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Category: Economics

Automated reply to your question about globalisation

Arabic Knowledge@Wharton: So when companies like Wal-Mart bring their logistics ability to Africa, it actually could be a good thing for the poor people of Africa?

Cowen: It’s exactly what we need more of. Yes.

Arabic Knowledge@Wharton: Yet there’s a fear Wal-Mart will put the smaller stores out of business.

Cowen: Yes, they do so sometimes, but they do so by charging lower prices. It makes it more accessible and more reliable. It’s not just the pricing at any one point and time. It’s what happens in the very worst periods. Companies like Wal-Mart are very, very good at keeping up supply and being regular.

This is a pretty standard reply from economists when quizzed about the devastation of local industries by foreign businesses, but I wonder if anyone knows whether anyone has looked into it more. (Recommendations welcome.) Because while I do not doubt that Walmart is able to procure and ship things with great efficiency, I do wonder what the effects of the crowding out of local businesses are and whether the cost justifies lower prices. While the possible things to do in an economy are theoretically infinite, what is immediately available to people with little skill, low literacy and poor infrastructure is finite. So after Walmart has come in to do the retailing, Nike has wiped out the shoe weavers, HSBC comes and takes away the retail banking business etc., there is less room for local entrepreneurs, and hence, a lack of employment opportunities for the local population. I have read at least one history mentioning this as one of the reasons why the privatisation of Russia had such devastating impact in the 90s.

Economists have been using this line for ages, but governments still seem to distrust this advice, perhaps for good reason: employment and sustainable local industries are important to a state that wishes not to be utterly dependent on foreign companies with powerful relations overseas (the exertion of British pressure to protect British lenders from default in Iceland?). In other words, governments do not like simply being additions to a company’s resources: it wishes to be in some way prior to the merchant class.

Upward Redistribution

Really interesting article by Dean Baker arguing that policy in the world has often been covertly upward distributionist, that while politicians were debating progressive taxation with the moral artillery of self-reliance, they have been promoting policies which take money from the poor and middle class and give it to the rich.

I don’t think anyone would argue that this is a desirable policy in public. But Baker makes a very plausible case for his thesis and one idea I like is that we must look at policies carefully to see exactly what they entail. Often policies can be disguised with clever names. A free trade agreement sounds great to people with a basic understanding of economic theory but that agreement assumes free trade in some goods, but also protectionism in others. How do we decide which goods are protected by barriers and which are free? It is in these questions that the true ideological orientation and effects of policies lie. So while we haven’t been taxing the poor and giving it to the rich, it is still possible for subtle upward distribution to exist.

Are Baker’s examples convincing? The point about patent laws has been discussed often (here for a start) and the notion that patent laws can actually reduce innovation has also been brought into the mainstream. And given the monopolistic aspects of a patent, the notion that patents are bad for consumers is obvious, even more so if we realise that if the argument above is correct, then patents do not even generate new innovations for the market.

So I am willing to believe that patent laws bring profits to monopolist inventors to the detriment of everyone else. Increasing inequality may be a free market outcome, but it is also helped along by regressive policy. In any case, this is an idea that is worth looking into.

Public Intellectualism

Rather strongly worded argument on the blogosphere between Paul Krugman and Tyler Cowen, where Mr. Cowen accuses Krugman of demonising his opponents and being lazy constructing his case, and Mr. Krugman retorts that he is trying to affect policy rather than engage in academic niceties.

I actually like a lot of what Cowen is saying. It is pretty clear that Krugman is not Humean, and even if he has thought of what Cowen thought of, he generally does not bother to say it. It is true that Krugman has an ability to make things really clear (almost obvious) and this talent stems from a reductionist dynamic at the core of his thinking. So for a more thorough approach to the issue, Cowen’s suggestion, which is roughly to examine how large the effect Krugman is predicting is going to be over how long, see if there can be anything in the longer run that will make austerity even a plausible option and considering workable policies that might be adopted to the least worst effect (and some wonkish icing on the cake), would be a more convincing argument simply because it is more thorough.

Krugman on the other hand is probably approaching the issue from a different perspective. I don’t think his blog is a place for the sort of rumination Cowen suggests, but as a sort of outreach to a broader audience. Perhaps people search for Krugman more because he writes more generally and more simply for a larger audience (note how he still labels posts wonkish to ward off the fainter of heart). But for people who want to engage with Krugman’s arguments on a deeper level, well, perhaps Cowen is right that there are not that many avenues (not that I know anything at all about his complete bibliography).

After the divisive Christopher Hitchens’s death, yet another issue invoking the theme of what mould a public intellectual should be in.

Kahneman and Happiness

I really like Daniel Kahneman’s book and it has been pretty well-reviewed on the blogosphere (click here for a pretty interesting profile of the man). This book, as most psychology books try to do, packs some rather surprising insights into human behaviour, and expectedly, economists try to use them to argue for all sorts of things.

This is one of the arguments that I’ve been a little troubled by. The author of the article concludes that “leftist outrage over income inequality is therefore deeply misguided” because “to a large extent, incomes differ because priorities differ”. Here, Kahneman’s book seems to have some evidence that backs up his claim, that when one of your goals when young is to earn more money, you generally tend to earn more money.

If you think about it, the argument is reduced to a familiar “success is determined by how hard you are willing to work for it” form. But notice: the sample data is from “approximately 12,000 people who had started their higher education in elite schools in 1976″ (underline mine). Surely this does not include people leftists generally talk about (people in a poverty trap, disadvantaged minorities etc.). So while this seems to hold at what we can assume to be a fairly comfortable level of existence (to be enrolled in an elite school for higher education), the correlation might not hold at lower levels of income, especially if there are significant impediments near the bottom to stop people from moving up. I doubt that Caplan’s arguments hold for people of all income levels, which seems to suggest that there is still some direction in leftist outrage.

Fraud and Finance

Well this is more than a little bit clever. In one of the most quoted pieces in the blogosphere these days, Waldman demonstrates that the financial system is designed to move us towards “a high-investment dynamic rather than a low-investment stasis”.

I realised that this is a bit similar to what I was thinking a little while back about citizen banking, namely that without banks as the intermediary, there will be a lack of investors in high risk projects and a glut of investors in low risk markets, or more fundamentally, credit with different risk levels are different products!

But Waldman’s analysis really gets clever when he argues that rational investors will realise that there are only so many safe, sure-win products (and I think the pipeline for CDOs shows that sometimes these financial products have to be conjured up). What I find surprising about his conclusion is that the system must rely on deception to convince people that all this stuff the banks are dabbling in is relatively harmless.

I would think that he is right to argue that banks have to lie a little: after all, we accept that a high investment equilibrium is most beneficial, we agree that most people, especially those without a good understanding of how capital works tend to want their money to be as safe as possible, and we also accept that there are just not that many places to park your cash. An important thought to have the next time we try to fix finance.

Punishment

Here’s a thought. The major forms of punishment in society nowadays are fines, incarceration and occasionally death. But for the majority of crimes, largely fines or incarceration.

Fines are a regressive form of punishment, in the same way flat taxes are regressive, i.e. they impact the poor more than they do the rich. This is not merely an abstract problem of fairness. Because of this, fines are more effective as a deterrent to the poor than to the rich. It is easy to see how a summons for a twenty dollar parking offence will matter more to the family living on 600 a month than one living on 6000.

Interestingly, incarceration, on the other hand, is more punitive to rich people. In one sense, they take up an equal amount of the person’s time. You may even argue that it takes up more of the poor person’s time, given that the rich have access to better healthcare and hence usually live longer. But one year of incarceration leads to a higher absolute loss of income (opportunity cost) for the rich person.

A simple enough analysis. But I think it gets interesting once you consider diminishing returns to utility. The incarceration of a family member earning 40% of the household income can be considerably more disastrous than the loss of 60% income if the resulting changes in utility is greater. For example, if the mother in a poor family loses her job, losing 200 dollars of the family’s 800 dollars a month income. This 25% fall in income will lead to significant cutbacks in more basic things, like food, clothing and power. Compare this to a family that loses 2000 out of 10000 or 1 out of 5.

So here’s the thought. Our current punishment methods are inherently unfair. If there is to be an equivalent penalty exacted for an offense regardless of income levels, perhaps progressive fines or even jail terms may make sense.

A note on value in the gold standard

It occurs to me that when gold is pegged to the coinage/notes of a country, the relationship works both ways:

$ (value of 1 denomination of said currency) = G (weight of gold (in grams?))

which essentially means that 1 gram of gold is worth a certain amount of $.

Obvious. But that means that there is no real reason to peg gold to the said currency except to make the determinant of the money supply the determinant of gold. The choice of gold itself can be largely random, and is probably dependent on the chemical qualities of gold itself. And as Alfred Marshall noted, why would you base your economy on an industry like mining?

New Essay Up on VFC

Here. As usual check out the other write-ups.

Bitter

A hundred bucks isn’t bad. But.

Here is my essay on immigration. The abstract is below:

Abstract

In this essay, I argue that the opportunities immigration brings depend on the direction our economy takes in the future. In my opinion, this involves a move to high knowledge-based industries, and in particular, creative industries. To best achieve this, I argue that we need to reduce our dependence on cheap low-skilled foreign labour and instead establish Singapore as a destination for creative and skilled talent. This is not simply a matter of building facilities and offering incentives. It requires a social change. Strong-handed social intervention by the government, and a slapdash national identity due to the patchwork nature of the politics of pragmatism have created an environment hostile towards ideas that challenge the status quo.

I also argue that the main challenges we face are related to the problem of density. One solution is to make each body in Singapore count for more. Another is for Singapore to develop systems with loads of spare capacity (to increase elasticity of supply). However, this comes at the cost of upkeep costs (with which HDB had a particularly bad experience during the Asian financial crisis). Ultimately, it may simply be that more packed streets are simply a price to pay for the benefits immigrants bring.

I conclude with the assertion that the immigration of skilled workers is desirable. First, I address the issues of greater density and argue that Singapore can look at other major cities who are addressing these issues. Second, I advance the position that the most crucial step to encouraging immigration of such workers is fostering a culture of innovation. One possible point of intervention through which we can do this is through universities, where a homogeneity of thought can be broken up, and people can be exposed to different knowledge and skill sets.

Globalisation as a parable

A marvellously clear exposition of globalisation from Dani Rodrik. An excerpt:

“It was time for another trip to the shaman. The village held a long and boisterous meeting at which each side argued its case passionately. All agreed that the situation was unsustainable, but the proposed solutions varied. The fishermen wanted a change in the rules that would reduce their contributions to the monthly feasts. Others wanted an end to the fish trade with outsiders. Some even asked to blockade the road with boulders so that no-one could enter or leave the village.

The shaman listened to these arguments. “You have to be reasonable and compromise,” he said after some thought. “Here is what I suggest. The council of elders should place a toll booth at the entrance to the access road, and everyone who comes in and out should pay a fee.” “But this will make it more costly for us to trade,” the fishermen objected. “Yes indeed,” the shaman replied. “But it will also reduce over-fishing and make up for the loss in contributions at the feasts.” “And it won’t cut off trade altogether,” he added, pointing with his head to the villagers who wanted to block the road.

The villagers agreed that this was a reasonable solution. They walked out of the meeting satisfied. Harmony was restored to the village.

And everyone lived happily ever after.”

Hm. I really should get the book before I go in.