Golden Sachs

Personally, I thoroughly enjoyed Sachs' book; it was a good read, it was optimistic, it cited historical examples, it listed directly applicable goals and frameworks that could be applied in the case of all countries, and, perhaps most importantly, it did not resort to over-simplification. Though this tendency to simplify may be the economist's main gripe with politicians, it still seems apparent in economic books which too narrowly examine the relationships of certain variables and their impact on the economy. Sachs points out that the model is far too multi-faceted to simplify as such (which is in line with common sense); indeed, a clinician's outlook on development economics is necessary to correctly diagnose a sick patient and prescribe the proper treatment.

In this regard, the clinical approach to development seems like a monumentally successful new approach to devising sound economic policy, which Sachs, in turn, argues is likely to solve just about any political problem one could think of, bringing up a whole new set of questions about the consequences of international economic equality. Sachs' argument is somewhat reminiscent of Fukuyama's End of History argument, which claims that increasing economic and political liberalization are guaranteed by the nearly universal ideological legitimacy liberalization enjoys.
Sachs presents the argument for liberalization in less specific and ideological terms, though; he assiduously (and seemingly exhaustively) lists the prerequisites for development: secure property rights, an absence of central planning, stable inflation rates, and so on. All of these necessary conditions amount to liberalism, and the kind evidently best fostered by liberal democracies. At points, Sachs even refers to democratization as the seemingly obvious goal at the end of development for some countries.

Sachs insightfully qualifies his optimism by pointing out that simple geography often has a lot to do with the economic obstacles a country faces. The unchangable facts about a given country's makeup limit its potential for growth, often to the point where poverty still seems unavoidable. However, barriers to these kinds of hardships have been perpetually diminishing with the advent of better forms of travel, telecommunications, and other technologies which can revive a country's economic viability by reducing the transaction costs involved. However, it does seem necessary for these countries to accumulate some sort of capital, be it technological, human, or even foreign currency for the purpose of stabilizing its own. Yet these myriad conditions need to be examined before action is taken, as Sachs the clinician duly points out. Unfortunately, it seems as though the IMF and World Bank operate less like clinicians and more like pharamacists; they dispense the most profitable medicine that is supposed to alleviates the reported symptoms, without a nuanced examination of other lurking variables that might influence a proper diagnosis and therefore treatment. The IMF and World Bank also seem to be excessively mindful of the political importance of the loans' backers to conduct proper macroeconomic policy for the sake of the country being helped. If the IMF and World Bank operated more like clinicians (to whom the cost of the correct treatment is irrelevant), it seems as though Sachs' end of poverty would be realizable.

However, international realities and political willingness to reform may be lacking. Despots are not inclined to hand over their kingdoms in exchange for the welfare of their civilians to their own detriment; that's why they got into the despot business in the first place. The U.S., despite its immense power, cannot bully every last country into democratization, and faces increasing costs and resentment at its attempt to impose it. Therefore, while the ideological conditions may be set for the Hegelian dialectic and the End of History to proceed, the material conditions are far from being realized, and may delay the End of History a bit longer.

Related Analysis

Looks like Tim Harford (a Financial Times columnist, author of The Undercover Economist) just read Easterly too, but forgot to cite his sources. Of course, he gives much more focus to the political angle, one which highly coincides with my own tastes.

Postmezzo: In search of virtuosity

Similarly to Chris, I had a complete change in opinion of Easterly once I started reading section III. Although I thought it was interesting to put statistics to the many development policy failures I was slightly familiar with, I felt that part II gave short shrift to these “panaceas.”

The best example of this tension between parts II and III that I found was his discussion of Solow. Since I’ve had several classes which turned to the Solow growth model as a saving grace for the developed world I was shocked to have Easterly reject that in part II. The complaint that less developed nations have barely grown at all rather than converge towards the more developed nations seems to be quite damning evidence against the classical Solow model. Furthermore, Easterly attacks the idea that nations must merely overcome a transition period of increased investment to achieve the optimal level of current and future consumption. While his claims seem to be valid, I felt he abandoned the idea of investment too quickly. This, however, turned out to be planned once I began reading chapter 8. To the best of my understanding, proposals he makes for increasing returns would completely change the shape of the Solow model. (This is something I’d really like to discuss tomorrow) As a result, the divergence which empirical evidence suggests can be more readily explained. Now one enters a world where a corporation would receive greater returns from investment in labor or capital in the more developed world. However, the shapes which I was left with for the model still demand investment. Although there is less of a transition period, per se, foreign aid and world bank investment would actually seem to help developing nations even more in this modified model than in the classical Solow model. Increasing marginal returns would imply that new investment in education or infratstructure would actually make future investments even more lucrative, possibly moving a nation from a vicious to a virtuous cycle.

Several examples can be found where Easterly’s models from section III could be applied to encourage further use of his “failed panaceas.” Couldn’t loans and investment aid be focused on creating complementary technologies such as roads and computer systems? Why does Easterly abandon Mankiw’s analysis of secondary education as a determinant of growth when his own model would imply that exactly that kind of education could encourage the increasing returns of matching and leaking? Upon close analysis, I found that Easterly’s “failed panaceas,” might be medicines applied incorrectly or to allergic patients. If corruption and poor policies can be addressed, I see no reason why capital investment, education, debt forgiveness and adjustment loans couldn’t be used to move developing nations into virtuous cycles.

Solow, so slow

Ok, I'd like to discuss the Solow Growth Model, since I don't know it as well as some of the more econ-proficient, so please correct me if I have my facts wrong. Thanks.

Overall, I liked the book, and I'll agree with most of what Chris said about Easterly's attitude towards "panacea-policies," but this thesis seems to me to be a rehash of Blinder's Murphy's Law of Economic Policy. Easterly carefully shows how any single or double variable explanation for growth is insufficient, but admits that the idea was somewhat legitimate because that variable seems to be necessary, if not sufficient. As such, he reinforces the idea that if you ask 100 economists a question, you'd get 300 answers; economic policy still seems to be too complex and sophisticated to put into simple "T-shirt" slogans or singular policy objectives. However, Easterly gives these individual estimations unnecessarily short shrift. Without an experimental inquiry into determining whether or not one of the many confusing and lurking variables held any causative correlation, we would still be left to assume that either countries and peoples are naturally more productive or that only mimicking exactly the tried and true methods could produce wealth. By establishing rigorously that there are several necessary, if not sufficient factors, this comprises an argument in itself; it shows that a macroeconomic system of management must take a multi-faceted approach looking at as many possible perspectives as possible. To some degree, this explains the success of the "Gang of Four" as well as the success of Western democracies that had imperialistically invested in their economies with the proceeds from natural or extracted resources at one point or another in their histories. Partially due to the faith in the financing gap approach (the Harrod-Domar model), nascent economies like those of sub-Saharan Africa that are ineffectively spending themselves into debt concentrate on too few approaches because the investment planning is too centralized, resulting in narrow, inefficient investment (as Hayek warned against). In countries where there are freer markets for the targets of investment, the capital necessarily flows to the kind of investment with the best return, as suggested by the Solow growth model.

One question I had about some of Easterly's arguments in his discussion on Solow concerned his apparent assumption that the supply of labor is relatively fixed. He says that jobless growth is OK because it necessarily implies a higher per capita income, however, if the population rate (offset for age of employment) is expanding faster than employment growth, but not faster than the rate of GDP growth, couldn't workers be losing income? Is this situation still subject to the Luddite fallacy? Could a country in such a situation see their standard of living fall as their average productivity increased, while population growth outstripped such an increase? I would think the answer is probably not, but it seems to be a situation that has potential to resemble a Malthusian nightmare the likes of which only Ward Elliott could have imagined.

Concerning Easterly's discussion of transitioning economies in the Solow growth model, is it possible that economies do go through profound low-capital to high-capital shifts becaues of external shocks? For example, the Antebellum South certainly saw a large supply shock to labor, almost certainly causing a much higher relative return to capital investment, and so on. It is true that the South is still the poorest region in America (but isn't it the fastest growing?), probably the result of such a large economic shock to investment. Could political changes like emancipation disrupt the continuity of the model? This brings up the question of whether or not growth rates are really indicative of conditions; GDP growth is often slow when laying the foundation for long-run growth, causing policymakers to shun those policies which do not appear to produce immediate positive results (the likes of which can be emblazoned on a T-shirt). If we were to use another indicator aside from growth of output per capita to weigh economic welfare (such as an index that would assess the status of all the necessary conditions to achieving growth), policymakers might respond to the indicators of success tied to that indicator, resulting in a more long-run oriented policy.

As far as indicators go, what about the fact that GDP is used as a primary indicator of income rather than GNP? To simultaneously address another issue, how is GDP skewed because of outsourcing? If a country is impaired in its attempts to efficiently accumulate capital (i.e. the capital which these supposedly flawed growth models suggest is necessary), wouldn't the more efficient solution be to outsource the capital (i.e. rent it from someone else), preventing the necessity for domestic investment? The problems here are transaction costs and irrational, illiberal political fears of foreign ownership of domestic inputs to production (see, the Dubai port deal, foreign energy ownership in Europe, etc.). Again, the theme is simple-minded politics nationalistically interfering with economic efficiency.

One other miscellaneous issue I'd like to bring up (maybe for class discussion) is Easterly's idea that “creating skills where there exists no technology to use them is not going to foster economic growth” (73). This seems to make sense in light of the argument he makes, but why couldn’t an investment in skills make it attractive for companies to bring technologies/business centers to those places with ostensibly lower costs per worker (since there is no demand for those skills yet)? Technology is supposedly easily transportable (as it seems to be in high tech), so why couldn’t fostering the skills to use them be productive by reducing the costs of hiring an employee for foreign businesses? This seems to coincide with the success story of India, though in India's case the training was usually at the hands of the corporation rather than public investment. Perhaps this is because of the corporate preference for vocation-specific training, rather than general secondary-schooling, which Easterly also criticizes as an indicator. Perhaps more vocation-specific educational investment (which may resemble Singapore's frequent economic reorientations) would make this a more reliable engine of growth.

Ok, too much to cogently discuss already, so I'll save the rest for class.

Road to Serfdom in Cartoon Form

How lamentable that I had not found this before reading Hayek's Road to Serfdom! It was still a good read though.

Shit, looks like sam just beat me to some of this, oh well, I already wrote it:

Of all of the diverse topics that Krugman touches on, I found that his discussion of free trade and protectionism was the most interesting. Throughout the chapter there were interesting tid-bits that I hadn’t really thought about in past musings on free trade.

1) US trade is relatively free because exporters advocate free trade. With all the talk about being fair and considering both producers and consumers in our considerations of protectionism, I feel like exporters weren’t fully considered. Although it must be fairly obvious that exporters are the strongest lobbying group for dropping trade barriers, I had never considered that a large trade deficit (where exporters are outnumbered by import-competing groups) would lead to future protectionism. It seems that some forms of US protection (export and production subsidies) would lead to exporters joining demands for protectionism. With all of these factors leading to pushes for protection, why are we still relatively unprotected? I think Krugman is quite accurate in noting the American confidence in free-trade ideology.

2) Even more interesting to me were Krugman’s claims that protectionism might not be as bad as this ideology would have us believe. With the amount of time and energy spent proselytizing the benefits of free-trade, I was astounded to discover that US import restrictions only impose costs on world efficiency equal to one quarter of one percent of US GDP. Arguments that claim that protectionism could be an inherently good thing such as strategic trade policy theory seem to further weaken the hysteria surrounding the need for free trade. Although I still don’t believe free trade’s positives should be ignored, I thought it was interesting to be exposed to some argument suggesting that there might be creative views to look at the positives and negatives associated with opening markets.

Throughout this chapter, I constantly thought about what trade protection really is. Through some of my work on international agriculture I have started to naturally equate US and EU ag subsidies with third world tariffs and quotas. What is the fundamental difference between subsidizing producers on their exports to artificially lower export prices and taxing imports to artificially raise import prices? It seems that this argument could be further expanded to include almost any type of government expenditure. Doesn’t health care, education, non-corrupt property protection and law enforcement all reduce the cost of production for individuals and corporations? Do these policies not offer an unfair, government sponsored, advantage to some nations over others? It seems that the best way to argue for these programs in an economic light would be to use variations of Krugman’s ideas of strategic trade policy. I need to further explore this but maybe comments to this post and discussion tomorrow will help me flesh it out.

Diminished Great Expectations

The first thing about The Age of Diminished Expectations that struck me is the irony in Krugman's discussion of the diminished expectations of a society so caught up in the American Dream, and the pursuit thereof, that many of its members fall victim to the "irrational exuberance" Krugman would later refer to in The Great Unraveling. The key delineation is that the diminished expectations Krugman discusses in this volume are popular expectations about the management and overall performance of an economy; Krugman paints a gloomy picture about the ability of fiscal/monetary policy to productively improve economic conditions, especially with relation to social issues. The reader might be led to believe that only free markets, independent of arbitrary government intervention, can resolve the issue, but that such a solution requires a business cycle that the socially-minded among us would not accept. As such, Krugman illustrates, American expectations have been tempered to expect and consent to government mismanagement, so long as it steers the economy clear of disaster. If such an assessment of the American mentality is true, what implications does this attitude have for American economic philosophy, especially considering a large part of America's historical success has been thanks to the encouragement of the American Dream.

Is the unrestrained pursuit of the American Dream (a.k.a. as much wealth as one could acquire with as little effort as possible) something we want to encourage in our society? Is it ok that "a few Americans have prospered to an unprecedented extent," conceivably at the expense of the general welfare? Perhaps a better way of phrasing this point is to ask if legislation intent on restricting such absolute freedom corresponds with the values we want to promote in our society. On the other hand, do we want to remove the major disincentives to failure in such commercial enterprises? Conservative economists tend to promote equality of opportunity over equality of conditions precisely because they want markets to operate as such. Since Krugman convincingly points out that productivity per worker is the main determinant of the standard of living, are government programs designed to keep consumption at high levels good policy choices? Invoking the classical choice of guns or butter, Krugman affirms that investment is a better use of government, communal funds than butter for either the rich or the poor. Investment, especially through money markets tends to invest in businesses based on their rate of return, rather than their socioeconomic status, though that does impair access to capital and other such factors affecting equality of opportunity. By using the government to aid this minimalist extent, likely carried out by a inflation-phobic Chairman of the Federal Reserve, Americans could use their own motivation to increase their standard of living and consumption. But then again, does this meet up to our best expectations? Or are we bound to be disappointed?

Oh but i do

Since I feel pretty similiarly to Sam and wanted to touch on the environmental stuff from the book, I thought I'd build off what he's said.

First off, general impressions about the book: I think Blinder would be useful to thrust into the arms of those who are less knowledgeable about economic topics. His writing style is very accessible and one doesn’t get the feeling that he is making presumptuous self-righteous editorializing. This may explain why Sam wanted to have the chapter to hand to loopy environmentalists. I also found the discussion on monetarism, rational expectations and supply side economics , while possibly overly dismissive, a good history lesson. Nevertheless, I have to agree with Sam that this may have been a little too simplistic for us at this point. More rigorous economics or more radical departures from thought we’ve been reading might be interesting to dive into at this point. Oh well.

About the environmental section: I thought Blinder did an excellent job of characterizing environmentalism and how to best solve environmental issues. I’m happy to say that most respected environmentalists that I know of have moved towards his solutions. For me as a philosopher, the dismissal of rights does become slightly problematic. If one doesn’t look at inherent rights and value, arguments for making decisions outside the market for the benefit of non-human entities becomes difficult. Dealing with questions of pollution as questions of “more or less” rather than “yes or no” does create problems with my sympathies with deep ecology as a philosopher. Nevertheless, when I don my cap as an economist, I recognize that I am evaluated transactions between humans and would gladly work to increase the efficiency of this system.

It is here that I think Blinder and the economists of his time made large contributions. His discussion of sulfur dioxide regulation was incredibly interesting because it was the terrible inefficiencies of sulfur regulation which led to the huge successes of sulfur pollution control as a large scale test of cap and trade policy. In fact, that success seems to have convinced most environmentalists that I have studied under that there is a great deal to be said for market based pollution control. Even in working for Greenpeace in Vienna, I noticed that many in the office were eager to use the markets for environmentally beneficial purposes.

There are some problems with market solutions, however, that I think Blinder misses and policy makers should be aware of. Most significantly I was troubled by the lack of discussion of environmental justice. As Blinder knows, markets may create the most efficient systems but they in no means guarantee proper distribution. Cap and trade systems have been feared by environmental advocates, especially those working as social advocates in low income areas, due to the fear of pollution bubbles. If air rights are less valued in a low income area than in Malibu (where wealthy individuals could buy up air rights to protect their own views/property) what would prevent toxic industries from targeting poor areas. This is especially problematic because the poor most impacted by such a shift are least likely to be able to provide proper health and legal routes to protect their well-being. In order to protect from such situations, one would need to move to a system with at least some straight-forward regulation.

Another point I would like to make is specific to environmentalist support/dissent on market systems of the Bush administration. Many people attack environmentalists for their opposition to these “efficient” solutions. However, if one looks carefully, the biggest complaints are usually that any shifts the current administration makes towards market regulation also includes increases in the absolute amount of pollution allowed under regulatory schemes. Total permits may allow more tons of a toxic than current regulation allows of the industry. I think many environmentalists would jump at the chance to create a true polluter pays system where every permit is sold and there are no “free” permits or tax exemptions. As blinder notes, however, this would not be acceptable to the industry.