Category: Economics

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.)

“Sachs Aid Model Has Financed Tyranny”: More on Why Aftrica is Poor


Famine in Niger is no surprise — desert wastes, locusts and decades of Marxist rule keep it second-to-last on the world poverty list. Famine in the fertile climes of southern and eastern Africa, however, seems more shocking. But there’s a common thread: centralized state rule — incompetent at best — marked by corruption and sustained by aid. These are the shackles that keep Africans poor: It would be nice if EU and U.S. trade barriers were removed at trade talks in Hong Kong this week, but exports are a distant notion to the 75% of Africans who live off the land.
Niger is little-blessed by nature, but it has also spent its postcolonial era trying various forms of failed government, with Marxism reigning longest. A quarter of the population — 2.5 million people — faces starvation. Yet more temperate southern and eastern African countries are on the edge of famine, too, with 10 million affected in southern Africa alone. Again, we find the same economic profile: Zimbabwe, Malawi, Zambia, Mozambique, Swaziland and Lesotho all lack economic freedom and property rights; all have economies mismanaged by the state; all depend on aid. All these countries have a history of utopian schemes that failed to produce everlasting manna. State farms, marketing boards, land redistribution, price controls and huge regional tariffs left few incentives or opportunities for subsistence farmers to expand. Despite torrents of aid, these cruel social experiments could not turn sands verdant or prevent the granaries of southern and eastern Africa from rotting.
Ethiopia’s Prime Minister Meles Zenawi believes that allowing Ethiopians to own their land would make them sell out to multinationals. He seems to have overlooked a basic market principle: It demands a willing seller and a willing buyer at an agreed price. If that price is worth selling for, the farmer might have some money to reinvest elsewhere; if that price is worth buying for, the purchaser must have plans to make the land profitable. If there is no sale, owners might have an incentive to invest in their own land and future, having, at last, the collateral of the land on which to get a loan. After decades of socialism, Ethiopia’s agricultural sector — the mainstay of the economy — is less productive per capita than 20 years ago when Band Aid tried to defeat famine. Although 60% of the country is arable, only 10% has been cultivated. Ethiopia is entirely dependent on donations; but instead of grasping reality, Mr. Zenawi, a member of Tony Blair’s “Commission for Africa,” is forcing resettlement on 2.2 million people.
In Zimbabwe, the murderous kleptocrats of Robert Mugabe’s regime deny that land seizure has pushed their rich and fertile country into famine: Some three million people face starvation today.
. . .
African leaders must be pushed to reduce economic intervention, free financial markets, remove bureaucratic obstacles to setting up businesses, establish property rights and enforce contract law. These are the forces that release entrepreneurial energy. But the ruling cliques will do none of these unless forced to do so as a condition of aid. The Sachs aid model has financed tyranny and corruption for 40 years, leaving Africans destitute. The world trade meeting in Hong Kong will hear cries for “Trade Justice” for Africa, representing more protectionism and more state-run, aid-fueled schemes. What we really need is economic freedom and the rule of law at home: We are perfectly capable of improving our own lot if only allowed to do so.

For the full commentary, see:
FRANKLIN CUDJOE. “The Terms of Trade: Africa Needs Freer Markets — and Fewer Tyrants.” The Wall Street Journal (Weds., December 14, 2005): A20.
(Note: ellipses added.)
(Note: The WSJ identifies Mr. Cudjoe as “director of Imani, a policy think tank in Ghana.”)

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.

Land Next to Proposed Ethanol Plant Suddenly Declared “Blighted”

(p. 1A) ORD, Neb. – Carl and Charlene Schauer were upset and more than a little offended when the City Council declared their 50-acre cornfield “blighted and substandard.”
Nothing is wrong with the cornfield, located almost five miles outside of town.
Nothing – except its proximity to the site of a proposed $75 million ethanol plant that local officials say will bring 34 jobs to the community of 2,300.
Invented to give cities the power to enlist private development in clearing slums, the “blighted and substandard” designation has become a critical tool for economic development projects across Nebraska.
It allows cities to use property taxes to help pay development costs on behalf of private enterprise, under a mechanism called tax increment financing. That allows increased property taxes generated by improvements of blighted property to be used to help fund the redevelopment.
Blighted land even can be condemned through eminent domain, then turned over to private developers. That practice was upheld by the U.S. Supreme Court last year.
Stunned by that ruling, several Nebraska lawmakers have introduced legislation to prevent local governments from using eminent domain to acquire private property that would be turned over to another private (p. 2A) owner for economic development.
Three bills (Legislative Bills 924, 910 and 799) specifically protect agricultural land, forbidding governments to declare it blighted. A fourth bill (LB 1252) would limit eminent domain to public projects like parks and roads.
And State Sen. Matt Connealy of Decatur proposes a constitutional amendment (LR 272 CA) to remove the requirement that land be designated as substandard and blighted before cities can use property taxes to help private developers pay project costs.
Connealy said it appears some smaller cities are pushing the boundaries of the blight definition.
The Ord ethanol project has been touted by Gov. Dave Heineman, the New York Times and others as an example of small-town hustle and progress.
Carl Schauer’s son, Curt, and his wife, Susan, however, have gone to court to try to stop it.
They live directly across Nebraska Highway 11 from Carl Schauer’s cornfield. Although not included in the proposed ethanol site, their home is less than 1,000 feet from where the plant would be built. They are worried about noise, smell, traffic and health hazards from the around-the-clock operation.
“I guess we’re the sacrificial lambs in the name of economic development,” said Susan Schauer, a licensed practical nurse.
A local official said the city does not want to take even the smallest part of Curt Schauer’s property if he doesn’t want to sell it.
“I don’t think anybody in this community would ever do that,” said Bethanne Kunz of the Valley County Economic Development Board.
After Schauer rejected an offer to buy a strip of his land for a railcar loading area, Kunz said, the ethanol site was reconfigured to leave out Schauer’s property. The field was annexed by the city as part of a redevelopment zone under a Nebraska law that allows small towns and villages to acquire outlying land through “remote annexation.”
The Schauer family still doesn’t know why the field was declared blighted – and it’s worried that the designation could spell trouble. Could their land be taken if another new factory wanted to locate in the area?
“I think it’s wrong that government can take private property and turn it over to private enterprise,” said State Sen. Tom Baker of Trenton.
Government already offers plenty of help – including grants and tax breaks – to business to encourage development, said State Sen. Deb Fischer of Valentine. “Does government have to give away the farm, too?”

Read the full story at:
REED, LESLIE. “‘Blight’ label raises concerns.” Omaha World-Herald (Sunrise Edition, Saturday, January 21, 2006): A1 & A2.

Ayn Rand Admirer Illarionov Pushed Russia Toward Free Market

Image source: WSJ article quoted and cited below.

Since the following interesting article, Andrei Illarionov has resigned. That’s probably a bad sign for Russia, unless you argue that Illarionov can be more effective outside the government than inside it.
The article begins by quoting Al Breach, who is chief strategist at Brunswick UBS:

(p. A13) It’s a one-party state, and if you’re out, you’re out,” Mr. Breach says. “If he can help stop some of the bad things, it’s worthwhile sticking around.”
This year, however, things haven’t gone his way, with state-owned oil and gas companies swallowing up independent oil producers, vastly expanding the state’s presence in the economy. The result, says Mr. Illarionov, has been a fall in private investment in the oil industry and slowing oil-production growth–at a time when world crude prices are soaring. Meanwhile, state outfits have also bought stakes in private engineering companies and taken over the management of Russia’s biggest car maker, AvtoVAZ.
It is all anathema to Mr. Illarionov, a St. Petersberg-trained economist and longtime admirer of Ayn Rand, the American writer who lauded unfettered capitalism. In the early 1990s he was an adviser to Yegor Gaidar, then- prime minister and architect of Russia’s early market reforms. But he quit in 1994, criticizing the government for failing to curb inflation and for putting the brakes on overhaul (sic). He then became one of Russia’s most respected independent analysts: He was the only prominent economist to call for a sharp devaluation of the ruble before the currency crashed in August 1998.
Mr. Putin hired him as an adviser in 2000, and he was a top (sic) force in drafting the liberal, modernizing agenda that the president pushed through in his first term. His ideology — trimming state spending, slashing taxes, cutting red tape and deregulating Russia’s gas, electricity and railway monopolies — became official policy.
Mr. Illarionov was seen as one of the key drivers of crucial overhaul initiatives: a flat income-tax rate of 13%, a rainy-day Stabilization Fund for Russia’s oil windfall, and the decision to dip into the fund to make early repayments on Russia’s foreign debt.
But his reputation suffered in later years from a long, bruising fight over how to restructure the electricity industry, and a quixotic campaign against the Kyoto Protocol, both of which he largely lost. Russia ended up ratifying the climate-change pact last year.

For the full article, see:
GUY CHAZAN. “Putin Insider’s Outsider Game; Adviser Illarionov Preaches Capitalism, but Who Is Listening?” THE WALL STREET JOURNAL (Fri., December 23, 2005): A13.
(Note: There are several differences (e.g., in the title, and in the reference to Ayn Rand) between the online version of this article, and the print version of this article.)

Nebraska’s Ban on Corporate Farming May be History (Three Cheers)

(1A) Initiative 300 generally bans corporations and certain other business entities from owning farmland or engaging in agricultural activity in Nebraska, although there are a number of exceptions geared toward family-based organizations.
It was added to the Nebraska Constitution through a petition drive and vote of the people.
Since receiving 57 percent of the vote in 1982, Initiative 300 has survived several state and federal court challenges, a petition drive to repeal it and attempts by state lawmakers to circumvent it.
The ban was promoted as a way to protect family farms in Nebraska from large corporations.
But Camp ruled that the effort to protect Nebraska farmers violated the U.S. Constitution’s commerce clause because it discriminated against out-of-state interests.
“There is considerable evidence to support the premise that Initiative 300 was conceived and born in a protectionist fervor,” the judge said.
Camp acknowledged that the ban might promote legitimate state interests, such as conservation of natural resources and rural economic development. But she said the state had not shown that the ban was the only (p. 2A) way to reach those goals.
In the lawsuit, Jones said the result of the ban has been a loss of income because he cannot contract with out-of-state corporations for raising and feeding livestock. The ban also reduces the value of his land and his stock in the family farm corporation by barring potential purchasers.
Other plaintiffs said the ban has prevented them from transferring their farm and ranchland as they wished and has interfered with their ability to compete in a national market.
In addition, the judge agreed with two of the plaintiffs who said the ban violated the Americans with Disabilities Act, because it says the person holding a majority of a farm must supply a majority of the day-to-day labor on the farm.
One was Shad Dahlgren of Lincoln, who was paralyzed as a teenager and uses a wheelchair. The other is Todd Ehler, an Elkhorn man who also is disabled.
Both said they are limited in their ability to own farms, since they cannot provide the day-to-day labor required under Initiative 300.

Governments do not know, and usually do not seek, the most efficient market structure. When they try to impose one, as in the Nebraska ban on corporate farming, their actions almost always end up reducing efficiency, and increasing prices for consumers.
For the full article, see:
Stoddard, Martha and Bill Hord. “Ruling Hits Corporate Fram Ban: Initiative 300 Unconstitutional, Judge Says.” Omaha World-Herald (Sunrise Edition, Friday, December 16, 2005): 1A & 2A.
(The online version is, I believe, the version printed in the evening edition of Thurs., Dec. 15, 2005, which I believe is the same, except for the headline.)

Ben Rogge on Bread, Capitalism and Free Choice


‘I believe that capitalism is the system that produces the wholesome bread, and socialism is the system that produces the moldy bread,’ Ben Rogge used to tell us. ‘But,’ he would continue, ‘even if I was wrong, and if it was the other way around, and it was capitalism that produced the moldy bread, and socialism that produced the wholesome bread, I would still choose capitalism. I would choose it because capitalism is the system of free choice.’
But most of us are not like Ben Rogge. Most of us are more like Deng Xiaoping, whose most famous saying is ‘It does not matter whether a cat is black, or white, as long as it catches mice.’ Contra Rogge, he cared only about which economic system produces the goods.
Personally, I believe Rogge was right. But I also believe that if capitalism is to survive, it will only be by continuing to convince the far more numerous Deng Xiaopings of the world.

Theory Uncomplemented by History, “Is Worse than no Theory at All”

I have been primarily a theorist all my life and feel quite uncomfortable in having to preach the historian’s faith. Yet I have arrived at the conclusion that theoretical equipment, if uncomplemented by a thorough grounding in the history of the economic process, is worse than no theory at all.

Excerpted from a letter from Schumpeter to Miss Edna Lonegan, dated February 16, 1942, stored in the Schumpeter archives at Harvard, and reprinted in:
Swedberg, Richard. Schumpeter: A Biography. Princeton, NJ: Princeton University Press, 1991, pp. 229-230.

Ben Rogge on Consistency, Smith and Ricardo

Some would argue that consistency is not always a good thing. Ben Rogge’s favorite quote from Emerson was:

A foolish consistency is the hobgoblin of little minds, adored by little statesman and philosophers and divines.

Rogge used to mention this quote when he defended Adam Smith against the charge of inconsistency. He would say that Smith’s errors on one page would not keep him from writing an important (albeit inconsistent) truth on the next page. In this regard, he contrasted Smith with Ricardo. Ricardo was consistent, and since he was wrong at the start, he was consistently wrong throughout.
Source for the Emerson quote:
Bartlett, John. Familiar Quotations. Boston: Little, Brown and Company, 1955, p. 501, column b. Bartlett gives the source as Emerson’s essay “Self-Reliance.”

Ethiopian Comparative Advantage Squandered through Graft and Corruption: More on Why Africa is Poor

   The source for the image of the book is: http://nasw.org/users/markp/grounds.html

 

One theory of how countries acquire a comparative advantage in a commodity ties the comparative advantage to some natural resource, climate or other "endowment" advantage the country has. This partially ‘explains’ some comparative advantages, but leaves many others unexplained (like why Japan has a comparative advantage in cars).

But even on the endowment theory’s own terms, it would seem that an initial comparative advantage can be squandered. Consider Ethiopia, which is the country in which coffee beans were first discovered, many centuries ago.

(p. 153) . . . Ethiopia, the birthplace of coffee, now exported a negligible amount of the bean, largely due to graft and corruption extending from King Menelik down to the country’s customs agents, . . .

(King Menelek II ruled Ethiopia from 1889 until his death in 1911.)

 

The quotation is from:

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