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Economic Understanding of the Great Depression is Still “Fragmentary”

In the last few decades the accepted opinion among most economists was that the profession understood what caused the Great Depression sufficiently so that we could be confident that we know how to avoid another Great Depression in the future.
Now the accepted opinion is becoming less accepted. I quote below the last sentence of Harold Cole’s review of a 2007 book that surveys current views of the Great Depression by distinguished economists:

(p. 418) I came away from the book struck by the fragmentary state of the science with respect to the Great Depression and the challenges that we still face in terms of developing a truly satisfactory quantitative theory of what happened.

Source:
Cole, Harold. “Review of Parker’s “the Economics of the Great Depression”.” Journal of Economic Literature 46, no. 2 (June 2008): 415-18.

The book under review is:
Parker, Randall E. The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Era. Cheltenham, U.K. and Northampton, Mass.: Elgar, 2007.

The Economist Starts a Column Named “Schumpeter”

Source of Schumpeter stairway to innovation graphic (my name for it): http://media.economist.com/images/20090919/D3809WB0.jpg

Thanks to Shane Eloe for alerting me that in their Sept. 19th issue, The Economist started a column named “Schumpeter.” Here are a couple of paragraphs from their first installment:

(p. 78) Joseph Schumpeter was one of the few intellectuals who saw business straight. He regarded business people as unsung heroes: men and women who create new enterprises through the sheer force of their wills and imaginations, and, in so doing, are responsible for the most benign development in human history, the spread of mass affluence. “Queen Elizabeth [I] owned silk stockings,” he once observed. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort…The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.” But Schumpeter knew far too much about the history of business to be a cheerleader. He recognised that business people are often ruthless monomaniacs, obsessed by their dreams of building “private kingdoms” and willing to do anything to crush their rivals.

Schumpeter’s ability to see business straight would be reason enough to name our new business column after him. But this ability rested on a broader philosophy of capitalism. He argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a “perennial gale of creative destruction”.

For the full commentary, see:
“Schumpeter; Taking flight; This week we launch a new column on business and management. Why call it Schumpeter?” The Economist (Sat., Sept. 19, 2009): 78.
(Note: the online version was dated Thurs., Sept. 17th)
(Note: ellipsis in original.)

55% of Nebraskans Favor School Vouchers

The Friedman Foundation mentioned in the passage below, was founded by Nobel Prize winning economist Milton Friedman who is often credited with creating the idea of education vouchers in his classic book Capitalism and Freedom.
Capitalism and Freedom was based on a series of lectures that Friedman delivered at Wabash College at the invitation of my much-missed mentor Ben Rogge. (Before teaching me economics in Indiana, Rogge was a native Nebraskan who earned his bachelor’s degree from Hastings College.)

(p. 4B) A majority of Nebraskans are open to school-choice reforms such as school vouchers and tax-credit scholarships, according to a survey made public Thursday by a national school-choice group.

“It really appears Nebraska is ready to start talking about school-choice reform options,” said Paul DiPerna, director of partner services for the Friedman Foundation for Educational Choice, which commissioned the survey.
The group partnered with the Nebraska Catholic Conference and other state and national groups to conduct the telephone survey of 1,200 likely voters.
Fifty-five percent of those surveyed said they favored school vouchers and supported a tax-credit scholarship system, which would give tax credits to individuals and businesses that contribute money to nonprofit organizations that distribute private school scholarships.

For the full story, see:
Dejka, Joe. “Support for school choice tax plan seen; An Indianapolis organization says its survey shows Nebraskans would back a pending bill.” Omaha World-Herald (Fri., Sept. 18, 2009): 4B.

“Stimulus” Did Not Stimulate

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

(p. A23) The nearby chart reviews income and consumption through July, the latest month this data is available for the U.S. economy as a whole.

Consider first the part of the chart pertaining to the spring of this year and observe that disposable personal income (DPI)–the total amount of income people have left to spend after they pay taxes and receive transfers from the government–jumped. The increase is due to the transfer and rebate payments in the 2009 stimulus package. However, as the chart also shows, there was no noticeable impact on personal consumption expenditures. Because the boost to income is temporary, at best only a very small fraction was consumed.
This is exactly what one would expect from “permanent income” or “life-cycle” theories of consumption, which argue that temporary changes in income have little effect on consumption. These theories were developed by Milton Friedman and Franco Modigliani 50 years ago, and have been empirically tested many times. They are much more accurate than simple Keynesian theories of consumption, so the lack of an impact should not be surprising.
. . .
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic–not the fiscal stimulus program–deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

For the full commentary, see:

JOHN F. COGAN, JOHN B. TAYLOR AND VOLKER WIELAND. “The Stimulus Didn’t Work; The data show government transfers and rebates have not increased consumption at all.” The Wall Street Journal (Thurs., SEPTEMBER 17, 2009): A23.
(Note: ellipsis added.)

Obama Should Remember that a Tariff War Helped Create the Great Depression

As an economics graduate student at Harvard, David Rockefeller was a student of Joseph Schumpeter.
After Schumpeter died, his wife spent the last few years of her life working to pull together the disorganized, but nearly completed, manuscript of Schumpeter’s magnificent History of Economic Analysis. In her preface, Mrs. Schumpeter writes: “It seems appropriate at this point to acknowledge gratefully a gift from David Rockefeller and a grant from the Rockefeller Foundation which made possible much of the secretarial and editorial assistance outlined above.” (p. x)
Below I quote a few passages from David Rockefeller’s reaction to Obama’s imposition of tariffs on Chinese automobile tires:

(p. A21) AS if he needed another policy concern to distract him from the health care debate, President Obama now finds himself embroiled in a quarrel with China over his imposition of a steep tariff on automobile tires from that country that is to take effect this week. The Chinese have responded by threatening to impose higher tariffs on American chicken. This may seem like a petty dispute, but the controversy could endanger the global economic recovery if the underlying issue — the rise in protectionism –is not resolved quickly and forcefully. Perhaps Washington has justification for increasing tariffs in this particular case, but in general it sets a bad precedent.

President Obama should resist the desire to accommodate the forces of protectionism from unions, environmentalists and cable television pundits alike. Giving in to their demands may be politically astute, but it would send the wrong message to our trading partners and, more important, inflict damage on the already weakened American economy. Despite the recent rally in the stock market, the next two or three years could still be very painful.
I lived through the stock market crash of 1929 and the Great Depression that followed it, and I saw that there was no direct cause and effect relationship. Rather, there were specific governmental actions and equally important failures to act, often driven by political expediency, that brought on the Depression and determined its severity and longevity.
One critical mistake was America’s retreat from international trade. This not only helped to turn the 1929 stock market decline into a depression, it also chipped away at trust between nations, paving the way for World War II.

For the full commentary, see:
DAVID ROCKEFELLER. “Present at the Trade Wars.” The New York Times (Mon., September 21, 2009): A21.
(Note: the online version of the commentary is dated Sun., Sept. 20.)

Free-Market German Aristocrat Receives Ovation for Opposing Bailout

(p. A7) BERLIN — Could the heir apparent to Chancellor Angela Merkel be a wealthy, handsome 37-year-old baron who loves rock ‘n’ roll?

The baron, Karl-Theodor zu Guttenberg, vaulted to prominence this year when he took over the often dull job of economics minister in the midst of the financial crisis. His independent stand on a thorny economic matter earned him the respect of voters.
. . .

It was his independent streak that earned him the respect of voters, rather than just their curiosity. Mr. Guttenberg broke ranks with Mrs. Merkel over how to handle the troubled German automaker Opel. Mrs. Merkel supported a consortium led by Magna International, a Canadian auto parts maker, and Sberbank, a Russian bank. Mr. Guttenberg favored bankruptcy, and even offered to resign just months into his tenure.
He lost the battle, but gained credibility with voters — an important commodity with a disenchanted electorate that has largely ignored the coming vote. At the big kickoff campaign rally in Düsseldorf for Mrs. Merkel’s conservative Christian Democratic Union, Mr. Guttenberg was the only politician to receive a spontaneous ovation from the crowd of 9,000.

For the full story, see:
NICHOLAS KULISH and JUDY DEMPSEY. “Aristocrat’s Rise Shakes German Doldrums.” The New York Times (Weds., September 22, 2009): A7.
(Note: ellipsis added.)

Adaptation of Thai Rice Farmers to Global Warming

A 2009 study of the effects of global warming on Thai rice farmers, finds that most such farmers have been able to fully adapt to milder changes, and to allay the worst effects of extreme changes. The researchers note that for milder changes, the farmers may even benefit from the increased rainfall that often accompanies such changes. The researchers also note that the adaptation would have been greater if they had been able to take account of the full range of adaptations the farmers could make:

(p. 210) Our results illustrate the complexity of climate change effects on rice yields at both the aggregate and individual levels, the scope of farmers’ ability to counter climate change, and thus the importance of accurate modeling of farmers’ decisions. Overall, farmers are unable to neutralize the adverse effects of the more extreme climate change. However, they are able to cope with milder climate change and even benefit slightly from small increases in rainfall. While most farmers manage to adjust to milder climate change, poor farmers are less able to do so.

It should be noted that in our analysis we consider only farmers’ adjustment through input decision rules. We do not model or incorporate possible changes in timing of input usage, nor broader adjustments such as changes in the type of crop grown or migration. As a result, our findings may overstate both yield changes and implied welfare effects of climate change.

Source:
Felkner, John, Kamilya Tazhibayeva, and Robert Townsend. “Impact of Climate Change on Rice Production in Thailand.” American Economic Review 99, no. 2 (May 2009): 205-10.

Entrepreneur Sees What Others Do Not See

Walt Disney with Mickey Mouse in Disneyland. Source of photo: http://app2.sellersourcebook.com/users/101907/ebay_125.jpg

One of the characteristics of innovative entrepreneurs is that they have the vision to see possibilities that others do not see, and the perseverance to turn the vision into reality.
When I saw the mug pictured above, I bought one. It shows a frumpy middle-aged Walt Disney in an empty black and white Disneyland looking down at a smiling full-color Mickey Mouse.
By chance, this summer, we were present at the birthday of Disneyland. We attended the brief celebration on Main Street. I found myself getting choked up when they played a recording of Walt Disney at the park dedication, saying that Disneyland was intended to be the happiest place on earth.

Feds Ignore Birds Killed by Windmills

(p. A19) On Aug. 13, ExxonMobil pleaded guilty in federal court to killing 85 birds that had come into contact with crude oil or other pollutants in uncovered tanks or waste-water facilities on its properties. The birds were protected by the Migratory Bird Treaty Act, which dates back to 1918. The company agreed to pay $600,000 in fines and fees.

ExxonMobil is hardly alone in running afoul of this law. Over the past two decades, federal officials have brought hundreds of similar cases against energy companies. In July, for example, the Oregon-based electric utility PacifiCorp paid $1.4 million in fines and restitution for killing 232 eagles in Wyoming over the past two years. The birds were electrocuted by poorly-designed power lines.
Yet there is one group of energy producers that are not being prosecuted for killing birds: wind-power companies. And wind-powered turbines are killing a vast number of birds every year.
A July 2008 study of the wind farm at Altamont Pass, Calif., estimated that its turbines kill an average of 80 golden eagles per year. The study, funded by the Alameda County Community Development Agency, also estimated that about 10,000 birds–nearly all protected by the migratory bird act–are being whacked every year at Altamont.
Altamont’s turbines, located about 30 miles east of Oakland, Calif., kill more than 100 times as many birds as Exxon’s tanks, and they do so every year. But the Altamont Pass wind farm does not face the same threat of prosecution, even though the bird kills at Altamont have been repeatedly documented by biologists since the mid-1990s.
. . .

This is a double standard that more people–and not just bird lovers–should be paying attention to. In protecting America’s wildlife, federal law-enforcement officials are turning a blind eye to the harm done by “green” energy.

For the full commentary, see:
ROBERT BRYCE. “Windmills Are Killing Our Birds; One standard for oil companies, another for green energy sources.” The Wall Street Journal (Tues., SEPTEMBER 8, 2009): A19.
(Note: the online version of the commentary is dated September 7th.)
(Note: ellipsis added.)

Jane Jacobs “Rightly Condemned the Arrogance and Elitism of Urban Planners”

Source of book image: online version of the WSJ review quoted and cited below.

(A15) In her day, she was a tenacious activist and an opponent of powerful interests, courting disfavor in high places. But today everyone loves Jane Jacobs, and understandably so. The author of the now-classic “The Death and Life of Great American Cities” (1961) is widely regarded as a common-sense visionary who reminded people about what makes cities livable.

According to Anthony Flint, the author of ”Wrestling With Moses,” Jacobs’s most important contribution was the idea that “cities and city neighborhoods had an organic structure of their own that couldn’t be produced at the drafting table.” Mr. Flint, a former journalist who now works at the Lincoln Institute of Land Policy, clearly counts himself as a Jacobs fan. His book is a lively and informative valentine to her, aimed at showing us especially how she “took on New York’s master builder and transformed the American city.”
The villain of the story is Robert Moses, the ”master builder” who for four decades–from the 1930s into the 1960s–led several well-funded, quasi-governmental agencies and radically transformed the landscape of New York, building roads, bridges, tunnels, parks, playgrounds, beaches and public housing. Though he never held elective office, he was powerful indeed, establishing a formidable base in the city and state bureaucracies. He might have fallen into obscurity after his death if it were not for Robert Caro, who immortalized Moses in “The Power Broker” (1974), a massive biography that portrays Moses as a despot whose creations helped to destroy the city.
. . .
One roots for Jacobs every step of the way, not least because she rightly condemned the arrogance and elitism of urban planners. And Moses was, in fact, a bully who had acquired too much power and disregarded the concerns of local residents. Slum clearance too often targeted functioning working-class neighborhoods, and urban renewal went far beyond what its utopian aims could possibly deliver.

For the full review, see:
VINCENT J. CANNATO. “Not Here, She Said; How Jane Jacobs fought the ‘power broker’ to save the Village–and a city.” The Wall Street Journal (Thurs., July 29, 2009): A15.
(Note: ellipsis added.)

The source of the book being reviewed, is:
Flint, Anthony. Wrestling with Moses: How Jane Jacobs Took on New York’s Master Builder and Transformed the American City. New York, NY: Random House, Inc., 2009.

Increase Health Insurance Competition by Ending Cross-State Ban

(p. A13) How do we get to a competitive market? The tax deduction for employer-provided group insurance, which has nearly destroyed the individual insurance market, is a central culprit. If we don’t have the will to remove it, the deduction could be structured to enhance competition and the right to future insurance. We could restrict the tax deduction to individual, portable, long-term insurance and to the high-deductible plans that people choose with their own money.

More importantly, health care and insurance are overly protected and regulated businesses. We need to allow the same innovation, entry, and competition that has slashed costs elsewhere in our economy. For example, we need to remove regulations such as the ban on cross-state insurance. Think about it. What else aren’t we allowed to purchase in another state?

For the full commentary, see:
JOHN H. COCHRANE . “What to Do About Pre-existing Conditions; Most Americans worry about health coverage if they lose their job and get sick. There is a market solution.” The Wall Street Journal (Fri., AUGUST 14, 2009): A13.