Economic Growth – Page 43 – artdiamondblog.com

“Free to Choose” Turns Estonia into “Boomtown”

Source of book image: http://search.barnesandnoble.com/booksearch/imageviewer.asp?ean=9780156334600

If, like Mr. Laar, you are only going to read one book in economics, Milton Friedman’s Free to Choose, is not too bad a choice:

(p. A23) Philippe Benoit du Rey is not one of those gloomy Frenchmen who frets about the threat to Gallic civilization from McDonald’s and Microsoft. He thinks international competition is good for his countrymen. He’s confident France will flourish in a global economy — eventually.

But for now, he has left the Loire Valley for Tallinn, the capital of Estonia and the economic model for New Europe. It’s a boomtown with a beautifully preserved medieval quarter along with new skyscrapers, gleaming malls and sprawling housing developments: Prague meets Houston, except that Houston’s economy is cool by comparison.

Economists call Estonia the Baltic tiger, the sequel to the Celtic tiger as Europe’s success story, and its policies are more radical than Ireland’s. On this year’s State of World Liberty Index, a ranking of countries by their economic and political freedom, Estonia is in first place, just ahead of Ireland and seven places ahead of the U.S. (North Korea comes in last at 159th.)

It transformed itself from an isolated, impoverished part of the Soviet Union thanks to a former prime minister, Mart Laar, a history teacher who took office not long after Estonia was liberated. He was 32 years old and had read just one book on economics: ”Free to Choose,” by Milton Friedman, which he liked especially because he knew Friedman was despised by the Soviets.

Laar was politically naïve enough to put the theories into practice. Instead of worrying about winning trade wars, he unilaterally disarmed by abolishing almost all tariffs. He welcomed foreign investors and privatized most government functions (with the help of a privatization czar who had formerly been the manager of the Swedish pop group Abba). He drastically cut taxes on businesses and individuals, instituting a simple flat income tax of 26 percent.

For the full commentary, see:

JOHN TIERNEY. "New Europe’s Boomtown." The New York Times (Tues., September 5, 2006): A23.

Contrasting Planners with Searchers in Economic Development

Source of book image: http://www.amazon.com/gp/product/1594200378/sr=8-1/qid=1143511279/ref=pd_bbs_1/102-0403843-7507349?%5Fencoding=UTF8

A professor at New York University and a senior fellow at the Center for Global Development, Easterly spent most of his career as an economist at the World Bank. He had to leave that job after publishing his iconoclastic 2001 book, “The Elusive Quest for Growth,” which skillfully combined a history of economists’ growth theories with a devastating empirical analysis of the failure of international efforts to spur third world development. The book’s theme was “incentives matter.”
In “The White Man’s Burden,” Easterly turns from incentives to the subtler problems of knowledge. If we truly want to help the poor, rather than just congratulate ourselves for generosity, he argues, we rich Westerners have to give up our grand ambitions. Piecemeal problem-solving has the best chance of success.
He contrasts the traditional “Planner” approach of most aid projects with the “Searcher” approach that works so well in the markets and democracies of the West. Searchers treat problem-solving as an incremental discovery process, relying on competition and feedback to figure out what works.
. . .
“The White Man’s Burden” does not match “The Elusive Quest for Growth” as a tour de force. Easterly is doing something harder here: not merely cataloging past failures but trying to suggest a more promising approach. Unfortunately, his alternative is still underdeveloped, devolving at times into slogans.
After all, Searchers plan, too. The question is not whether to plan, but who makes the plans, how they are changed and where feedback comes from. “The White Man’s Burden” underplays the essential role of competition, not only in markets but between political jurisdictions.

For the full review, see:
VIRGINIA POSTREL. “The Poverty Puzzle.” The New York Times, Section 7 (Sun., March 19, 2006): 12.
For Easterly’s latest book, see:
Easterly, William. The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. The Penguin Press, 2006. 436 pp. $27.95.

“The world we have lost was ripe for rejection”

The source for the image of the book cover is: http://img.textbookx.com/images/large/91/0521633591.jpg

Roche delineates minimal light and exiguous fires, chilblains and miasmas, the distinction of white linen, the rare treat of sweetness, the still rarer taste of coffee that made its drinkers sparkle, and the hankerings they inspired. Limited access to water affected drinking habits, cooking, hygiene, and sartorial practices. Housewives and laundresses coped with mountains of dirty linen by river or by pond; the great sent their laundry to the American islands for a whiter wash; the poor rioted for soap as well as bread. Society moved from an economy of scarcity and salvation to one of plenty and prodigality. But the move was slow and spotty. The world we have lost was ripe for rejection.

For the full review, see:

Weber, Eugen. "Recommended Reading." The Key Reporter 67, no. 2 (Winter 2002): 12.

The reviewed book is:

Roche, Daniel. A History of Everyday Things: The Birth of Consumption in France, 1600-1800. Cambridge University Press, 2000.

NGOs Throw Money at Poverty, and Then Declare Success

Mark Pendergrast, in his opus on coffee, tells us about Bill Fishbein, a coffee retailer from Rhode Island, who wanted to help small, poor, coffee farmers in Guatemala:

(p. 419) . . . , Fishbein wanted to do something to help. At first, he worked with established nongovernment organizations (NGOs) but soon became disillusioned. Too often, the NGOs simply threw money at communities, then declared projects successful even without long-term improvements. "It amounts to a network to move money around, to pull the heartstrings of donors," he complains.

Source:

Pendergrast, Mark. Uncommon Grounds: The History of Coffee and How It Transformed Our World. New York: Basic Books, 2000.

“Growing Recognition of Economic Costs” of Koyoto Protocol

Commentary on the Kyoto Protocol:

(p. 3) . . . the current stalemate is not just because of the inadequacies of the protocol. It is also a response to the world’s ballooning energy appetite, which, largely because of economic growth in China, has exceeded almost everyone’s expectations. And there are still no viable alternatives to fossil fuels, the main source of greenhouse gases.

Then, too, there is a growing recognition of the economic costs incurred by signing on to the Kyoto Protocol.

As Prime Minister Tony Blair of Britain, a proponent of emissions targets, said in a statement on Nov. 1: ”The blunt truth about the politics of climate change is that no country will want to sacrifice its economy in order to meet this challenge.”

This is as true, in different ways, in developed nations with high unemployment, like Germany and France, as it is in Russia, which said last week that it may have spot energy shortages this winter.
. . .
The only real answer at the moment is still far out on the horizon: nonpolluting energy sources. But the amount of money being devoted to research and develop such technologies, much less install them, is nowhere near the scale of the problem, many experts on energy technology said.

Enormous investments in basic research have to be made promptly, even with the knowledge that most of the research is likely to fail, if there is to be any chance of creating options for the world’s vastly increased energy thirst in a few decades, said Richard G. Richels, an economist at the Electric Power Research Institute, a nonprofit center for energy and environment research.

”The train is not leaving the station, and it needs to leave the station,” Mr. Richels said. ”If we don’t have the technologies available at that time, it’s going to be a mess.”

For the full commentary, see:
ANDREW C. REVKIN. “THE WORLD; On Climate Change, a Change of Thinking.” The New York Times, Section 4 (Sun., December 4, 2005): 3.
(Note: ellipsis added.)

The Good Old Days, When Coffee Smelled Like Wet Dogs

We tend to romanticize the country store, and to deride chain stores and name brands. But maybe coffee lovers should think twice.

(p. 116, footnote 1) "The air was thick with an all-embracing odor," wrote Gerald Carson in The Old Country Store, "an aroma composed of dry herbs and wet dogs, [of] strong tobacco, green hides and raw humanity." Bulk roasted coffee absorbed all such smells.

Source:

Pendergrast, Mark. Uncommon Grounds: The History of Coffee and How It Transformed Our World. New York: Basic Books, 2000.

(Note: the “of” in brackets in the Carson quote is the word Carson used in his book; Pendergrast mistakenly substitutes the word “or”; I have corrected Pendergrast’s mistake.)

Good Rules Encourage Entrepreneurship, Resulting in Vibrant Economy

Some useful observations from the 2004 co-winner of the Nobel Prize in Economics, Edward Prescott:

Good tax rates, . . . , need be high enough to generate sufficient revenues, but not so high that they choke off growth and, perversely, decrease tax revenues. This, of course, is the tricky part, and brings us to the task at hand: Should Congress extend the 15% rate on capital gains and dividends? Wrong question. Should Congress make the 15% rate permanent? Yes. (This assumes that a lower rate is politically impossible.)
These taxes are particularly cumbersome because they hit a market economy right in its collective heart, which is its entrepreneurial and risk-taking spirit. What makes this country’s economy so vibrant is its participants’ willingness to take chances, innovate, acquire financing, hire new people and break old molds. Every increase in capital gains taxes and dividends is a direct tax on this vitality.
Americans aren’t risk-takers by nature any more than Germans are intrinsically less willing to work than Americans. The reason the U.S. economy is so much more vibrant than Germany’s is that people in each country are playing by different rules. But we shouldn’t take our vibrancy for granted. Tax rates matter. A shift back to higher rates will have negative consequences.
And this isn’t about giving tax breaks to the rich. The Wall Street Journal recently published a piece by former Secretary of Commerce Don Evans, who noted that “nearly 60% of those paying capital gains taxes earn less than $50,000 a year, and 85% of capital gains taxpayers earn less than $100,000.” In addition, he wrote that lower tax rates on savings and investment benefited 24 million families to the tune of about $950 on their 2004 taxes.
Do wealthier citizens realize greater savings? Of course — this is true by definition. But that doesn’t make it wrong. Let’s look at two examples: First, there are those entrepreneurs who have been working their tails off for years with little or no compensation and who, if they are lucky, finally realize a relatively big gain. What kind of Scrooge would snatch away this entrepreneurial carrot? As mentioned earlier, under a good system you have to provide for these rewards or you will discourage the risk taking that is the lifeblood of our economy. Additionally, those entrepreneurs create huge social surpluses in the form of new jobs and spin-off businesses. Entrepreneurs capture a small portion of the social surpluses that they create, but a small percentage of something big is, well, big.
Congratulations, I say. Another group of wealthier individuals includes those who, for a variety of reasons, earn more money than the rest of us. Again, I tip my hat. Does it make sense to try to capture more of those folks’ money by raising rates on everyone? To persecute the few, should we punish the many? We need to remember that many so-called wealthy families are those with two wage-earners who are doing nothing more than trying to raise their children and pursue their careers. Research has shown that much of America’s economic growth in recent decades is owing to this phenomenon — we should encourage this dynamic, not squelch it.

For the full commentary, see:
EDWARD C. PRESCOTT. “‘Stop Messing With Federal Tax Rates’.” The Wall Street Journal (Tues., December 20, 2005): A14.

Leading Clinton Economist Advocates a Schumpeterian “Dynamism”

Source of book image: http://www.amazon.com/gp/product/product-description/0743237536/104-0088216-5679944

Today’s review of the new Gene Sperling economic policy book in the New York Times Book Review, begins by emphasizing Sperling’s importance in the Clinton administration:

(p. 16) If you were inclined to identify Clintonism with a single person other than the big man himself, that person might well be Gene Sperling – a top campaign adviser in 1992; a tireless advocate of fiscal discipline during the first term; an inveterate policy wonk throughout all eight years of the administration. So it’s little surprise that this book-length vision for a Democratic economic strategy can best be described as Clintonism 2.0.

NOAM SCHEIBER. “Clintonism 2.0.” The New York Times Book Review, Section 7 (Sun., January 22, 2006): 16.

Here is the opening paragraph of Sperling’s chapter one, which is entitled ” Growing Together in the Dynamism Economy.”

In the 1990s, a new economic era was created when a period of intense globalization collided with an information technology revolution. Yet precisely defining a "new" economy is less important than understanding the nature of the change. I believe a more descriptive label is the “dynamism” economy. Of course, dynamic change in market economies is hardly new. The mid-twentieth-century economist Joseph Schumpeter identified the process of “creative destruction,” positing that a healthy market economy is continually moving forward, replacing old capital, old industries — and existing jobs — with more productive alternatives. Yet, what feels most “new” for average citizens is the breakneck speed at which the increased globalization, rapid technological advance, and the explosion of the Internet are putting fierce competitive pressures on the economy and accelerating change not only in products and services, but also in entire job categories and industries.

Part of the first chapter is viewable at Amazon.com. The book citation is: Sperling, Gene. The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity. Simon & Schuster, 2005.

“Dynamism” as a descriptor for the good society also appeals to libertarian economics columnist Virginia Postrel, author of The Future and Its Enemies and webmaster of dynamist.com.

Rioting Caused by Economy Closed to Creative Destruction

Source of photo: WSJ online version of article quoted and cited below.

The French rioters face very high unemployment. French restrictions on the labor market, and the economy more generally, cause the high unemployment. For example, the French make it hard for firms to fire employees, so as a result, firms are more reluctant to hire workers in the first place, resulting in higher unemployment. Although they do not know it, the rioters are rioting because France is closed to creative destruction. The following commentary is on point:

(p. A16) Like other Americans, immigrants often dramatically improve their quality of life and economic prospects by moving out to less dense, faster growing areas. They can also take advantage of more business-friendly government. Perhaps the most extreme case is Houston, a low-cost, low-tax haven where immigrant entrepreneurship has exploded in recent decades. Much of this has taken place in the city itself. Looser regulations and a lack of zoning lower land and rental costs, providing opportunities to build businesses and acquire property.

It is almost inconceivable to see such flowerings of ethnic entrepreneurship in Continental Europe. Economic and regulatory policy plays a central role in stifling enterprise. Heavy-handed central planning tends to make property markets expensive and difficult to penetrate. Add to this an overall regulatory regime that makes it hard for small business to start or expand, and you have a recipe for economic stagnation and social turmoil. What would help France most now would be to stimulate economic growth and lessen onerous regulation. Most critically, this would also open up entrepreneurial and employment opportunity for those now suffering more of a nightmare of closed options than anything resembling a European dream.

For the full commentary, see:
Joel Kotkin. “Our Immigrants, Their Immigrants.” The Wall Street Journal (November 8, 2005): A16.