Easterly on the wrong lessons from the US crisis

economics ▪ policy ▪

William Easterly on what not to learn from the crisis, ie., "that development flows from all-knowing states rather than creative individuals". His last two paragraphs:

How much poverty has endured because individual entrepreneurs were shunned in favor of the likes of the $5 billion state-owned Ajaokuta Steel Mill in Nigeria, which never produced a bar of steel? Or because African governments spend their time preparing World Bank-required national Poverty Reduction Strategy Reports instead of freeing space for innovators?

We will never know. But we do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor.

HT: Marginal Revolution

» read more...

Concise Encyclopedia of Economics online

economics ▪ resources ▪

The Concise Encyclopedia of Economics, explaining basic economics concepts, can be accessed here.

» read more...

On the economics of superstition

economics ▪ superstition ▪

As part of my economic history class, I was required to do readings (with no symbols and very little graphs). Here is an interesting one, by Vernon Smith, Nobel Laureate in economics. He was talking about the economic principles in the emergence of humankind, and he has the following to say about superstition:

Another example of the hidden economic function of culture is the magical practice of the Naskapi Indians of Labrador, who, when the caribou were scarce and the tribe hungry, resorted to scapulimacy, a divination in which the shoulder blade bone of a caribou was heated by fire until it cracked. As cracks appeared they were interpreted by a diviner in terms of the local geography as caribou trails, one of which the hunter should follow if he was to be successful. All this is commonly interpreted as showing the capacity of Naskapi for belief in magic. But is scapulimacy functional? One function is to sharpen the hunter's concentration, and to impress upon all the need for great dedication. But another effect was to cause the hunter to choose a random route, steering him away from previously successful hunting routes, and preventing the caribou from being sensitized to regularities in hunter behavior. This is precisely the normative argument for using mixed strategies in certain games of conflict. What the Naskapi in effect seem to have discovered was that reading shoulder blades had survival value.

» read more...

The utility of math

economics ▪ social sciences ▪

David Colander, reviewing this book, observes:

Economists have a tendency to obfuscate and lose themselves in a maze of equations and statistical tests that often have little intuitive meaning to the researcher, let alone to policymakers. My quest in economics has been to fight against those tendencies in applied policy work. But despite econommists' faults, I have to admit that their medium -- equations and statistical tests -- places a limit on the obfuscation that occurs. Ultimately the equations have to parse. Language -- the medium of sociologists and science scholars -- imposes fewer limits, which makes it easier for them to obfuscate. (JEL, XLVI/3, 78)

...which, I think, explains why it's much easier to do good economics than other social sciences.

» read more...

Why a high oil price is a good thing...

economics ▪ policy ▪

Foreign Policy gives five very good reasons.

» read more...

McLeod on "renewing" the rupiah

monetary ▪ policy ▪

Ross McLeod argues for dropping some zeros off the Rupiah:

[It] is far easier to eyeball numbers if they consist of three or four digits rather than a dozen or more (and of course many more numbers can be reported in a single table if they are rounded). For the same kinds of reasons, it is highly inconvenient to have to undertake low value transactions in very large nominal amounts.

The argument for introducing another ‘new rupiah’ is compelling. (The present rupiah was itself once new, having been introduced to replace the old one, which had become almost worthless as a result of the hyperinflation of the mid-1960s.) Quite simply, it is grossly inefficient to have to calculate and undertake transactions in the millions, when they could just as easily be done in hundreds or thousands.

I can think of only one counter argument: that the introduction of a new rupiah would be confusing and worrying to many members of the public. No doubt if the transition were not handled carefully, that would be the case. But people are not stupid. Provided high-level government officials explain the rationale for the change carefully and patiently, the general public will understand. Perhaps the most important aspect to stress is that the old currency will be exchangeable for the new at a rate of, say, 1000 for 1, for a reasonably long period of time. It would probably be sensible to introduce new cents at the same time.

I wholly agree.

» read more...

The newly-published growth report

growth ▪ policy ▪

The final version of the growth report, published by the Commission on Growth and Development is out and can be downloaded here. I don't have time to read it in full yet, but here is a snippet from this summary on Asia:

Nine of the 13 countries that have been successful in achieving sustained high growth are from Asia: China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan (China) and Thailand.

These nine high-growth countries all share common characteristics: engagement with the global economy, macroeconomic stability, high rates of saving and investment, the market allocation of resources, and credible and capable governments.

And here is an interview of Michael Spence, Nobel Laureate and chairman of the commission, on the report.

More on this once I read the report once I pass my core exams.

UPDATE 1: William Easterly doesn't like the report.
UPDATE 2 (6/3/08): Martin Wolf takes on Easterly. (HT: Dani Rodrik).
UPDATE 3 (6/16/08): Dani Rodrik joins the fray.

» read more...

On writing op-eds

writing ▪

A set of good advice on what not to do when writing op-eds by Issues in Science and Technology chief editor, Kevin Finneran, amusingly summarized (and "illustrated") by ASU professor Merlyna Lim.

» read more...

Poverty trap in the US

policy ▪ poverty ▪

When one hears about poverty trap, the image that comes up usually involve developing countries. It isn't necessarily so. Here is Jeffrey Liebman, Harvard professor (and an adviser to presidential candidate, Barack Obama):

Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can’t fully reverse her decision to take the higher paying job because she can’t get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn’t help much either.

The question is what is the policy solution here...

You can read the rest at Jeff Frankel's blog here. It's not easy to design a policy support for the poor -- a means-tested program such as EITC that cuts off benefit at a certain income may create an adverse incentive at the margin for those whose income is around the cut-off point.

HT: Greg Mankiw.

Slightly off topic, I think it's about time Indonesian politicians start to think in a systematic way about policy support for the poor that minimizes the incentive distortions to the broader economy. I think this can be done -- for all its faults, especially as a program designed and implemented in such a short time, the cash transfer program was relatively successful in achieving such an objective. It's high time that we think of such programs, especially given the expected global food price hikes.

» read more...

Indonesians want more globalization

indonesia ▪ policy ▪

...according to this survey. Asked the following:

Overall do you think economic globalization, including trade and investment, is growing much too quickly, a bit too quickly, a bit too slowly, or much too slowly?

more than half of the representative respondents in Indonesia think that the current growth of globalization is too slow (39% thinks it's a bit too slowly, another 15% much too slowly). Only 40% think that the current pace of globalization is either a bit or much too fast. Surprised?



HT: Dani Rodrik

» read more...