Category: Economic Growth

For Happiness, “Income Does Matter”

SatisfactionPerCapitaGDPgraph.jpg Source of graph: online version of the NYT article quoted and cited below.

(p. C7) . . . , Betsey Stevenson and Justin Wolfers argue that money indeed tends to bring happiness, even if it doesn’t guarantee it. They point out that in the 34 years since Mr. Easterlin published his paper, an explosion of public opinion surveys has allowed for a better look at the question. “The central message,” Ms. Stevenson said, “is that income does matter.”
To see what they mean, take a look at the map that accompanies this column. It’s based on Gallup polls done around the world, and it clearly shows that life satisfaction is highest in the richest countries. The residents of these countries seem to understand that they have it pretty good, whether or not they own an iPod Touch.
If anything, Ms. Stevenson and Mr. Wolfers say, absolute income seems to matter more than relative income. In the United States, about 90 percent of people in households making at least $250,000 a year called themselves “very happy” in a recent Gallup Poll. In households with income below $30,000, only 42 percent of people gave that answer. But the international polling data suggests that the under-$30,000 crowd might not be happier if they lived in a poorer country.
. . .
Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes.
But it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.
Economic growth can also pay for investments in scientific research that lead to longer, healthier lives. It can allow trips to see relatives not seen in years or places never visited. When you’re richer, you can decide to work less — and spend more time with your friends.
Affluence is a pretty good deal. Judging from that map, the people of the world seem to agree. At a time when the American economy seems to have fallen into recession and most families’ incomes have been stagnant for almost a decade, it’s good to be reminded of why we should care.

For the full commentary, see:
DAVID LEONHARDT. “Economic Scene; Money Doesn’t Buy Happiness. Well, on Second Thought . . . .” The New York Times (Weds., April 16, 2008): C1 & C7.
(Note: ellipses in text added; ellipsis in title in original; the title in the online version was “Economic Scene; Maybe Money Does Buy Happiness After All.” )

SmileyMoneyFace.jpg

Source of graphic: online version of the NYT article quoted and cited above.

Lack of Legal Status for Poor Keeps Them “In Constant Fear”



The passage below is quoted from a WSJ summary of an article in the July 16, 2007 issue of Time:

(p. B5) Writing in Time magazine, Ms. Albright, former U.S. secretary of state, and Mr. de Soto, a Peruvian-born economist who heads the Institute for Liberty and Democracy in Lima, say that about half of the world’s population work in shadow economies. They generally lack birth certificates, legal addresses or, crucially, deeds to their shacks and market stalls. “Without legal documents, they live in constant fear of being evicted by local officials or landlords,” write Ms. Albright and Mr. de Soto, who co-chair the U.N. Commission on Legal Empowerment of the poor. As a result, the poor are unable to invest or even plan for the future.




For the full summary, see:
“The Informed Reader; Poverty; Lack of Strong Legal Identity Helps Keep Down World’s Poor.” Wall Street Journal (Fri., July 6, 2007): B5.



The Free Market Works


The story quoted below tells how outsourcing high-tech jobs to India has bid up the salaries of high-tech Indian engineers, thereby reducing the appeal of further outsourcing. Marvelous how the market works!
Another lesson from the story applies to forecasting: mechanical extrapolation of current trends is inferior to prediction that takes account of predictable changes in prices (in this case, salaries).


(p. A15) Around the century’s turn, when U.S. companies first began flooding to India for its cheap labor, pundits warned that the subcontinent could increasingly rob the U.S. of high-end white-collar jobs. Debate was especially sharp in Silicon Valley, then in a slump, because India annually turns out nearly 500,000 engineering graduates.
. . .
Several years on, the forces of globalization are starting to even things out between the U.S. and India, in sophisticated technology work. As more U.S. tech companies poured in, they soaked up the pool of high-end engineers qualified to work at global companies, belying the notion of an unlimited supply of top Indian engineering talent. In a 2005 study, McKinsey & Co. estimated that just a quarter of India’s computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies.
The result is increasing competition for the most skilled Indian computer engineers and a narrowing U.S.-India gap in their compensation. India’s software-and-service association puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it’s closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody’s Economy.com.
Rafiq Dossani, a scholar at Stanford University’s Asia-Pacific Research Center who recently studied the Indian market, found that while most Indian technology workers’ wages remain low — an average $5,000 a year for a new engineer with little experience — the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. “For the top-level talent, there’s an equalization,” he says.



For the full story, see:
Pui-Wing Tam and Jackie Range. “Second Thoughts: Some in Silicon Valley Begin to Sour on India; A Few Bring Jobs Back As Pay of Top Engineers In Bangalore Skyrockets.” Wall Street Journal (Tues., July 3, 2007): A1 & A15.
(Note: ellipsis added.)

Creative Sparks Arise from Opportunistic Innovation


StrategicIntuitionBK.jpg










Source of book image:
http://ecx.images-amazon.com/images/I/51vovIVI5sL.jpg

(p. D16) One of the insights of “Strategic Intuition” is that business makes progress by following the opportunistic innovation model, while governments and international-aid agencies aim repetitively at rigid social goals. Such rigidity happens partly for a reason that Mr. Duggan is too polite to mention — bureaucrats, by nature, rarely give off a creative spark. Mr. Duggan prefers to emphasize a structural cause: The public demands solutions to problems of great social importance; thus bureaucrats get stuck with fixed objectives. Yet Mr. Duggan also shows that social progress often happens by emulating the opportunism of business. Among the most powerful of his examples is Muhammad Yunus’s invention of microcredit.
. . .
If there are still businessmen who feel compelled to follow a fixed-goal plan — missing out on the profits of opportunistic flexibility — then at least there is the free market to punish them. Market feedback is surely one big reason that we have so many innovative entrepreneurs. Where the old approach does most of the damage is in social policy, where the feedback is either fuzzy (as in domestic policy) or absent (foreign aid). Social policy could use a lot fewer commencement speakers and a lot more creative sparkers.

For the full review, see:
WILLIAM EASTERLY. “BOOKSHELF; Surprised by Opportunity.” The Wall Street Journal (Weds., November 14, 2007): D16.
(Note: ellipsis added.)

The reference to the Stratetic Intuition book is:
Duggan, William. Strategic Intuition: The Creative Spark in Human Achievement. New York: Columbia University Press, 2007.

“The No. 1 Need that Poor People Have is a Way to Make More Cash”

 

  Moving water is easier with the 20-gallon rolling drum.  Source of photo:  online version of the NYT article quoted and cited below.

 

(p. D3)  . . . , the Cooper-Hewitt National Design Museum, . . . , is honoring inventors dedicated to “the other 90 percent,” particularly the billions of people living on less than $2 a day.

Their creations, on display in the museum garden until Sept. 23, have a sort of forehead-thumping “Why didn’t someone think of that before?” quality.

. . .

Interestingly, most of the designers who spoke at the opening of the exhibition spurned the idea of charity.

“The No. 1 need that poor people have is a way to make more cash,” said Martin Fisher, an engineer who founded KickStart, an organization that says it has helped 230,000 people escape poverty.  It sells human-powered pumps costing $35 to $95.

Pumping water can help a farmer grow grain in the dry season, when it fetches triple the normal price.  Dr. Fisher described customers who had skipped meals for weeks to buy a pump and then earned $1,000 the next year selling vegetables.

 

For the full story, see: 

DONALD G. McNEIL Jr.  "Design That Solves Problems for the World’s Poor."  The New York Times  (Tues., May 29, 2007):  D3.

(Note:  ellipses added.)

 

FilterForDrinkingWater.jpg TechnologiesForPoor.jpg   The photo on the left shows a woman safely drinking bacteria-laden water through a filter.  The photo on the right shows a "pot-in-pot cooler" that evaporates water from wet sand between the pots, in order to cool what is in the inner pot.  Source of photos:  online version of the NYT article quoted and cited above.

 

Big is Not Always Better

 

It is an enduring puzzle why the West has been so much more succesful than China in achieving economic growth over the past several centuries.  The puzzle arises because there is considerable evidence of early Chinese acheivements in technology.

One example would be the exploratory voyages of Zheng He.  The Chinese ships were much, much larger than those of Christopher Columbus.  But as Clayton Christensen has shown in a more modern context, size does not always matter as much as nimbleness and motivation. 

(And another part of the story involves culture and institutions.)

  

 

The most complete account of Christensen’s thinking, so far, is his book with Raynor:

Christensen, Clayton M., and Michael E. Raynor.  The Innovator’s Solution:  Creating and Sustaining Successful Growth.  Boston, MA: Harvard Business School Press, 2003.

 

(Note:  I am grateful to Prof. Yu-sheng Lin for first informing me of the large difference in size between the ships.  I am also grateful to Prof. Salim Rashid, and Liberty Fund’s Mr. Leonidas Zelmanovitz, for my having the opportunity to encounter Prof. Lin.)

 

Innovative New Products Often Expensive at First, But Price Soon Falls


AdoptionInnovationsGraph.gif Source of graph: online version of the NYT article quoted and cited below.

(p. 14) To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.
As the second chart, on the spread of consumption, shows, this wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.
At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.



For the full commentary, see:
W. MICHAEL COX and RICHARD ALM. “You Are What You Spend.” The New York Times Company, Week in Review section (Sun., February 10, 2008): 14.

Bill Gates Reads Julian Simon

(p. A15)  A core belief of Mr. Gates is that technology can erase problems that seem intractable. That belief was deepened, Mr. Gates says, by his study of Julian Simon, a now-deceased business professor who argued that increases in wealth and technology would offset shortages in energy, food and other global resources.
Pacing in his office last week, Mr. Gates retold the story of a famous $10,000 wager between Mr. Simon and Paul Ehrlich, a Stanford University professor who predicted that human population growth would outstrip the earth’s resources.  Mr. Simon bet that even as a growing population increased demand for metals such as tin and copper, the price of those metals would fall within the decade ending in 1990. Mr. Simon won the bet. “He cremated the guy,” says Mr. Gates.  Mr. Ehrlich’s administrator at Stanford University said he was out of the country and couldn’t comment on the wager.

For the full story, see:

ROBERT A. GUTH.  “Bill Gates Issues Call For Kinder Capitalism; Famously Competitive, Billionaire Now Urges Business to Aid the Poor.”  The Wall Street Journal  (Thurs., January 24, 2008):  A1 & A15.


Bill Gates Misreads Adam Smith’s Theory of Moral Sentiments

 

GatesDavos2008.jpgBill Gates speaking at the Davos meetings in Switzerland on January 24, 2008.  Source of the photo: http://graphics8.nytimes.com/images/blogs/dealbook/davos2008/gates600.jpg

 

The German scholars used to call it “Das Adam Smith Problem”:  how to reconcile the Adam Smith’s Theory of Moral Sentiments with his later Wealth of Nations.  One alleged inconsistency is the advocacy of altruism in the former, and the advocacy of self-interest in the latter.  

But a closer reading of The Theory of Moral Sentiments solves the problem.  Smith thought a case could be made for altruism, but only toward those we know really well, which primarily meant one’s own family, and maybe also others in one’s community who one knows well.  The reason is that altruism works only when we know very well the situation and values of those who we propose to help.  Otherwise, we may end up doing more harm than good.

So when Gates embarks on global altruism, he should be careful in citing Smith for support.

 

The passage quoted below discusses Bill Gates’s interpretation of Adam Smith:

(p. A15)  Key to Mr. Gates’s plan will be for businesses to dedicate their top people to poor issues — an approach he feels is more powerful than traditional corporate donations and volunteer work. Governments should set policies and disburse funds to create financial incentives for businesses to improve the lives of the poor, he plans to say today. “If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world,” Mr. Gates plans to say.

In the interview, Mr. Gates was emphatic that he’s not calling for a fundamental change in how capitalism works. He cited Adam Smith, whose treatise, “The Wealth of Nations,” lays out the rationale for the self-interest that drives capitalism and companies like Microsoft. That shouldn’t change, “one iota,” Mr. Gates said.

But there’s more to Adam Smith, he added. “This was written before ‘Wealth of Nations,'” Mr. Gates said, flipping through a copy of Adam Smith’s 1759 book, “The Theory of Moral Sentiments.” It argues that humans gain pleasure from taking an interest in the “fortunes of others.” Mr. Gates will quote from that book in his speech today.

Talk of “moral sentiments” may seem surprising from a man whose competitive drive is so fierce that it drew legal challenges from antitrust authorities. But Mr. Gates said his thinking about capitalism has been evolving for years. He outlined part of his evolution from software titan to philanthropist in a speech last June to Harvard’s graduating class, recounting how when he left Harvard in 1975 he knew little of the inequities in the world. A range of experiences including trips to Africa and India have helped raise that awareness.

In the Harvard speech, Mr. Gates floated the idea of “creative capitalism.” But at the time he had only a “fuzzy” sense of what he meant. To clarify his thinking, he decided to prepare the Davos speech.

For the full story, see:

ROBERT A. GUTH.  “Bill Gates Issues Call For Kinder Capitalism; Famously Competitive, Billionaire Now Urges Business to Aid the Poor.”  The Wall Street Journal   (Thurs., January 24, 2008):  A1 & A15.

 

One good article that discusses some of the issues in my initial commentary is:

Coase, Ronald H.  “Adam Smith’s View of Man.”  In Essays on Economics and Economists.  Chicago:  University of Chicago Press, 1995.

 

CharitableFoundationsTop10.gif

 

Source of the graphic:  online version of the WSJ article quoted and cited above.

 

Raghuram Rajan on the Current Economic Downturn and the Subprime Mortgage Mess

 

       “Traders in the oil futures pit of the New York Mercantile Exchange on Tuesday” (January 22. 2008).  Source of caption and photo:  online version of the NYT commentary quoted and cited below. 

 

Raghuram Rajan is mentioned in the article quoted below.  I first ran across him as the co-author of a book that was billed as applying Schumpeterian ideas of creative destruction to issues of economic growth and development. 

Then, at the American Economic Association meetings in New Orleans in early January, I was on my way to a History of Economics Society reception, when I stumbled by chance into a modest reception in which Rajan was giving an informal speech on the subprime mortgage crisis.

It was such an interesting presentation, that I ended up totally missing the History of Economics Society reception.  Rajan argued that the main problem was one of misguided incentives.  Bonuses at top investment firms like Merrrill Lynch and JPMorgan Chase, are supposed to go to those whose investments produce high returns, with modest risks.  The problem with the complicated securities based on the subprime mortgages was that they produced high returns, but the risks were actually also fairly high.  The high-flying investors probably had some knowledge of this, but the public did not.  In most years the investors could invest in the high return, but high risk, securities, and collect huge bonuses.  But now the chickens have come home to roost.

Rajan suggested that the answer would be a change in the way in which the traders are given bonuses.  Instead of handing them out annually, let them become vested only after observing the investment’s track record for several years.  If the investment goes south before the bonus is vested, the trader does not get the bonus.  This would provide an incentive and reward for those who accurately accessed the risk of their investments. 

 

(p. A1)  . . . , Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

 

For the full commentary, see: 

DAVID LEONHARDT.  “ECONOMIC SCENE; Worries That the Good Times Were Mostly a Mirage.”  The New York Times  (Weds., January 23, 2008):  A1 & A23.

(Note:  ellipsis added.)

 

The Schumpeterian book co-authored by Rajan, is:

Rajan, Raghuram G., and Luigi Zingales.  Saving Capitalism from the Capitalists:  Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity.  New York:  Crown, 2003.

 

“Freedom and Prosperity Are Highly Correlated”

 

    Source of graph:  http://www.heritage.org/Press/ALAChart/images/ALC_017_index_econ_freedom_3col_c.jpg

 

(p. A13)  . . .  the evidence is piling up that neither government nor multilateral spending on education and infrastructure are key to development. To move out of poverty, countries instead need fast growth; and to get that they need to unleash the animal spirits of entrepreneurs.

Empirical support for this view is presented again this year in The Heritage Foundation/The Wall Street Journal Index of Economic Freedom, released today. In its 14th edition, the annual survey grades countries on a combination of factors including property rights protection, tax rates, government intervention in the economy, monetary, fiscal and trade policy, and business freedom.

The nearby table shows the 2008 rankings but doesn’t tell the whole story. The Index also reports that the freest 20% of the world’s economies have twice the per capita income of those in the second quintile and five times that of the least-free 20%. In other words, freedom and prosperity are highly correlated.

 

For the full commentary, see: 

MARY ANASTASIA O’GRADY.  "The Real Key to Development."  The Wall Street Journal  (Tues., January 15, 2008):  A13. 

(Note:  ellipsis added.)

 

IndexOfEconomicFreedom2008.gif     Source of table:  online version of the WSJ article quoted and cited above.