sachs’ book lacks the amount of psychological reflection which some think is essentially necessary to discuss and sort of psychological stance it might need in order to make real recommendations for change, but I believe that the psychological aspects are implicit and obviously embedded within his ideas. For example, he has extreme faith in democracy, viewing our leaders as those who follow the citizens in a sort of backwards but sensible manner. He does not underestimate the importance of “public awareness and engagement.”
By focusing on positivism amid what seems like doom, Sachs has done a wonderful job in working toward his positive vision of possibility and future opportunity. Even if on the inside he doesn’t think that we will be able to quell the problems facing humanity today and that the lifeboat we are all in is about to sink taking us all under, at least he purports to follow this line of thought and is consistent in that—trying desperately to creat a self-fulfillling prophecy of attitudes, harking back to Gladwell’s The Tipping Point where there is a point in time where change becomes unstoppable. Can one do that through words? Through motivational stories? Through well-written inspirational books that focus on debunking those of other academics as well as displaying the worries and hopes of our time in a succinct intelligible way? Time will tell us that answer—and there is not point in speculating but rather all our efforts should be in…searching?!

Foreign Policy

I appreciated the confident position Sachs takes on the issue of global development, poverty, population growth, etc. His book is ambitious, stressing the importance of non-fossil fuel energy sources and creating market incentives for their implementation, securing the sustainability of our water and land resources, capping the world population by incentivizing voluntary fertility reductions, and a reappraisal of foreign policy, particularly by the U.S.


One day’s pentagon spending would prvide enough funds to ensure ant malaria bed nets protection for every sleeping site in Africa for five year. 274


His book is particularly critical of the Bush administration and it’s foreign policy of conditional and belief laden aid, and its. In his chapter on Rethinking Foreign Policy he argues that the U.S. has overestimated the necessity for military in securing U.S. interest when the greatest challenges facing the world are “political, economic, and environment and are unsolvable by military means”(272). When one considers that in 2007, the U.S. spent about as much money on its military as the entire world combined (572 billion) and that development and humanitarian aid only amount to around 2.4% (14 billion) of this military expenditure, one can’t help but feel like something’s wrong . It doesn’t take much to realize that greater investment in the latter would do more for U.S. foreign relations and good will than another unilateral military intervention. Further, fighting a war against terrorism has done nothing to address the root of the problem. What’s needed is for these resources to be reallocated to fight the root cause of this violence, including instability and hostility due to diseases, water and food shortage.

I felt Sach’s argument was particularly strengthened when he drew to memory the outcomes of the U.S.’s more recent military conflicts and the futility its military prowess had in yielding desirable outcomes. It’s true that the U.S.’s military interventions have primarily taken place in the developing world, and it’s likely that this trend will continue. It’s also evident that the outcomes of Vietnam and Somalia are manifesting themselves in Afghanistan and Iraq. It should be clear by now that a militaristic perspective on the world has done nothing but fan global dismay for the U.S.

Overall I have to say I’m with Sachs, very much in support of multilaterism, of a shift in military funds to development and humanitarian aid, and a reappraisal of foreign policy.

Wednesday, November 5, 2008

Sachs, the Optimist

I find it interesting that Sachs focuses not on alternative energy sources (he discusses them, of course, saying that there's a "reasonable chance" that we might need solar & nuclear power), but instead on how to use fossil fuels in a better manner. He states, "The challenge for this century will not be in the limited availability of fossil fuels, but in their safe ecological use and in the timely investments needed to ensure that the right kinds of fuels are available at the right times and places" (p44). He emphasizes that we should not be worried about running out of natural resources. Instead, we should shift our focus on how to be able to use fossil fuels in a sustainable manner. The solution? Carbon sequestration, of course! We have all heard about this idea before - storing CO2 underground, so that we can have the luxury of continuing on with the same source of fuel while mitigating the consequences. It sounds almost too good to be true! In fact, it pretty much is at this point.

Sachs' argument on this issue seems to be vulnerable to an Easterly-esque critique: he says, "A fascinating alternative, which could prove to be a breakthrough technology, would be to capture CO2 directly from the air through special chemical processes and then sequester the captured CO2" (p101). I read on, eager to hear of which scientists were on the verge of uncovering a technology that would be such a panacea to our energy problems. Sadly, this never came. Sachs discusses how engineers have pointed out the advantages of capturing CO2 from the air, but progress on the R&D seems to be null. This makes me question the feasibility of this "Planner" argument. We could all name many "fascinating alternatives" to worldly problems - wouldn't it be cool if we came up with a technology that could distribute mosquito nets to those in need in malaria prone regions of Africa? or how about a technology that would get us all jobs/into grad school? Clearly, I do not see the connection between feasibility, or even a hint of practicality, and Sachs' idealism in this case.


However, there are instances that defy Easterly's "planner" critique of Sachs. For instance, I am impressed by the Millenium Village Project- it seems to incorporate a healthy balance of both planner strategy and searcher detail. In particular, the fact that the project chooses villages in part based on how receptive local governments are to the strategy, and then incorporates participation of locals into the project is encouraging.

Positively negative

One of the main things that I liked about Sachs' take on development and global politics is that he hasn't given up on the world like Easterly seems to have done. There is still potential for the world to collaborate and work to find a way to avoid massive climate change and construe a system that will limit all equally to the quantity of carbon emissions. There is hope that we can work together in order to find a better future instead of wasting the money that we set aside as Easterly describes on corrupt governments and projects that fund worthless development efforts.

In some respects Sachs made it sound like it was easy to get all the different nations of the world to hop on board with the idea that we need to band together in order to avert destruction. The sad fact that remains is that we are not necessarily forward looking people, in any nation. If we were, we might have already solved this problem of climate change as well as carbon emissions. If we only would recognize the large hole that we have already dug ourselves in terms of the environment we might not be polluting to the level that we are. But Americans and other nations choose to remain oblivious. We are intelligent enough to recognize that we are making a potentially irreversible stamp on our environment, we just choose to remain oblivious to the efforts that could be made here and now to fix it. It's sad that as forward looking as we claim to be we still neglect the responsibility of advocating sustainable business and industry practices. From here on out we must practice what we preach otherwise we are doomed. Ahh revert back to Easterly because of our history and the fact that history and attitudes are unlikely to change unless we make a serious change, one that is possible but not probable until people feel the threat in their every day lives, aka when it's too late.

Shoulda-Coulda-Woulda: Will Asia Trump the Americas?

Sachs makes an interesting claim in his "The Asian Century": Asia will become the "center of gravity of the world economy" during the 21st century.

He might be onto something... or is he?

Sachs' prediction here is believable (unlike his other doomsday prophecies).  Asia certainly has the potential to be the economic powerhouse of the 21st century: they are liberalizing their markets, they are sustaining high levels of growth, and they have done much in the last 25 years to reduce poverty.  

But Asia (and China in particular) has had a history of falling short of their potential.  The most obvious example: China had the preconditions necessary to have an industrial revolution centuries ago... but they didn't.

Perhaps this century will be different, but Sachs needs to more aware of his (long-term) history before he makes such bold prophecies.



Monday, October 27, 2008

Wed Lecture: The Fed and Stabilizing Financial Mark
Can a Lender-of-Last-Resort Stabilize Financial Markets? Lessons from the Founding of the Fed

Eric Hughson

Don and Lorraine Freeberg Professor of Finance and Economics, and Director of the Financial Economics Institute, Robert Day School of Economics and Finance, Claremont McKenna College The US Economy is hitting home -- not only "the home" that may have been lost to foreclosure in the last year, but the metaphoric home of our daily lives. The traditional assurances of pundits about the long term behavior of the markets are no longer convincing as Americans worry about the viability of their retirement and begin to invoke the year 1929. With the espoused ideals of the free market having failed housing and credit, there has been a turn back to government, a turn that might be ironically described as socialism to save capitalism. Eric Hughson, professor at CMC, along with his research partners, CMC Professor Marc D. Weidenmier and HMC Professor Asaf Bernstein, have looked at the founding of the Federal Reserve as a historical experiment to provide some insight into whether a lender-of-last-resort can stabilize financial markets. What they discovered might surprise: the introduction of a lender-of-last-resort, in the period following the Aldrich-Vreeland Act of 1908 and the Federal Reserve Act of 1914, dramatically reduced financial market volatility in the United States. Professor Hughson will discuss the historical lessons in the context of today's market volatility.

Founders Room of Honnold/Mudd Library at 4:15 PM, October 29th

Thursday, October 23, 2008

Final Tutorial Times

Presenters are listed first.

Tuesday, October 28th
9:00-David, Nina
9:25-Akta, Max
9:50-Jordan, Erik
10:15-Hillary, Kyle
10:40-Sarah, Nathan
11:05-Matt, Marco

Thursday, October 30th
9:00-Max, Sarah
9:25-Nina, Akta
9:50-Erik, Hillary
10:15-Kyle, David
10:40-Nathan, Matt
11:05-Marco, Jordan

Tuesday, November 4th
9:00-Jordan, Nina
9:25-Akta, Erik
9:50-Sarah, Nathan
10:15-Matt, Kyle
10:40-Hillary, Max
11:05-David, Marco

Housekeeping.

October 28: Blinder Tutorial
October 30: Easterly Tutorial
November 4: Sachs Tutorial
November 6: Sachs Seminar
November 11, 13: NO class, Brockstar in Paris
November 18: Fun day at Brockstar's house
November 20: NO class, Brockstar out of town
November 25: Final seminar
December: We're on! Student presentations

The Mile High Learning Club

When it comes down to it I am glad I talk to the person next to me on every airplane flight I take. Just as Edward Norton says something along these lines in Fight Club, “Everyone I meet while traveling are single-serving friends as you talk, you become friends, and when the plane lands your friendship is over and you both carry on with your separate lives.” There was one time I sat next to a guy with a huge notebook and asked him what the notebook was for. He explained to me that he was an architect and these were the blue prints of his prison. As always, I went to ask the important things as on an airplane people have an interesting desire to be completely honest as you know nobody who knows them so what they tell you cannot come back to haunt them. So of course, if any of you ever end up in the new prison in San Francisco, make sure you pretend you are ill to get transferred to the medical room and then walk to the water fountain by the north exit and run out the door leading to the outside, as this door will always be unlocked and after you run out you will need to hop only one 5-foot fence to get out… You still run the risk of getting hit by snipers, but the architect said that was one’s best bet for a prison break from his prison.

The second most interesting person who I ever talked to on an airplane was this guy who owned an organization that sold water pumps to poor people in Africa. I had this conversation 5 years ago and little did he know, on our flight from Oakland to LAX, he would some up the entire point of William Easterly’s book, The White Man’s Burden. This single serving friend was explaining to me that his goal was to get every poor and starving person this water producing tool so everyone could both have enough drinking water for their family and enough water to grow crops which can be used as food or sold. So being the na├»ve 17-year-old that I was, I asked him if they just gave every African person who wanted a tool, a tool. He laughed at me with a laugh of concern and said that absolutely under no circumstances would he give away his tool for free. Everyone had to buy their own water producing tool. After he explained to me how incredible this tool was as it could draw water up from incredibly far below and make every family who owned this tool exponentially better off as his product was almost essential for everyone to own in the poor regions, I thought it was cruel to not give them away. When he said the device costed $220 dollars a piece, I became angry and thought he was an evil man for trying to make ungodly amounts of money off selling this tool to desperate Africans. At my squawk of, “$220 DOLLARS!!! How can a poor African afford that!?!” he explained that the first $200 of every tool was paid for by his company through donations, but the last $20 the African had to come up with on his own.

So at this moment I no longer believed him to be an evil man, but simply a stupid one, as I asked, “Well why don’t you raise $20 more per person?” While I expected and answer along the lines of, “If I did that how could I determine who gets one and who doesn’t,” his actual answer made me believe that I was sitting in the presence of a shear genius. One who could some up Easterly’s book in the remaining twenty minutes of the flight. This man stated that they could easily raise enough money to provide countless people with these water pumps and in fact we did that in our early years of being an organization. He would explain that what he found was that when someone was gifted with a water pump they would often misplace it, break it, or sell it and then ask for a new one. Even people who didn’t pawn off their water pump, often did little work with it and never achieved the achievable results. However, when he made someone pay $20 for the water pump, which he explained to me is generally an entire months wages and therefore along the lines of a year of saving, the new proud owner of this water pump cherished his farming tool and would never let anything happen to it, he would work vigourously to achieve the full potential of this tools capability, and this shocking difference is all due to the fact that this person had to sacrifice so much to get this tool that he truly understood its value. In the end, I believe the main point of my single-serving friend and Easterly is that if you give someone something they take it for granted and do not respect it. Just as if you give a man a fish he will not be hungry for a day, but if you teach a man to fish, he will not be hungry the rest of his life. If you make a person work hard for the things that will benefit their life, when they can finally afford them they will fully take advantage of their situation as they take pride in the opportunity that he or she created, through hard work and determination.

Honesty

The scariest factor about the planner attitude from a personal standpoint is the following: what may seem to be an honest reflection of what planners might think will come from their plans is never an adequate illustration of the future reality. Utopianism hurts in this way. Regardless of whatever factors go into a planner’s mentality—the future is never known and projections of prosperity are not only vain, they are uneducated and disheartening in the end. What purpose could optimism serve? Perhaps it is best understood as a personal motivation factor, or a way to move certain groups toward their goals in sync with one another. Positive thinking and declarative sentences should not mix when there is monetary and the uncertain follow-through of individual responsibility involved. How dare someone declare a statement about the future well being of other persons—human beings—when the declaration may as well be sarcastic in light of its inability to accurately predict the future or rationally make a claim with any probable certainty. Utopianism might as well be equated with a weather forecast which measures changes in weather (temperature change overnight perhaps) as positive indications of future prosperity. It’s getting cold tonight and then warmer again in the morning! Change has enveloped our lives with positive chance of future success, happiness, and all other great things unimaginable now but realistic certainties in the future years. (Ridiculous).

Easterly

Easterly’s book provides an interesting look at why present and past aid efforts have done so little for the poor. He argues that the West should discontinue big plans as these are unfeasible and distract from attainable goals. Such projects will focus on piecemeal improvements that can dramatically improve the lives of the poor- such as bringing about electricity, pipe water, high schools. His propositions are sensible, and his examples reaffirm the importance of market forces that bring about the best solutions at the lowest costs. Indeed, it was fascinating reading how supplementary items given out for free (such as mosquito nets) were less effective than those sold.

While aid programs can have negligible to no progress pursuing utopian plans, they can significantly affect the well being of people in the addressed country if they are focused. He points to examples where aid agencies have improved the conditions of the poor by addressing the poor infrastructure (roads and sewer systems), poor sanitation, and lacking water, medicinal, and food availability. He later brings forth evidence that big push aid can actually hinder the development of recipient countries. Overall, his argument is convincing and given the persistence of malnourishment, malaria, and other easily treated ailments it seems as if such solutions are best.

His recommendations include removing the West’s patronizing mind set, ending conditions placed on aid and IMF loans, ending military interventions, giving matching grants that increase the opportunities of individuals and searchers rather than coddle bad governments. He puts forth Singapore and Hong Kong as examples of countries that have attained the status of developed nations without the support of significant Western aid nor attention, either through IMF programs or military occupation and argues that more credit be given the poor. Most importantly, he reaffirms the importance of market forces to bring about the best solutions at the lowest cost. Indeed, he convinced me that giving out free

On the issue of corruption, Easterly critique the UN Millennium Project for claiming that it is the poverty trap and not bad government which best explains the low growth seen in those poor between 1985 and 2001. He makes the claim that politicians and planners purposefully neglect the impact corrupt governments can have on poverty to both make their end-all poverty goal seem attainable and to facilitate fund raising efforts, but doing so is near-sighted. As we’ve learned from previous authors, good government that protects markets and equal property rights lead to greater growth.

Searching for Kyle in Akta

Wait, I swear that makes sense. I spent the summer working for ASEAN in Indonesia, and I ran across all sorts of problems, some of which involved undercooked food, but many of which involved what Easterly what talking about. Basically, what I encountered echos parts of Kyle and Akta's posts, and as such, Easterly. Here we go.

ASEAN had an interdisciplinary problems like woah. Basically ASEAN was divided into three components: political, economic, and cultural. Within the two relevant bureaus (guess which ones) there were a number of subdivisions. None of these divisions spoke with each other, and no one was looking at problems from an interdisciplinary nature. The economics people were looking to solve economic problems regardless of political issues, while the political people were pushing programs that ignored economic realities within the 10 member states. As such, literally nothing ever got agreed upon at ASEAN.

Why did nothing get done? Because everyone was planning and not searching. Everyone- especially foreign firms- believed they had the full idea of what to do even before they arrived in Indonesia. Every plan that was implemented was started from theoretical scratch, and no one seemed to be looking to expand existing programs. And as such, very few plans seemed to get much done: there were always unexpected problems at the local level, and many programs had a hard time finding proper labor to implement their programs.

Does this mean the people working at ASEAN were stupid? Only kinda. These were all caring, intelligent people, but many of them hadn't worked in this region before, and few of them believed that their plans wouldn't work. The problem was that they didn't trust existing local solutions enough to expand them, preferring to start the solution all over themselves.

Easterly is frowning somewhere.

Wish I Were Still In Baja...

Countries that comprise what Easterly calls the Rest have consistently pushed to change their positions in the international economic order, while industrialized countries have attempted to preserve the status quo. Easterly explains the Rostovian take-off model of economic growth, which argues that economic modernization occurs in five basic stages of varying length - traditional society, preconditions for take-off, take-off, drive to maturity, and high mass consumption. Reminiscent of comparative advantage theses, Rostow’s model of economic growth assumes that economic growth must be led, at least initially, by only a few sectors. Rostow’s model is a descendant of the liberal school of economics, emphasizing the efficiency of free trade. It denies the dependency theory argument that countries reliant on trading raw materials may become unable to diversify their economies into manufacturing sectors. The basic assumption is that countries understand modernization in the way Rostow describes modernization, namely that society ascends to materialistic norms of growth. The linearity of the model neglects to consider possible transgressions based on the culture or political structure of a society. Unlike other theorists, Rostow fails to understand intra- and inter-country dynamics, dynamics which are critical in Easterly’s examination.


Easterly is decisively opposed to the way in which the West has framed the issue of foreign aid. The racist, colonial motivated terminology of the pre-WWII era was replaced by an equally objectionable “paternalistic and coercive strain” which assumes that because those in the developed world have incidentally found themselves in a society of peace and prosperity that they can plan other societies’ ascent to a comparable position. The West still ascribes to a fantasy which presumes that the “west can change complex societies with very different histories and cultures into some image of itself.” These modern versions of the White Man’s Burden makes questions like “how should we approach population growth in the third world?” seem paternalistic and intrusive. Easterly cites the success efforts of The Gang of Four (Hong Kong, Korea, Singapore, and Taiwan) to participate in markets without “significant Western assistance as a share of their income.”


The rules of the game have been skewed in strong disfavor to the developing world. Between 1974 and 1984, developing countries maintained an interest in promoting the principles of the New International Economic Order—which replaced the Bretton Woods system of international political economy—and began to see the impediments of population growth on the process of development. Even evolution away from the Bretton Woods system did little to enhance the bargaining power of developing countries. As William Easterly comments, “the needs of the poor don’t get met because the poor have little money or political power with which to make their needs known and they cannot hold anyone accountable to meet those needs.” While poor countries chose to participate in the international institutional regime, the current international economic order leaves them with few viable alternatives. Most developing countries lack the economic or political bargaining power to effectively negotiate for greater access to rich countries’ markets without unfavorable quotas, tariffs, duties, and export credits. Nor can they adequately protect their own emerging markets from the corporations and banks of the affluent countries. Furthermore, the political power in the developing world is unevenly distributed. The international order depends on diplomatic recognition of the governing in a country, regardless of whether the party holds majority political support. The dilemma becomes one of upholding international institutions or holding people to rules that are disadvantageous to them when they did not agree to the rules in the first place. A tyrant’s success in subjecting a population is rewarded within the current system.


In 2000, world leaders developed eight goals for development, including: eradicate extreme poverty and hunger, achieve universal primary-school enrollment, promote gender equality and empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria, and other diseases, ensure environmental sustainability, and develop a global partnership for development. Easterly suggests that the Millennium Development Goals are the next sweeping, utopian Plan. He recommends that aid agencies focus on feasible, accountable projects: “aid agencies could do more on these problems if they were not diverting their energies to utopian Plans and were accountable for tasks such as getting food, roads, water, sanitation, and medicines to the poor.” While he claims that “aid agencies cannot end world poverty,” he does say that “they can do many useful things to meet the desperate needs of the poor and give them new opportunities.” He seems to suggest that a more focused, task-specific approach to development is needed.


In 2004, the Copenhagen Consensus, in line with much of Easterly’s analysis of the dynamic of Planners and Searchers in the foreign aid realm, set priorities among a series of proposals for confronting the global challenges of malnutrition and hunger, communicable diseases, governance and corruption, education, conflicts, sanitation and water, financial instability, subsidies and trade barriers, climate change, and population/migration by considering the economic costs and benefits of each. Certainly one can argue the faults of a cost-benefit system of analysis, but the Copenhagen Consensus gave “weight both to the institutional preconditions for success and to the demands of ethical and humanitarian urgency.” Each of these challenges has particular relevance to population growth. Of the highest priority were new measures to prevent the spread of HIV/AIDS, policies to address hunger and malnutrition, and policies promoting trade liberalization.

Wednesday, October 22, 2008

Searching for a Free Market before Freedom

So what is the solution to the development problem? Like many people, I too, am searching for this answer while international aid organizations are planning their attack to the problem. Like Easterly, I am a strong proponent for the bottom-up mentality, putting the aid in the pockets of the poor and helping them to make social choices which will then create a free market which leads to bigger and better things that would be impossible to create using a top-down mechanism. That said, it is important for aid agencies and corporations to search for the market that can get the poor on their feet. Yes, they will need a financial boost. Yes they will need resources of the West. But, getting this financial boost and resources to the poor through corrupt governments and thick bureaucracies is only asking for failure.

I think it is interesting to compare Sen's Development as Freedom with Easterly's The White Man's Burden because Sen's arguments are very philosophical and political in nature, while Easterly brings up the third subject, economics, when addressing the issue of development. While Sen talks a lot about the importance of freedom in development, Easterly talks about the importance of free markets in development (which has freedom components of course). Does freedom have to exist for free markets to work though? I think Easterly addresses this with his discussions on corrupt governments and bureaucracy stating that non-free governments makes it more difficult for aid agencies to do their jobs and help the poor in a developing country. If international aid organizations or corporations could bypass the developing country's government completely then such free market economies could be stimulated by outside organizations. Corporations operating in these developing countries, do, to an extent, help bring money to the country, but also bring associated problems as well, so allowing the inflow of corporations, though having a free market mentality, may not be the best idea. Although Sen does point out some bottom-up mechanisms for promoting freedom which will then lead to poverty reduction (i.e. empowering women), he does not talk about the economic power that the poor need to lift themselves out of poverty.

Would a combination of Sen and Easterly's arguments work? Perhaps...if the developing countries had an open door policy to the West to come in and change their government, culture, market system, etc. If that happens, there will just be a lot of new democracies in the world. However, this just won't happen. What, then, should come first to address the poverty issue and what would be easier to attain? Freedom for all people or a free market for all people? Both will be difficult to attain, but a bottom-up approach would be establishing a free market to which cultural norms can adapt as the market gets stronger and people become better off. Once people start practicing freedom with their market abilities, other freedoms will hopefully follow suit and it will be seen that a free market works best in a free world (democracy!). Overall, both are important to poverty reduction and if a developing country allows for both freedoms and free markets to exist in their country, only good things will happen.

Searching for Interdisciplinary Approaches to Poverty

So, I kind of alluded to this last week... it is a theory I have been working on, but I figured I could write my blog post about it, because I see this as a real solution to development aid.

Basically, there is a problem--that I was talking about last week--that poverty creates problems that are interdisciplinary in nature. I noticed this over the course of my studies in both PPE and college in general. The first time I encountered the interdisciplinary nature of poverty was in Ward Elliott's con law class, I was writing a paper about education reforms and Brown v. Board. Basically, there were studies that showed that the problem of the racial gap in educational achievement was best addressed, not by educational reforms, but by reforms more directed towards addressing poverty holistically. For example, it turns out that you can make student test scores go up by providing subsidized housing for poor people. The reasoning behind it is that poor people move a lot more than rich people, and people that move a lot do worse in school than those that move less, so if you provide housing subsidies to stabilize the housing situation of the poor, then their kids do better in school. There are a whole set of these. The most striking was one study--I think I mentioned it in class--that showed that integrating vision clinic services into elementary schools--identifying kids who need glasses and have vision tracking problems--raises reading scores more than California's class size reduction to classes under 20.

Basically, the idea I came away with after this first encounter was that, to address the racial gap in education, you really could not just address education, but had to do something to address aspects of poverty itself.

I did not really understand this at the time though. It was only this summer that I put it all together.

The second time I saw the interdisciplinary nature of poverty was with Sen in Hurley's class. Sen talked about how poverty in and of itself was not the problem. Lower incomes were not a problem; the problem was that people with lower incomes were deprived of certain capabilities that those with freedoms have. Going from this, Sen advocated an approach to international aid that sought to address not just economic growth, but to address freedom (or capabilities). For example, in some place in India, they were able to increase their lifespans and greatly increase healthcare quality, without increasing incomes substantially. The lesson is that if aid is taken holistically, rather than concentrating on increasing income, we can help people more. Income is not what matters, it is the capabilities that come with income. In other words, poverty should not be addressed as an economic problem, but an interdisciplinary one.

Finally, this summer, I figured out how these two depictions were linked through a third source. This source was a doctor named Paul Farmer, who works in the poorest area of Haiti--the poorest country in the Western Hemisphere. Farmer talked about how diseases were not just biological problems, but biosocial disorders. His patients in Haiti were suffering from malaria, tuberculosis, and AIDs, while his patients at Harvard were not. Did that mean that somehow the people in the two areas were somehow biologically different? No, it meant that poverty is a cofactor of infection of certain diseases, making disease a biosocial disorder. As a result, treating disease should not just provide medication, but also address poverty. This has actually worked for him, by providing small stipends and nutritional supplements and the like, Paul Farmer has gotten cure rates for tuberculosis in the poorest area of Haiti that rival those in the urban United States.

I struggled to synthesize all this learning in my head this summer. I knew that it was all pointing to one thing: poverty needs interdisciplinary solutions. But how can this occur? Sen seemed to imply that it would take people who planned out solutions that incorporated all kinds of factors. After reading Easterly though, I knew that this was not the solution. It was exactly this type of planning that had wasted all our money in the past.

Easterly provides a workable solution to the problem of interdisciplinary approaches to poverty: searching. It is impossible to approach poverty effectively in any interdisciplinary way on a large scale--or at least very difficult. However, when you see an interdisciplinary problem right in front of you, like Paul Farmer does on a daily basis, it is not so hard to make up interdisciplinary solutions. Farmer goes so far as performing small errands to provide things people need. Sometimes his patients ask for nail clippers, or for mangoes to be delivered to a family member in the Unites States, or for a six pack of beer. Paul Farmer has done all these things, because he is a searcher to the max. As a result, he is probably the most successful doctor to ever treat patients in the country of Haiti, because he uses the technique of searching to develop interdisciplinary approaches to poverty.

I think that this is really what we need more of. Although Easterly is a conservative--I think--and I am probably supposed to hate him, I think he is right. He is not right because small, homegrown solutions are inherently better, but because small, homegrown solutions can be interdisciplinary in an effective way. That is what I see as the only path forward to an effective future in foreign aid: interdisciplinary searching.

Searching in the Rest

Like Hillary, I spent the summer of 2007 working with an organization that very much embodies Easterly's concepts of homegrown development and searching. The Society for Education and Welfare Action-Rural (SEWA-Rural) ["sewa" = "prayer" in Gujarati... pretty neat I think] is an NGO in the tribal region of southern Gujarat that has a wide array of programs that all revolve around socio-economic development. It was founded and is run by Indians who were educated in India & the States and then decided to return to rural India to search for solutions to the problems they viewed as most significant. Their main focus is on health care - they have a hospital and a really effective and well-known vision program where they go to the nearby Adivasi (= "tribal" or "original inhabitants") villages and offer cataract treatment (a widespread problem in the region) for minimal charge. They also have a "women's development project" that includes a sort of microfinance program that allows the women to make money off of making papad (a food), as well as bachaat/savings and credit program and other educational programs. Finally, the program I directly worked with was their tutorial program. If you want to know more about the organization, you can check their webpage out: http://www.sewarural.org/. [Keep in mind that there is only one computer with internet in the entire county - so the webpage is kinda outdated.]

Anyways, I had the opportunity to experience all of the programs and services that SEWA-Rural offers and to observe the effectiveness of the various parts of the organization. Unlike the United Way, SEWA-Rural is far from a well-oiled machine - in fact, the inefficiencies were VERY frustrating and really made it hard to get things done. This is not to say that the organization wasn't successful on any fronts - programs that had existed longer, received more oversight by the Board of Directors and received more funding had already had the chance to work out many of the kinks in the system. Other sections were not so fortunate.

Essentially, my experience at SEWA-Rural showed me that there are echoes of many of the flaws that Easterly points to with Planner organizations in Searcher organizations as well. Given its small size, the bureaucracy of the NGO was unbelievable! And even though the founders, directors and members of the organization were all locals, there was still a huge gap between the perspectives of those who were part of the organization and those who were being served by SEWA-Rural. A large part of this has to do with the caste system, and the fact that those being served by the NGO were either Adivasi (technically not a caste, but considered to be Scheduled Tribe by the Constitution) or of the lowest caste while those running the programs were of higher castes.

Thus, while I agree that development should not be forced from the top down but should be "grown" from the bottom up, I think Easterly does not address the fact that many homegrown organizations are very flawed as well. Moreover, as much as the IMF may suck, I believe that "Planner organizations" like the IMF, the World Bank, UNDP, etc have a very important role to play in the realm of development. Their inefficiencies aside, having an organiztaion that allows homegrown organizations to learn from the successes and failures of other comparable organizations is invaluable. It was very frustrating to see SEWA-Rural start from scratch on so many programs that have already been established by other "homegrown" organizations in other regions. Why start from the beginning if you begin from where others have left off and simply apply their lessons to the specific situation? Isn't that the basic tenet of progress? The IMF and World Bank may need significant reform - I don't think anyone would disagree. But I believe that they must play an important role in a system that will effectively combine the benefits of Planning with those of Searching in order to allow for development.

Searchers and Planners: McCain and Obama

First, a quick statement: I was a big fan of The White Man's Burden.  This is not the first time I read the book, so rather than comment on a passage, an argument, etc., I thought I would apply it by identifying McCain and Obama as Searchers or Planners.

Easterly's argument is simple: economic intervention is bad, has always been bad and will always be bad (I'm over generalizing a bit, but not by much).  Markets, he argues, will help the poor to a greater degree than foreign aid or the IMF and the World Bank ever could.  His argument provides data and historical analysis to drive home his point.

Assuming that his argument is correct, we should hope that our governments should be more laissez-faire (Searcher style) than regulated and taxed (Planner style).  So what are McCain and Obama?  Searchers or Planners?

Obama is a Planner.  He promises to double foreign aid as President and as a Senator, he introduced a Global Tax Proposal which would commit the US to giving away $845 Billion in aid by 2013.  Obama is a quintessential Planner.

McCain is not a perfect Searcher, though he is certainly more of a Searcher than Obama.  McCain voted to cap our foreign aid at $12.7 Billion (admittedly, I'm not sure if this makes him a Searcher or a Planner).  McCain took a very Searcher approach at a CGI event in New York, stating, "Aid is not the whole answer.  We need to promote growth and opportunities, especially for women, where they do not currently exist.  Too often, trade restrictions - combined with costly agricultural subsidies for the special interests - choke off the opportunities for poor farmers and workers abroad to help themselves."

Summer of Searching

This summer I do believe I was in an organization of searchers (not gonna capitalize it like Easterly does cause I find it annoying). One of the main reasons that I like this book is because it is all about getting to the point of helping people, not of setting lofty goals that no one is ever accountable for when they, inevitably, fail. So since this book is about changing lives and making a difference for people all over, I am going to talk about domestic searching and my experience this summer.

The United Way of Lake County is in most respects like other United Ways. We raise a bunch of money and give it to charities who have applied for grants and proven that they are making a difference in our community. Where we branch off is the fact that in finding out about these different organizations we learn a lot about the community we are serving. We use this information to create our own programs that are geared toward filling some of the gaps in service. The reason that this is important is because it works. All the theoretical mumbo jumbo doesn't matters less to me now because I've seen success and the process that good programs go through in order to be effective both in the community and with the limited funding they are given.

The main initiative for UWLC is called Success by Six. One of the greatest needs in our community surrounds the education of children in the poorer areas. These children are the ones who tend to get left behind by an early age and in order to get kids in school and keep them there we focused on early education and preparation for school. After sponsoring a study to find out what particular areas needed to be improved in the local kindergarteners we targeted these issues with several programs that get parents involved in education. These programs are specifically taylored to the community and help parents be their children's first teachers and begin to teach them the basics (alphabet, numbers, their name, colors, shapes, etc.) so that they are more prepared for kindergarten. The more prepared the children are the less likely they are to fall behind. We have increased the kindergarten readiness of our community by large percentages and now are moving on to supplement our programs and expand into the upper grades to keep this drive to learn and improve going.

Searching really does work and I applaud anyone who takes the initiative to do something for others and solve simple problems so that everyone can enjoy a better life. I was honored to be a member of the organization and I hope that all similar groups make that much of an effort and produce real change in a truly effective piece-meal fashion.

PS Didn't want to get into the hard numbers or anything, but if anyone is interested, doubtful but cool, I have several reports I can send you!

Tuesday, October 21, 2008

Mexico

Why, you ask, was that trip to Mexico so sick? Perhaps because instead of planning a course of action, we searched for the best campsite after we arrived in Baja.

Thursday, October 16, 2008

Ray Fair Links

http://fairmodel.econ.yale.edu/vote2008/index2.htm
http://fairmodel.econ.yale.edu/

Blinder Expresses Why I Chose to Be a Doctor

Hard Heads, Soft Hearts was great. But this is just the problem in my opinion. There was a time where I thought it would be so cool to be a policy maker. Not necessarily to be a politician, but to work in politics in some capacity where I would develop policy. The idea seems appealing, you go around as a smart person and you read up on things and conduct research and you come up with answers as to what the best solution to a given problem is. The government implements the policy and wham-o, you have just helped the lives of millions of people.

Then I did the Washington, DC program. I got a taste of how policy was really crafted. It seemed to me that Murphy's Law of Economics is not just true of economics but everything. We actually know more about everything than it may seem. While social sciences are necessarily vague in their responses to the correct solutions to many problems, there are wide-reaching consensuses. For example, class size reduction does not improve educational experiences of students in any way that is proportional to its cost. It costs a lot and it does not do much, there are a lot of things we could do that would help students more for the money. Nevertheless, California, among other states, has state-mandated and funded class size reducation laws that take classes from numbers like 32 down to 24 or things like that. And that costs so much and really does very little.

This is just one example, and of course half of Blinder's book is filled with others. But Blinder, like many a liberal is too much of an optimist. Wake up Blinder... shall I dare say... remove your blinders! It is not just that economists are poor communicators. This is true of every field.

The policy wonks say that solution Y to problem X is the best answer. You put it in the magical political machine and bam, instead of solution Y, the political hacks turn it into solution Z, as various interest groups fight, scratch, and bite. This is what frustrates me about policy making. Hence... I will be a doctor.

Let's get strategic

I found Krugman's discussion of free trade, protectionism and strategic trade to be quite interesting, especially knowing now that he just won the Nobel prize for is work on the analysis of trade patterns and location of economic activity (aka economic geography). Just recently I've become and advocate of free trade (Thanks Professor Blomberg!) instead of fair trade, so reading this chapter first put me on the fence on what I truly believe in terms of trade because of his strategic trade and protectionism arguments. I found his strategic trade policy arguments interesting and somewhat convincing as I saw it being a middle of the road between free and fair trade. Strategic Trade Policy, however "is really an argument for a limited government industrial policy consisting of carefully targeted subsidies, not for tariffs and import quotas." That being said, it seems like a strategic trade policy is a lot of work and could greatly interfere with free market efficiency which is not worth it, especially if "there just isn't any evidence that an aggressive strategic trade policy can produce large gains." Overall, strategic trade may work and it may have to work given that other major players are resorting to this policy method. Free trade, although probably best for our nation, may not be feasible all the time given that "free trade becomes very difficult to sustain politically if there is a widespread and growing perception that one of the main players is following different rules." All countries need to be on the same page for trade, but when we're all trying to protect our own interests, sometimes at the expense of others, getting countries on the same page is a difficult task. Thus, it may be necessary to get strategic to benefit ourselves the most.

Also, unlike Erik, I really enjoyed Blinder's book. I really empathized with what he said and completely agreed with his hard head, soft heart approach to policy. I just wish that politics and party divides were a little less involved in our economic policy because this involvement makes it a bit more difficult to achieve this hard head, soft heart approach that Blinder discusses. What would our world be like if we tried to achieve this "happy blend" buy joining "the rational economic calculation of the conservative Republican to the compassion of the liberal Democrat"? I think we'd see efficiency and more happiness. I'm all about it.

Oh Eric... This book was awesome!

Well as Eric said, I as one of his liberal classmates loved this book. Krugman's effective use of economic theory in layman's terms made the book a very enjoyable read. The whole time I was reading this I kept thinking: "What would it say if it were written now?" I believe his points would hold even more truth. When he talks about the massive discrepancies between the income of the rich and the poor and points out the old theory that the rich are rich because they exploit the poor no longer works because while the poor may only have had a 5% drop in income the rich have had a 12 fold increase. His attribution of such a discrepancy to the evolution of financial markets seems to hold even more weight now over ten years later. When he gets to his section on Financial Follies, I know a key fourth example would be the events of the past year. Of course like a good liberal he shows how the Savings and Loan crisis was the result of government deregulation and I think he would rightly observe the exact same fault in the current situation. For myself his discussion on the actual importance of the G7 meetings for the US reinforces my belief that such meetings are pretty much nothing more than expensive photo ops. But at least the look of global economic progress is better than nothing?

I love tequila but not its effect

While reading Krugman's appraisal on the 1994 economic crisis in Mexico, I couldn't help but notice that Mexico's crisis and the U.S.'s recent predicament share a similar cause.

A little background on the crisis: In the early 90's international economists noticed that inflation in Mexico was rising faster than in the U.S. so it was proposed that the Mexican govermment take steps to devalue its currency. At the time, the political parties opposed taking any strong stance on the issue given the proximity of an upcomming presidential elections (sort of like now). Once the elction took place, however, the policy passed and it was not long before it was labeled the "December Mistake".

Krugman argues that the eventual magnified consequence of the policy can best be explained by faltering investor confidence. When the policy devalued the peso less than was expected, investors felt more devaluations would follow. Further burdening confidence in the Mexican market was news that certain insiders had been privy to the devaluation long before it had been announced. The circumstanced drop the value of the peso in half but the effect was not limited in Mexico. Rather, the drop in confidence spread onto other Latin American countries (this is what's known as the Tequila effect). Mexico's efforts to resolve their crisis with higher interest rates and a large $50 billion loan from the U.S. only sent them into a recession and it wasn't until 1996 that the situation seemed to have improved.

Krugman boldy claims "if the analysis of the crisis given above is correct, many countries may be vulnerable to what amounts to the whims of the capital markets"(191). Indeed, his analysis is correct but as we've seen this vulnerability is not limited to developing countries Krugman underlies the power of investor confidence by adding: "A country need not follow unsound policies to get in trouble; all that need happen is for investors to conclude... that the country is at risk- and their loss of confidence will produce a crisis that justifies their fears"(191).

Now, I'm not saying that the situation in the U.S. is as bad as it was in Mexico. Aside from facing inflation, Mexico was also facing political turmoil which only gave investors more to worry about: an indigenous uprising in Chiapas (which had declared war on the Mexican government) and the mysterious assassination of a presidential candidate. Now, given the validity of Krugman's theory on the power of investor confidence and their present sensitivity, it's clear that any such occurrence in the U.S. would send consumer confidence over the edge.

The Infant Industry Argument

Protectionism sucks, according to Blinder. And especially with infant industries: how do we know when they have been on the bottle too long? How can we wean them off? Blinder sees these problems as systemic within the American conception of economics. Too often, he claims, we give certain industries room to grow, or to re-tool themselves for changing in industry, without placing some sort of restriction upon when they need to be able to freely compete in the marketplace. I can't help thinking about biofuel, and in particular the cultivation of ethanol in the United States, which has been repeatedly proven to be the most moronic political boondoggle since Prohibition. We protect corn-based ethanol production under various guises: "national security" concerns because it has something to do with our fuel supply, protectionism of the American farmer, and under the ever expanding "green" label. Yet ethanol in the US has failed to become a viable source of energy, and has along the way helped drive up food prices worldwide. We put large tarrifs on Brazilian ethanol, which is produced at a fraction of the cost of American ethanol, because we believe that this industry will eventually take off.

Blinder says "the infant-industry argument is valid only if the ultimate gains to society will be great enough to repay the losses incurred by protecting in youth." Certainly this already can't be said of ethanol in the US. No one believes ethanol to be a long term fix for oil dependency, yet the political considerations let taxpayer money flow to farmers who would help us greater by letting us eat their corn.

I Love Democracy and America and Good

“People rarely speak of the ‘right’ to own an automobile or home that they want … why then should we assume that the right to pristine air and water is inalienable?” Blinder’s economic arguments are simple and often quite convincing. The pollution section is no exception. However, the statement above shows ignorance of the difference between public and private goods. Cos’s theorem does a great job of assigning costs, but only if ownership is established. I see a disconnect between Cos and goods such as the environment which one person or company cannot possibly claim title to. Does a democratic society give the government a right to dole out pollution credits, showing ownership through a sale? Perhaps, but I haven’t yet seen the argument spelled out convincingly in either class or a text.

In the spirit of critiquing economist’s writing styles, comparing selling businesses pollution credits to tennis clubs selling memberships is a hilarious sign of elitism.

“Some people argue that putting price tags on clean air and water ‘cheapens’ these things, that is, makes people think them less valuable. I don’t suppose they apply the same reasoning to mink coats or Rolls Royces.” Once again, Blinder is throwing out a contrived analogy to try to reduce the environmentalist’s argument to the absurd. In doing so, however, he mixes too many ideas to put across a clear point. Is Blinder suggesting that mink coats and Rolls Royces are more highly coveted because they cost more money? If so, he is rejecting the simplistic (and powerful) economic framework the book is meant to operate on. Is he is bringing in the idea of Giffen Goods, is he suggesting that as we make the environment more valuable, people will actually consume (pollute) more of it? No, this is clearly against his claim. Blinder makes a strong point about how to most efficiently reducing pollution – I remember hearing about a recently implemented national pollution credit system. He should leave the moral decisions on which the economic framework should be built to the philosophers, or perhaps democracy.

Wednesday, October 15, 2008

Hard Heads, Soft Hearts Makes Me Want to Throw Up

Ugh.  I mean every word of my title.

Blinder's book wouldn't have been half as bad if he had just been honest.  The goal of his book wasn't to find policies that incorporate both "hard headedness" (reliance on market structures) and "soft heartededness" (curbing inequality); rather, it was to bash Republicans and praise Democrats.  

I'm sure my liberal classmates (whom I love dearly!) loved this book.

On page 10, Blinder makes the laughable assertion that, "The many policy changes that I advocate in this book are not easily classified as 'conservative' or 'liberal,' as Democratic or Republican.  They derive... from a coherent underlying philosophy."  Nevermind that his philosophy is the philosophy of the Democratic Party.  [He was on Clinton's Council of Economic Advisors and an advisor to Kerry's campaign in 2004!!!  And this guy claims to be anti-partisan?!]

He makes his first error on page 24, stating that welfare is 'public generosity.'  He goes on and on about how Democrats and liberals care more about 'public charity' and 'public generosity' than conservatives and Republicans.  

But taxes and welfare spending are not charity or generosity.  I choose to give to charities; I am forced to pay taxes.  If I don't give money to Make A Wish Foundation, no one throws me in jail.  If I don't pay taxes, I end up in the slammer.  Are we beginning to see the difference?

Blinder also states that the free market produces winners and losers, as if every market transaction produced a loser.  (And as if only the rich win, another Democratic Party line.)  But in a free market, wouldn't we see almost all winners?  If I am (freely) engaging in a transaction, then I believe I am going to "win" and so does the person on the other end of the deal.  Only when coercion enters the system (through taxes, regulations, etc.) will there be a loser produced.  

Blinder is not wrong, however, to point out that the market produces inequalities.  Free markets might produce inequalities... but they also make the poor better off - and if we are really to have a "soft-heart" for the poor, then the most just thing to do would be to follow the free market and abandon Blinder's redistributive policies.

Response to Blinder

Blinder’s professed “answer” to economists’ woes about their natural lack of eloquence and inability to put into writing any of their “unlovely” and wart-covered scientific cases comes in the form of a book, Hard Heads, Soft Hearts. There is no modesty involved; Blinder sees examples such as economists’ weak influence in politics where it matters most and the Murphy’s law infecting the science as a centuries-long cry for help to propose the right policy recommendations from economists in a coherent and persuasive way to the rest. Economists agree (!), according to Blinder—they just need to be heard rightly.
After searching around, I found a bit of humility in the text, where he states that although the “crusade for better economic performance” doesn’t have a “lofty moral” which campaigns against injustices or the like—there is still a lot of value we glean from an efficiently run economic system (193). He suggests that when the economic system is successful in terms of efficiency and less bureaucracy, then it is easier to achieve other national social policy goals. Of course, this is an easy argument to make. It is like making the argument that if one part of a country is happy—it is easier to make the rest of the country happy. Meaning that a part of the solution getting solved is one step toward solving the entire solution—however I do not believe that pure economic efficiency in terms of policy-making and policy outcomes are a prerequisite to all other social goods. Many social goods are non-governmental including the services and products produced by non-profits and other private activity.
Another interesting point made by Blinder (which also happens to belittle politicians and put a feather in the cap of the economist) is where he explains that “negative-sum economic policies are often positive-sum political policies” meaning that politicians will sign on to less efficient policies because they create positive political gain (202). I’m not convinced that this is true across the board (in fact it would be a sad world if that were true); however, thinking about examples such as ethanol does make one want to agree with Blinder’s attitude at least in part. See article from 2005: http://www.cbsnews.com/stories/2005/07/19/tech/main709983.shtml Has ethanol caused more than 25% of the rise in food costs? Is producing ethanol inefficient and not worth spending energy and resources on? “Even if every bushel of U.S. corn, wheat, rice and soybean were used to produce ethanol, it would only cover about 4 percent of U.S. energy needs on a net basis, Washburn estimates.” See http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_wasik&sid=aOS8e5kvDESE This example comes to mind when Blinder discusses special interest groups—and his solutions for interest group lobbying and manipulation of the political system may not be any more feasible than his theory about politicians is consistent.

"Just a short hop"

As much as Blinder assures us that he is neither Republican nor Democrat (p12), and that he embraces the 18th c conception of a "liberal" in the sense of one who has respect for the virtues of the market and respect for those who the market leaves behind, his views are clear. His philosophy sounds awfully close to the fiscally-conservative yet socially-liberal argument that I've seen many liberal-minded students who have taken economics/business courses make when asked about their political views.

Blinder begins the book with an explanation of his "hard head" (free market) but "soft heart" (concerned with distributional justice). I thought his description of a "true liberal" at the beginning of the book was particularly funny. Have any of us ever cheered for the underdog (when we don't have a preference for either team), just because they are loosing?

I think he makes some of his most controversial points in his chapter discussing unemployment & inflation, opinions which he certainly carried over into his stint as Vice Chairman of the Board of Governors of the Fed (1994-1996). He comes off as a strong Keynesian and his arguments for more emphasis on unemployment and less on what he claims to be rather unfounded fears of inflation identify his liberal-mindedness (in very much the 21st c conception of the word). He believes in activist gov policy that aims to maintain the economy at full unemployment and he claims that for every percentage-pt reduction in the inflation rate, we must accept a 2 pt or to increase for 1 year in unemployment (Phillips Curve). Thinking back to the SRPC and the LRPC, I would have to agree with his assertion that the inflation-unemployment trade off is only a short-run phenomenon, meaning that the only wya to keep unemployment down in the long-run is to accept steadily increasing inflation.

However, I am not so convinced with Blinder's logic behind the redistribution of wealth. He discusses the robin hood-esque argument of poor men valuing dollars more than rich men, and then says that it is only a "short hop" to the conclusion that the gov must redistribute income from the rich to the poor. He is clearly underestimating the distance of that jump and oversimplifying what the heat behind the debate between liberal v. conservative economic philosophy.

Monday, October 13, 2008

Guns, Germs and Steel at the Claremont Colleges

Thursday, October 23

2008 Dr. Bruce J. Nelson '74 Distinguished Speaker Series:
Jared Diamond: "Collapse: How Societies Choose to Fail or Succeed"

7:30 - 8:30 PM

Galileo Hall
Harvey Mudd College
240 E. Platt Blvd.
Claremont, 91711
(909) 607-0899

"Biology and the Environment: Past, Present and Future." Jared Diamond, Professor, Department of Geography, UCLA, and Pulitzer Prize winner for the book Guns, Germs and Steel. Lecture followed by a dessert reception.

Blomberg: The Prophet

Brockstar totes called this one:
http://www.nytimes.com/2008/10/14/business/economy/14econ.html

Paul Krugman...This is exciting

On my NY Times home page this morning: Paul Krugman Wins Economic Nobel http://economix.blogs.nytimes.com/2008/10/13/paul-krugman-wins-economics-nobel/?hp
We're reading him this week!!! He's kind of a big deal....

Thursday, October 9, 2008

Tutorial Times

Capital gains tax

I absolutely love Obama. I think he is a great public speaker, a great leader, and I agree with him 100% on social issues. I am from Oakland and went to high school in Berkeley, so based on my background I lean far to the left. Claremont did a good job at making me more open minded and more towards the middle, but I am still extremely liberal. However, while I am liberal I am also a realist and I agree with Barro's idea of presidential economic report cards, and I grade Obama's proposed economic policy an F+. I threw in the plus because I like him, but I believe that raising the capital gains tax is about the worst thing he could do in our current economy. For that reason alone I am on the fence as to who I will vote for in this upcoming election. It scares me that I might vote for a 72 year old who undoubtedly has to have some SERIOUS psychological issues, due to being tortured for five years in a Vietnamese prison camp. Not to mention voting for someone who has to have some health problems, due to the fact he is pushing 73 and the presidency isn't a stress free job and it's not like you can take month long vacations… whoops, I guess now that's ok, Bush did it… Speaking of health problems, what is even more terrifying is that if he gets elected and he kicks the bucket, then SARAH PALIN will be the president of the United States. I mean people think Bush is stupid… I can't think of anything more terrifying than a person who believes every single word in the bible is true and that living in Alaska counts as a foreign experience because it's so close to Russia. What is more terrifying than that woman becoming president? Perhaps raising the capital gains tax…

The capital gains tax is currently at 15%. Obama is planning on nearly doubling this tax. As the capital gains tax taxes peoples gains in an investment it could single handedly edge out many venture capitalist funds as the cost of doing business would be so high. Just say for example that a VC fund invests 100 million dollars in a company with a deal that the company must return the 100 million over 5 years, with an extra 50 million total, so about 10% a year. If everything goes according to plan this VC firm under Obama's rule would lose an extra 6 million dollars of profit. While that might not seem like much, it is a lot. As it is VC firms take on lots of risk and cutting into their profits by 10% would mean that the firm would have to take less risk and therefore due deals that would have less potential reward. If VC firms are crippled that hurts the country a great deal because private investment is how entrepreneurial ventures are started and without startups coming to life, our economy would suffer from not having the fresh blood. Lastly, if Obama is elected, that might spark a fire sale in the stock market. People who have positions that have a significant gain at the moment, would likely sell their position. If they wait until January they will have to pay back an additional 10%-15% of their profits. I completely agree with everything Obama wants to do except for raising he capital gains tax, yet that might be enough for me not to vote for him come November.

Getting it Right?

Let me start this off with one word: wow. As one of those modern liberals whose thoughts mimic Barro's view of the world as a teen, I must remind myself reading books like this is why I came to CMC.
As my last paper discussed the Russian/Georgian conflict the section most interesting to me at the moment dealt with the optimal size of a nation. His argument for smaller fragmenting of states is one that while some of the underlying notions (i.e. we only function well around people who look like us; less interest group activity is better) might cause my liberal self to balk, I find I actually agree and understand many of his points. I regrettably concede that from a cold hearted economic point of view, the resources wasted on lobbying hurt the economy. But more notably his basic discussion about the economic difficulties of policy designed to facilitate economic exchange between two opposing cultures existing as a greater cost to the community than the cost of shifting borders is one I can agree on. In addition to the economic difficulties and inefficiencies associated with the current arbitrary borders in much of the developing world, the costs associated with continued conflict is almost assuredly more expensive for both parties. I will definitely be using some of Barro's arguments in future Sudan related debates supporting my belief that the various ethnic regions of Sudan should split and redraw borders. Thus turning two non homogenous hostile factions into two wary trading partners.

Barro Has Solved the Financial Bail Out Problem!!

Barro was definitely a little bit conservative for me, but I have to admit, his last chapter was entertaining and hillarious.

I realized reading his analaysis of tax amnesty measures that Barro effectively solved the financial market bailouts that have been happening. I know that as a liberal I am just supposed to love government intervention to death, but nevertheless, I see a slight problem with the financial market bailout by the government. If the government bails out all these companies now, because they made risky investments and went bankrupt, then in the future they will only continue to make risky investments under the assumption that the government will be there to save them if it all goes bad. As someone said, the government is privatizing the profit and making the losses public. Which might not be all bad, except that it sets a precedent for doing it again in the future.

Barro has our solution. As he points out, this works as a solution to all time consistency issues with government policy. Barro suggests that when tax amnesties are offered, it is only really bad, because in the future people will expect more amnesties so they will not pay their taxes in the interrim periods. His suggestion is that we should declare a year long tax amnesty, get all the people that are avoiding their taxes to pay up, then after the year, we should say, "just kidding" and then punish them all for not paying taxes.

We could do this with the financial bailout. We can tell all the companies we are going to buy these loans off them and everything is going to be alright. Then when the companies are back on their feet again, we can fine them heavily and effectively force them to pay back the money they received as payment for the bad loans. This would mean that in the future, there would be no false incentive to go for risky investments with the promise of a government bailout--because the government renegged. It "avoids the moral dilemma of allowing [the companies] to escape [the profit loss they should have experienced]". Finally, it would of course avert economic disaster in the short run with no expense to taxpayers in the long run.

Perfect plan Barro! I like it!

Hidden Morality

Barro argues many things, but in his attempts to argue for so many points, he often leaves substance behind. His chapter about countries, while morally questionable, is well supported, but the chapter about monopolies is especially weak in evidence.

Sometimes when it is difficult to tell when Barro is laying out moral judgements and when he is talking about causative relationships. The democracy and growth chapter is incredibly well supported, but he makes suggestions without worrying about what goal the United States should have in dealing with the developing world, let alone the opinions of the developing world, whose lives have been reduced to “GDP per capita.” That being said, I think his data is excellent, probably better than anything we saw in Elliott’s class.

As far as the NCAA monopoly, I agree with Hillary. It is a bold move by Barro to insult the basketball player that comes from poverty and goes to a university for 4 years without any data. When discussing the Ivy League monopoly, Barro falls back upon an argument he has already labeled as inefficient (and therefore implicitly immoral). Barro claims the monopoly power of the universities subsidizing education for the poor is a bad idea, but supports this by saying that if anything, the government should make the transfer! I don’t know if Barro is implying that the transfer should not happen in general, or simply leaving the difficult questions of morality out of the discussion because it is easier to make a straw man out of the Ivy League’s bold moral action. Barro seems to forget that as a non-profit, the position of an Ivy League school need not reflect the goal of maximizing profits, but rather of gathering the best students, which both affirmative action and price discrimination work toward. His peak cockiness is shown at the end of the monopoly chapter, when discussing how ridiculous it is that anyone can claim the title economist. I enjoy reading rants like this, but it takes away from the academic nature of the rest of the text. Barro reminds me a little of Matt Drudge, but obviously more intelligent.