Reviving Gold Standard Studied in Republican Platform
Wow that is going to be tough for the Democrats to beat. Can you think of a
(a) former national government policy which
(b) was clearly more destructive than the Gold Standard
(c) and that Democrats might have any conceivable possibility of supporting now
First let's examine what the Dems are up against. I am currently working on a piece about the Gold Standard but here is a summary. Each country that adheres to the Gold Standard ties the size of their money supply to their holdings of Gold or things which can be converted into Gold. The common belief among economic historians is that adhering to the Gold Standard was in large part responsible for Great Depression both in the US and in Europe. The depressed UK economy of the 1920s, the US stock market bubble of the late1920s, the bank runs of 1931-32, and the inability for central banks both in the US and Europe to adequately react were all the direct result of adhering to the Gold Standard. To put the Great Depression into context, over 1929-1932 US industrial production fell 64% from its prior peak. In our current recession industrial production fell 17% from its previous peak. The combination of World War I reparations and the Gold Standard annihilated the German economy - which then set the stage for the rise of the Nazi Party, which directly led to World War II and then the Soviet takeover of Eastern Europe. Here is a nice speech
by current Fed Chairman Ben Bernanke which describes current thinking on the cause of the Great Depression.
So a-priori it is going to be tough for the Democrats to beat the Gold Standard. But lets look at a few of our worst former national policies and see if we can help the Democrats find a stinker as bad as the Gold Standard which they could support
Commission to Consider Reimposing the Smoot-Hawley Tariff - the original bill was passed predominantly with Republican support . The SHT acted to reduce US imports. Our trading partners then reacted by restricting our exports. However exports made up only about 5% of GDP in 1931 so - while the SHT certainly was not helpful -the impact on the economy was fairly small and certainly not as detrimental as the Gold Standard. Might Democrats support it? There is definitely a labor constituency within the Democratic party in favor of putting up trade barriers although there is also a constituency for expanding foreign trade - it depends what industry you are in. VERDICT: Gold Standard was more destructive. Might get some Democratic support.
Commission to Consider Reimposing Prohibition - the 18th Amendment and the implementing Volstead Act got both Democratic and Republican support - although Democratic President Woodrow Wilson opposed it. It was never very effective and it is pretty clear that it was not as destructive as the Gold Standard - although much more colorful. My guess is that there is more support within today's Democratic Party for legalization of marijuana then there is for prohibition of alcohol - but you might be able to find someone who is still in favor of the latter. VERDICT: Gold Standard was way more destructive. Doubtful that it gets much Democratic support.
Commission to Consider Sending Weapons to Mujahideen to Be Used Against Our Enemies - yeah that did not work out so great. Democratic President Carter started the program, Democratic Congressman Charlie Wilson was a prime driver of the policy, but it really ramped up during the Reagan administration - so both parties share blame in this one. Was it as destructive as the Gold Standard? In the aftermath of the Afghan-Soviet War warlords pillaged the country and then the horrific Taliban moved in. Osama Bin Laden used Afghanistan as home base while planning his attacks on the US. But there were plenty of other unstable countries that he could have probably based out of as well (Northern Yemen would be an obvious choice.) So its not really clear that this policy had much impact on the final outcome of 9/11. Would any Democrats support this policy today? Doubtful but without the specific context it is hard to say. VERDICT: Gold Standard was more destructive. Need more information to determine if there could be any Democratic support.
hmm we need to find some worse national policies
Commission to Consider Reverting Right to Suffrage Back to Landed White Males Over the Age of 21 - the original Constitution did not define who was eligible to vote, that was left to the states to define. In most (but not all) states the rule was landed white males only. What the Constitution did specify was that for purposes of apportionment non-free men were afforded 3/5ths person-hood. While certainly unfair it is hard to define the exact destructive level of this policy. There was no Democratic Party in 1787 so we don't know exactly how they would have voted on this. However today this is going to be a non-starter with the Democratic Party. Besides being an unfair policy - women and African Americans disproportionately identify as Democrats. VERDICT: Not clear which was more destructive. No Democratic support.
Commission to Consider Re-Implementing Jim Crow Laws - Southern Democrats were in large part responsible for the Jim Crow Laws although Democrats were in large part responsible for overturning them at the federal level as well. I don't see any chance of the Democratic Party supporting a return to Jim Crow. (OTOH the Texas Republican Party Platform does call for overturning the 1965 Voting Rights Act ). While it may be a moot question anyway - since Ds won't go for this - was 100 years of Jim Crow more destructive that the Great Depression and the rise of fasciism in Europe? Close one - but I think would still lean toward the Gold Standard as worse. VERDICT: Close call on which was more destructive. No Democratic support.
hmmm it is really hard to find national policies that were clearly more destructive than the Gold Standard.
Commission to Consider Doing Something Militaristic In Vietnam - tough to figure out exactly what policy to propose
Commission to Consider Trying the Bay of Pigs Invasion Again - not detrimental enough.
Ok I got it!
Commission to Consider Re-Implementing Slavery - YES! there is a national policy that was without a doubt more destructive than the Gold Standard. But there is zero chance that the Democratic Party would be in favor of that today.
So frankly I can't come up with anything that fits my three required criteria
(a) former national government policy which
(b) was clearly more destructive than the Gold Standard
(c) and that Democrats might have any conceivable possibility of supporting now
It looks like the Republican Party has the Democratic Party beat on this one (although we will certainly still accept suggestions).
Sunday, August 26, 2012
Thursday, August 23, 2012
Important Scientific Breakthrough
Southeast Asian Apes on Helium Sing Like Opera Stars
interesting story. A more interesting story might be what possessed scientists to give helium to Southeast Asian Apes in the first place.
interesting story. A more interesting story might be what possessed scientists to give helium to Southeast Asian Apes in the first place.
Romney says he hasn't considered replacement for Bernanke
"Republican presidential candidate Mitt Romney reaffirmed his decision on Thursday that if he wins the Nov. 6 election he would not reappoint Federal Reserve Chairman Ben Bernanke to a third term, though he hasn't considered whom he would name to run the U.S. central bank....."I haven't considered a single person at this point, given no names any thought or deliberation," he said."
Does that seem a bit strange to anyone else? I am going to get rid of Bernanke but I have given no thought what-so-ever as to who I would pick to replace him in arguably the second most powerful role in the US. The article goes on to suggest Greg Mankiw and Glenn Hubbard as two possible Romney picks for Fed Chairman.
Actually of all the economists on the right hand side of the aisle Mankiw would be one of the saner choices. I am not saying that Mankiw would be my number one choice for Fed Chairman - but taking into account the crazy policies which some of the "respected" economists on the R side of the aisle have been promoting recently (gold standard, expansion through austerity, Laffer curve) - he would certainly be one of the better possible picks from a Romney administration. Hubbard certainly has a distinguished academic background but sometimes in playing for team-Republican he makes some crazy-scary statements (see here) I find it hard to believe that Hubbard actually believes that BS. Mankiw also plays for team-R but he shys away from promoting nutty Tea-Party pleasing policies.
Mankiw's fame is as one of the fathers of the new-Keynesian economics school. That fact is ironic for two reasons (1) Keynes is an anathema to the new world of Republican-Tea Party-Austrian economics and (2) the term new-Keynesian is a bit of a misnomer - they would more properly be called new-Monetarists. More on what this means over the weekend.
"Republican presidential candidate Mitt Romney reaffirmed his decision on Thursday that if he wins the Nov. 6 election he would not reappoint Federal Reserve Chairman Ben Bernanke to a third term, though he hasn't considered whom he would name to run the U.S. central bank....."I haven't considered a single person at this point, given no names any thought or deliberation," he said."
Does that seem a bit strange to anyone else? I am going to get rid of Bernanke but I have given no thought what-so-ever as to who I would pick to replace him in arguably the second most powerful role in the US. The article goes on to suggest Greg Mankiw and Glenn Hubbard as two possible Romney picks for Fed Chairman.
Actually of all the economists on the right hand side of the aisle Mankiw would be one of the saner choices. I am not saying that Mankiw would be my number one choice for Fed Chairman - but taking into account the crazy policies which some of the "respected" economists on the R side of the aisle have been promoting recently (gold standard, expansion through austerity, Laffer curve) - he would certainly be one of the better possible picks from a Romney administration. Hubbard certainly has a distinguished academic background but sometimes in playing for team-Republican he makes some crazy-scary statements (see here) I find it hard to believe that Hubbard actually believes that BS. Mankiw also plays for team-R but he shys away from promoting nutty Tea-Party pleasing policies.
Mankiw's fame is as one of the fathers of the new-Keynesian economics school. That fact is ironic for two reasons (1) Keynes is an anathema to the new world of Republican-Tea Party-Austrian economics and (2) the term new-Keynesian is a bit of a misnomer - they would more properly be called new-Monetarists. More on what this means over the weekend.
Saturday, August 11, 2012
In Crazy Company
Putting Congressman Paul Ryan in charge of the House Budget Committee is like putting Jenny McCarthy in charge of the American Medical Association, Tom Cruise in charge of the American Psychiatric Association, or Charlie Sheen in charge of the FBI. What do they have in common? Each is good looking and a fairly good public speaker. They are passionate about their chosen topic area, and they sound like they know what they are talking about - unless of course you actually know something about the topic. Then they sound crazy. But they have the right to be crazy - or at least they have the right to their own opinion however misguided it may be. However these folks should not be in a place where their crazy opinions greatly impact the general public - and that includes Rep. Ryan.
That may seem like a strong statement comparing Rep. Paul Ryan to a Playboy centerfold and a guy famous for drug fueled parties with porn stars. But let me examine his case a bit a closer. In each of the stars cases the person in question has a weird opinion. McCarthy believes that vaccinations cause autism and therefore encourages kids not to be vaccinated. Cruise believes that psychiatry is dangerous and that psychological problems are caused by...well it is too hard to explain, check this out. Charlie Sheen is convinced that the Bush administration masterminded 9/11 as a pretext for the US to invade Iraq. In each case the stars opinion stands in sharp contrast to the views of experts in their field.
Now could it be that the experts are incorrect? Sure. The "experts" in Galileo's time were wrong. The Sun did not revolve around the Earth. Copernicus, Redi, Darwin, Einstein. There have been a number of times in history in which the "experts" were proven completely wrong. But there have been many more cases in which the experts were correct or were nearly correct and people expounding controversial theories were just off their rocker. In statistics we refer to it as Type I and Type II error. Type I error being that the conventional belief (known in statistics as the null hypothesis) is correct and you reject it. Type II error being that the conventional belief (null hypothesis) is not correct and you fail to reject it. In the first case you are disagreeing with the crowd and you are wrong and they are right. In the second case you agree with the crowd and you are both wrong. I tend to think that the standard of proof for the first case should be higher. If you are making a claim at odds with the experts then it should be up to you to provide strong evidence of to reject their case and support your own (and no Xenu is not a strong case).
So what claims is Rep. Paul Ryan making?
(1) That the US faces imminent inflation unless the Fed raises interest rates. See here October 2009 and here October 2010 and here Feb 2011 and here Feb 2012 .
(2) That taxes on the richest 1% greatly slow economic growth See here and there are a few good quotes here as well And this discussion mentions him as well. And here
(3) That switching to a commodity based (aka Gold) standard would be stabilizing See here and here
(4) That the national debt is a significant cause of our current recession See here
(5) Fiscal stimulus does not work See here
There are three ways that I could attempt to refute Rep. Ryan. First on theoretical grounds, second on empirical grounds, and third the appeal to authority. I know - appeal to authority is not really a proof - but if the experts all disagree with you (as with McCarthy, Cruise, Sheen) you are going to need strong defenses on the theoretical and empirical grounds to have any standing. So let us ask the experts what they really think.
APPEAL TO AUTHORITY
The University of Chicago's Booth School of Business polls distinguished scholars in economics on a variety of topics. Each poll has around 40 respondents. Remember this is the University of Chicago home to free market economics - not exactly a left wing bastion. Here are a few recent polls.
The Fiscal Cliff: "If the fiscal changes that are planned under current US law take place next year — including Bush era tax cuts expiring, Medicare payment rates to doctors being cut, the AMT applying to many more taxpayers, and automatic cuts in defense and non-defense discretionary spending kicking in — then US real GDP growth in 2013 will be lower than it would be under the CBO's alternative fiscal scenario, in which the above changes do not occur." The results? 30% strongly agree, 43% agree, 8% uncertain, 3% disagree (1 person out of 40), 3% no opinion. So they disagree with Rep. Ryan on the US debt being the problem with the economy. And they disagree with him on fiscal policy not having stimulative effects.
ARA: "Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill." The results? 29% strongly agree, 51% agree, 2% uncertain, 2% disagree, 2% strongly disagree, 0% no opinion. Again they disagree with Rep. Ryan on the effects of fiscal policy
Gold Standard: "If the US replaced its discretionary monetary policy regime with a gold standard, defining a "dollar" as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American." Now it is not 100% clear whether Rep. Ryan is in favor of a Gold standard. At the cited conference he spoke in support of one but now says that he is actually in favor of a "commodity standard" which ties the dollar to a basket of commodities rather than to gold specifically. A commodity standard has all of the same problems as a gold standard and then some. Think about it. If we were under a commodity standard which included food prices then as grain prices soared over the last three months due to drought across the country we would be forced to tighten the money supply. Or if there is an oil crunch then we tighten the money supply. And our monetary policy becomes dependent on China and India's demand for commodities. That does not sound like a good idea. I am certain that if the poll question were rephrased to "commodity standard" instead of "gold standard" the results would be exactly the same. The results? 0% strongly agree, 0% agree, 0% uncertain, 40% disagree, 53% strongly disagree, 0% no opinion. The Chicago panel strongly disagrees with Rep. Ryan's view that tying the money supply to commodity prices is a good idea - as would anyone who actually looked at the destructive history of the Gold standard. See here and here.
Taxes: "All else equal, permanently raising the federal marginal tax rate on ordinary income by 1 percentage point for those in the top (i.e., currently 35%) tax bracket would increase federal tax revenue over the next 10 years." Recall the Laffer curve is a concave shaped curve with marginal tax rate from labor income on the X axis and government tax revenue from labor income on the Y axis. The argument is that at a 0% marginal tax rate we have no revenue and at 100% tax rate no one works so we have no revenue. Somewhere in the middle there is a point with maximum tax revenue. The question is which side of the peak we are on. Laffer argued that we were on the right hand side of the curve so that lowering the marginal tax rate would increase government tax revenues. The preponderance of evidence says we are on the left hand side of the peak although Laffer and the WSJ editorial page still argue the contrary. The results? 44% strongly agree, 49% agree, 2% uncertain, 0% disagree, 0% strongly disagree, 0% no opinion. So the Chicago panel disagree with Laffer, the WSJ editorial page, and Rep. Ryan.
Interestingly they have another question labelled the Laffer Curve . The first part asks a slightly different question. Laffer Curve: "A cut in federal income tax rates in the US right now would lead to higher GDP within five years than without the tax cut." This is really just asking are tax cuts stimulative. Old school Keynesians agree with that and I suspect many current economists agree as well - and 0% strongly agree, 35% agree, 35% uncertain, 5% disagree, 3% strongly disagree, 5% no opinion. The second part explicitely asks if we are on the right hand side of the Laffer curve "A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut. " 0% strongly agree, 0% agree, 8% uncertain, 33% disagree, 38% strongly disagree, 5% no opinion. So again the Chicago panel disagrees with the Laffer, the WSJ, and Rep. Ryan.
Unfortunately there is no question asking the panelists if we risk huge inflation unless the Fed raises interest rates. I think I know what the panelists would say. They do ask the following question on Monetary Policy: "All else equal, the Fed's new plan to increase the maturity of its Treasury holdings will boost expected real GDP growth for calendar year 2012 by at least one percentage point." I would have gone with an uncertain here. Yes it would be stimulative but given where rates currently are 1% seems like a lot. 0% strongly agree, 0% agree, 33% uncertain, 36% disagree, 17% strongly disagree, 7% no opinion. There are a lot of comments in the panel expressing the same opinion as mine.
So my point is that on some major economic policy questions which have huge impact on the US public Rep. Ryan is way out in left field. As with Tom Cruise and Jenny McCarthy and Charlie Sheen he absolutely has the right to his own opinions - regardless of how they differ with the opinions of people who actually study the subject. However you probably do not want him anywhere near actually having any impact on US government policy. I have to believe that there are Congressmen on the right side of the aisle who understand what an awful idea a commodity standard really is. Put one of them in charge.
LATE NOTE: Funny I wrote most of this two weeks ago. I was not quite finished when the New Yorker put out this article on Rep. Ryan. Tonight there was a rumor Gov Romney would select Rep. Ryan as his running mate - so I figured I should get this out even if it was not yet quite ready for prime time. If I just had not spent so much time watching Mission Impossible I would have had this out earlier. Damn you Xenu!
LATE NOTE 2: Apparently I am not the only one who has noticed the marked discrepancy between the common views of economists as expressed by the University of Chicago poll and the views of certain Republican policymakers.
LATE NOTE 3: Mark Thoma agrees with me on Paul Ryan's crazy economic policy views.
That may seem like a strong statement comparing Rep. Paul Ryan to a Playboy centerfold and a guy famous for drug fueled parties with porn stars. But let me examine his case a bit a closer. In each of the stars cases the person in question has a weird opinion. McCarthy believes that vaccinations cause autism and therefore encourages kids not to be vaccinated. Cruise believes that psychiatry is dangerous and that psychological problems are caused by...well it is too hard to explain, check this out. Charlie Sheen is convinced that the Bush administration masterminded 9/11 as a pretext for the US to invade Iraq. In each case the stars opinion stands in sharp contrast to the views of experts in their field.
Now could it be that the experts are incorrect? Sure. The "experts" in Galileo's time were wrong. The Sun did not revolve around the Earth. Copernicus, Redi, Darwin, Einstein. There have been a number of times in history in which the "experts" were proven completely wrong. But there have been many more cases in which the experts were correct or were nearly correct and people expounding controversial theories were just off their rocker. In statistics we refer to it as Type I and Type II error. Type I error being that the conventional belief (known in statistics as the null hypothesis) is correct and you reject it. Type II error being that the conventional belief (null hypothesis) is not correct and you fail to reject it. In the first case you are disagreeing with the crowd and you are wrong and they are right. In the second case you agree with the crowd and you are both wrong. I tend to think that the standard of proof for the first case should be higher. If you are making a claim at odds with the experts then it should be up to you to provide strong evidence of to reject their case and support your own (and no Xenu is not a strong case).
So what claims is Rep. Paul Ryan making?
(1) That the US faces imminent inflation unless the Fed raises interest rates. See here October 2009 and here October 2010 and here Feb 2011 and here Feb 2012 .
(2) That taxes on the richest 1% greatly slow economic growth See here and there are a few good quotes here as well And this discussion mentions him as well. And here
(3) That switching to a commodity based (aka Gold) standard would be stabilizing See here and here
(4) That the national debt is a significant cause of our current recession See here
(5) Fiscal stimulus does not work See here
There are three ways that I could attempt to refute Rep. Ryan. First on theoretical grounds, second on empirical grounds, and third the appeal to authority. I know - appeal to authority is not really a proof - but if the experts all disagree with you (as with McCarthy, Cruise, Sheen) you are going to need strong defenses on the theoretical and empirical grounds to have any standing. So let us ask the experts what they really think.
APPEAL TO AUTHORITY
The University of Chicago's Booth School of Business polls distinguished scholars in economics on a variety of topics. Each poll has around 40 respondents. Remember this is the University of Chicago home to free market economics - not exactly a left wing bastion. Here are a few recent polls.
The Fiscal Cliff: "If the fiscal changes that are planned under current US law take place next year — including Bush era tax cuts expiring, Medicare payment rates to doctors being cut, the AMT applying to many more taxpayers, and automatic cuts in defense and non-defense discretionary spending kicking in — then US real GDP growth in 2013 will be lower than it would be under the CBO's alternative fiscal scenario, in which the above changes do not occur." The results? 30% strongly agree, 43% agree, 8% uncertain, 3% disagree (1 person out of 40), 3% no opinion. So they disagree with Rep. Ryan on the US debt being the problem with the economy. And they disagree with him on fiscal policy not having stimulative effects.
ARA: "Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill." The results? 29% strongly agree, 51% agree, 2% uncertain, 2% disagree, 2% strongly disagree, 0% no opinion. Again they disagree with Rep. Ryan on the effects of fiscal policy
Gold Standard: "If the US replaced its discretionary monetary policy regime with a gold standard, defining a "dollar" as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American." Now it is not 100% clear whether Rep. Ryan is in favor of a Gold standard. At the cited conference he spoke in support of one but now says that he is actually in favor of a "commodity standard" which ties the dollar to a basket of commodities rather than to gold specifically. A commodity standard has all of the same problems as a gold standard and then some. Think about it. If we were under a commodity standard which included food prices then as grain prices soared over the last three months due to drought across the country we would be forced to tighten the money supply. Or if there is an oil crunch then we tighten the money supply. And our monetary policy becomes dependent on China and India's demand for commodities. That does not sound like a good idea. I am certain that if the poll question were rephrased to "commodity standard" instead of "gold standard" the results would be exactly the same. The results? 0% strongly agree, 0% agree, 0% uncertain, 40% disagree, 53% strongly disagree, 0% no opinion. The Chicago panel strongly disagrees with Rep. Ryan's view that tying the money supply to commodity prices is a good idea - as would anyone who actually looked at the destructive history of the Gold standard. See here and here.
Taxes: "All else equal, permanently raising the federal marginal tax rate on ordinary income by 1 percentage point for those in the top (i.e., currently 35%) tax bracket would increase federal tax revenue over the next 10 years." Recall the Laffer curve is a concave shaped curve with marginal tax rate from labor income on the X axis and government tax revenue from labor income on the Y axis. The argument is that at a 0% marginal tax rate we have no revenue and at 100% tax rate no one works so we have no revenue. Somewhere in the middle there is a point with maximum tax revenue. The question is which side of the peak we are on. Laffer argued that we were on the right hand side of the curve so that lowering the marginal tax rate would increase government tax revenues. The preponderance of evidence says we are on the left hand side of the peak although Laffer and the WSJ editorial page still argue the contrary. The results? 44% strongly agree, 49% agree, 2% uncertain, 0% disagree, 0% strongly disagree, 0% no opinion. So the Chicago panel disagree with Laffer, the WSJ editorial page, and Rep. Ryan.
Interestingly they have another question labelled the Laffer Curve . The first part asks a slightly different question. Laffer Curve: "A cut in federal income tax rates in the US right now would lead to higher GDP within five years than without the tax cut." This is really just asking are tax cuts stimulative. Old school Keynesians agree with that and I suspect many current economists agree as well - and 0% strongly agree, 35% agree, 35% uncertain, 5% disagree, 3% strongly disagree, 5% no opinion. The second part explicitely asks if we are on the right hand side of the Laffer curve "A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut. " 0% strongly agree, 0% agree, 8% uncertain, 33% disagree, 38% strongly disagree, 5% no opinion. So again the Chicago panel disagrees with the Laffer, the WSJ, and Rep. Ryan.
Unfortunately there is no question asking the panelists if we risk huge inflation unless the Fed raises interest rates. I think I know what the panelists would say. They do ask the following question on Monetary Policy: "All else equal, the Fed's new plan to increase the maturity of its Treasury holdings will boost expected real GDP growth for calendar year 2012 by at least one percentage point." I would have gone with an uncertain here. Yes it would be stimulative but given where rates currently are 1% seems like a lot. 0% strongly agree, 0% agree, 33% uncertain, 36% disagree, 17% strongly disagree, 7% no opinion. There are a lot of comments in the panel expressing the same opinion as mine.
So my point is that on some major economic policy questions which have huge impact on the US public Rep. Ryan is way out in left field. As with Tom Cruise and Jenny McCarthy and Charlie Sheen he absolutely has the right to his own opinions - regardless of how they differ with the opinions of people who actually study the subject. However you probably do not want him anywhere near actually having any impact on US government policy. I have to believe that there are Congressmen on the right side of the aisle who understand what an awful idea a commodity standard really is. Put one of them in charge.
LATE NOTE: Funny I wrote most of this two weeks ago. I was not quite finished when the New Yorker put out this article on Rep. Ryan. Tonight there was a rumor Gov Romney would select Rep. Ryan as his running mate - so I figured I should get this out even if it was not yet quite ready for prime time. If I just had not spent so much time watching Mission Impossible I would have had this out earlier. Damn you Xenu!
LATE NOTE 2: Apparently I am not the only one who has noticed the marked discrepancy between the common views of economists as expressed by the University of Chicago poll and the views of certain Republican policymakers.
LATE NOTE 3: Mark Thoma agrees with me on Paul Ryan's crazy economic policy views.
Sunday, August 05, 2012
His Strong Point is His Grasp of Economic Figures
http://www.guardian.co.uk/world/2012/jul/30/mitt-romney-israel-economic-success
'Romney said: "As you come here and you see the [gross domestic product] per capita, for instance, in Israel, which is about USD 21,000, and compare that with the GDP per capita just across the areas managed by the Palestinian Authority, which is more like USD 10,000 per capita, you notice such a dramatically stark difference in economic vitality." According to the World Bank, however, Israel's per-capita GDP was about USD 31,000 in 2011, while the West Bank and Gaza's was just over USD 1,500.'
There goes that liberal media again. Criticizing him for being off by what... a factor of six or seven? Its not like being President requires you to know about numbers and stuff...right? But it does bring up an interesting question. Why is Israel's per capita GDP so much higher than that of its neighbors. per capita GDP data from the World Bank
| COUNTRY | Israel | Lebanon | Jordan | Syria | Egypt | West Bank & Gaza |
| per capita GDP (USD) | 31,282 | 9,904 | 4,665 | 2,892 | 2,780 | 1,123 |
| year | 2011 | 2011 | 2011 | 2010 | 2011 | 2005 |
Mitt Romney suggested that Israel's economic success (in contrast to the Palestinian's) was due to culture and the hand of providence - see here for text. Max Fischer over at the Atlantic points out that if GDP is due to cultural superiority then are we to assume that Kuwait and Brunei are culturally superior to Israel? I get what he is saying but its not quite a fair comparison. Both of the latter countries GDP is in large part due to their immense oil wealth - while neither Israel nor the Palestinian Territories derive their wealth primarily from natural resources.
Jordan Weissman also over that the Atlantic suggests four reasons that the Israeli economy has done well (1) it learned from its history of hyperinflation (2) it welcomes smart immigrants (3) the government promoted venture capital (4) Israeli Central Bank head Stanley Fischer implemented nominal GDP targeting. Some or all of these reasons may be significant but I think we should start with the economists textbook models. What leads to high GDP and high growth of GDP? Physical capital stock, human capital stock, technology which overlaps human capital stock, natural resources, and business environment.
ECONOMIC MODELS OF GROWTH
The baseline neoclassical economic model of growth says that output Y is a function of the physical capital stock K, the labor input L, and the state of technology A commonly referred to a multi-factor productivity
- Y=AKaN1-a
- y=Aka where y=Y/N and k=K/N
Assuming the neoclassical growth model is true then if Israel has a higher per capita output than does its neighbors we would expect that either her per capita capital stock or her technology level must exceed that of her neighbors. This model however assumes that each unit of labor is equally productive and that technology evolves exogenously (see the Wiki page for the full description of the model).
A simple extension of the neoclassical growth model assumes that labor is defined by not only how many of hours of input are used for production but by the quality of the labor as well. Just like we can accumulate physical capital the Lucas Growth model assumes that a nation can accumulate human capital as well. So that gives us another possible reason that Israel could have higher per capita output than its neighbors - they could have more human capital.
Some models of growth dispense with the technology A term but instead assume that when one invests in new capital they are also investing in the most recent technology. In this case A is now longer exogenous. If you look at the world in this manner (vintage capital) then it does not make sense to differentiate between the level of the physical capital stock and the state of technology - they are interlinked. So in trying to explain Israel's higher per capita output we may want to consider both the amount of physical capital and the technological state of that capital.
Finally there are two other factors which - while they do not appear in the standard growth model certainly influence per capita GDP. Max Fischer from the Atlantic gave the example of Kuwait which has a higher per capita output than does Israel. Obviously that may be (probably is) due to Kuwait's great oil wealth and not due to higher greater physical capital or human capital or technology. So we should also consider natural resources or factor endowments.
Finally there is a factor that I will call general business climate. As we can see from a myriad of examples (Zimbabwe is the current poster child) government can play a destructive role in economic growth. But as one can also see (think Somalia) a lack of security, central authority, and property rights can completely retard growth as well. So that factors that we should look at are physical capital, technology, human capital, resources, and business climate.
PHYSICAL CAPITAL
Per Wikipedia "In economics, physical capital or just 'capital' refers to a factor of production (or input into the process of production), such as machinery, buildings, or computers. This is a tough one....(add more here)
TECHNOLOGY
(add more here)
HUMAN CAPITAL
Human Capital as defined by Wikipedia is "the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. It is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biological, cultural and psychological complexity as they interact in explicit and/or economic transactions. Many theories explicitly connect investment in human capital development to education, and the role of human capital in economic development, productivity growth, and innovation has frequently been cited as a justification for government subsidies for education and job skills training."
We generally think of human capital as having something to do with education and training. From the CIA Factbook it appears that Israeli's are getting more schooling than their neighbors. Remember Israel's GDP is five times that of its next closest country so they are spending over five times as much to educate each person.
| COUNTRY | Israel | Lebanon | Jordan | Syria | Egypt | West Bank | Gaza |
| Median Age | 29.5 | 30.4 | 22.4 | 22.3 | 24.6 | 21.7 | 17.9 |
| Literacy Rate | 97.1 | 87.4 | 92.6 | 79.6 | 72.0 | 92.4 | 92.4 |
| Average Years Education | 15 | 14 | 13 | 11 | 11 | 14 | 14 |
| Education Expenditures / GDP | 5.9 | 1.8 | ? | 4.9 | 3.8 | ? | ? |
Some people have suggested that higher education may actually be a luxury good and university may not correspond to actual productive training. But if we are going to attribute any portion of per capita GDP to human capital then at least literacy has to be a relevant measure. And one would think that there must be some productive content in the biology, chemistry, engineering, computer science, etc...Accounting is probably useful for growth too.
Assuming we do consider higher education to be indicative of human capital let's look at some rankings of universities. From QS University Rankings (whose rankings also appear to be used by US News Reports World's Best Universities) Israel has four of the world's top 400 universities: Hebrew University (#120), Tel Aviv (#173), Technion (#220), Ben Gurion (#385). Lebanon has one: American University of Beirut (#300). Jordan, Syria, Egypt, West Bank & Gaza did not place.
Times Higher Education ranked them slightly differently. They have Hebrew University (#121), Tel Aviv (#166), Technion between 200 and 225, Bar Ilan between 300 and 350. Egypt's Alexandria University comes in between 300-350. Jordan, Syria, Lebanon, West Bank & Gaza did not place.
So I think it is fair to say that Israel is at least spending more at the primary levels and has a superior higher educational system to that of its neighbors. How much that actually contributes to increased growth is an open question.
NATURAL RESOURCES
(add more here)
BUSINESS CLIMATE
For a review of the business environment in each country I am going to refer to two sources. First the Heritage Foundation's Index of Economic Freedom. This is a survey published each year and IMHO it is the only thing of value that the Heritage Foundation produces. It seems to use objective criteria and though you may disagree with inclusion of some of the criteria it does seem pretty fair in how countries get placed. There was no data for West Bank and Gaza.
| Israel | Lebanon | Jordan | Syria | Egypt | |
| OVERALL RATING | 67.8 | 60.1 | 69.8 | 51.2 | 57.9 |
| Property Rights | 70 | 25 | 55 | 30 | 35 |
| Freedom From Corruption | 61 | 25 | 47 | 25 | 31 |
| Limited Govt Spending | 41 | 68.2 | 67 | 78.5 | 64.1 |
| Fiscal Freedom (Low Taxes) | 64.1 | 90.8 | 93.5 | 84.4 | 89.7 |
| Business Freedom (from Regs) | 64.4 | 53.9 | 69.5 | 60.1 | 63.8 |
| Labor Freedom | 65.1 | 60.6 | 75.7 | 50 | 53.7 |
| Monetary Freedom (Stable FX) | 79 | 76.9 | 81.2 | 70.9 | 62.3 |
| Trade Freedom | 83.6 | 80.4 | 79.6 | 72.8 | 74 |
| Investment Freedom | 80 | 60 | 70 | 20 | 65 |
| Financial Freedom | 70 | 60 | 60 | 20 | 40 |
Israel and Jordan are very close together. Syria is clearly the laggard. Israel's weak points are Limited Government Spending and high Taxes (although I would argue this may be why they can afford the better education?) Israel comes out well ahead in the categories of Property Rights and Lack of Corruption.
Secondly we can look at the World Bank's Ease of Doing Business Ratings. All numbers represent a ranking among 183 countries with 1 being the best and 183 the worst.
| Israel | Lebanon | Jordan | Syria | Egypt | West Bank & Gaza | |
| OVERALL RANK | 34 | 104 | 96 | 134 | 110 | 131 |
| Starting a Business | 43 | 109 | 95 | 129 | 21 | 177 |
| Construction Permits | 137 | 161 | 93 | 133 | 154 | 129 |
| Getting Electricity | 93 | 47 | 36 | 83 | 101 | 85 |
| Registering Property | 147 | 105 | 101 | 82 | 93 | 78 |
| Getting Credit | 8 | 78 | 150 | 174 | 78 | 166 |
| Protecting Investment | 5 | 97 | 122 | 111 | 79 | 46 |
| Paying Taxes | 59 | 30 | 21 | 111 | 145 | 39 |
| Trading Across Borders | 10 | 93 | 58 | 122 | 64 | 114 |
| Enforcing Contracts | 94 | 120 | 130 | 175 | 147 | 93 |
| Resolving Insolvency | 45 | 125 | 104 | 102 | 137 | 183 |
Under this rating system Israel appears to be a much more business friendly environment than any of its neighbors.
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