Month: October 2009

Dutch Were Too Busy Trading to Build a Church

NewAmsterdamPrint2009-09-26.jpg “Print of New Amsterdam by Joost Hartgers, 1626.” Source of caption and image: online version of the WSJ article quoted and cited below.

(p. A15) The financial collapse of 2008 and the Great Recession have had, not surprisingly, a major adverse impact on the economy of the country’s financial center, New York City. There have been over 40,000 job losses in the financial community alone and both city and state budgets are deeply dependent on tax revenues from this one industry. There has been much talk that New York might take years to recover–if, indeed, it ever can.

But if one looks at the history of New York there is reason for much optimism. The city’s whole raison d’être since its earliest days explains why.
The Puritans in New England, the Quakers in Pennsylvania, and the Catholics in Maryland first and foremost came to what would be the United States to find the freedom to worship God as they saw fit. The Dutch–who invented many aspects of modern capitalism and became immensely rich in the process–came to Manhattan to make money. And they didn’t much care who else came to do the same. Indeed, they were so busy trading beaver pelts they didn’t even get around to building a church for 17 years.
Twenty years after the Dutch arrived, the settlement at the end of Manhattan had only about a thousand inhabitants. But it was already so cosmopolitan that a French priest heard no fewer than 18 languages being spoken on its streets.
. . .
Deep within the heart of this vast metropolis–like the child within the adult–there is still to be found that little hustly-bustly, live-and-let-live, let’s-make-a-deal Dutch village. And the creation of wealth is still the city’s dearest love.

For the full commentary, see:
JOHN STEELE GORDON. “Opinion; Don’t Bet Against New York; The financial crisis has been devastating, but the city has reinvented itself many times before..” The Wall Street Journal (Sat., Sept. 19, 2009): A15.
(Note: ellipsis added.)

Doctors Seek to Regulate Retail Health Clinic Competitors

NursePractitioner2009-09-26.jpg“A nurse practitioner with a patient at a retail clinic in Wilmington, Del.” Source of caption and photo: online version of the WSJ article quoted and cited below.

Clayton Christensen, in a chapter of Seeing What’s Next, and at greater length in The Innovator’s Prescription, has persuasively advocated the evolution of nurse practitioners and retail health clinics as disruptive innovations that have the potential to improve the quality and reduce the costs of health care.
An obstacle to the realization of Christensen’s vision would be government regulation demanded by health care incumbents who would rather not have to compete with nurse practitioners and retail health clinics. See below for more:

(p. B1) Retail health clinics are adding treatments for chronic diseases such as asthma to their repertoire, hoping to find steadier revenue, but putting the clinics into greater competition with doctors’ groups and hospitals.

Walgreen Co.’s Take Care retail clinic recently started a pilot program in Tampa and Orlando offering injected and infused drugs for asthma and osteoporosis to Medicare patients. At some MinuteClinics run by CVS Caremark Corp., nurse practitioners now counsel teenagers about acne, recommend over-the-counter products and sometimes prescribe antibiotics.
. . .
As part of their efforts to halt losses at the clinics, the chains are lobbying for more insurance coverage, and angling for a place in pending health-care reform legislation, while trying to temper calls for regulations.
. . .
(p. B2) But such moves are raising the ire of physicians’ groups that see the in-store clinics as inappropriate venues for treating complex illnesses. In May, the Massachusetts Medical Society urged its members to press insurance companies on co-payments to eliminate any financial incentive to use retail clinics.
. . .
The clinics are helping alter the practice of medicine. Doctors are expanding office hours to evenings and weekends. Hospitals are opening more urgent-care centers to treat relatively minor health problems.

For the full story, see:
AMY MERRICK. “Retail Health Clinics Move to Treat Complex Illnesses, Rankling Doctors.” The Wall Street Journal (Thurs., SEPTEMBER 10, 2009): B1-B2.
(Note: ellipses added.)

A brief commentary by Christensen (and Hwang) on these issues, can be found at:

CLAYTON CHRISTENSEN and JASON HWANG. “How CEOs Can Help Fix Health Care.” The Wall Street Journal (Tues., July 28, 2009).

For the full account, see:
Christensen, Clayton M., Jerome H. Grossman, and Jason Hwang. The Innovator’s Prescription: A Disruptive Solution for Health Care. New York: NY: McGraw-Hill, 2008.

RetailHealthClinicGraph2009-09-26.gif

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

Adaptation Greatly Reduces Negative Effects from Global Warming

One of the advantages of flexible economic systems, such as capitalism, is that they can adapt to unexpected or exogenous changes in the environment (e.g., changes in the weather). In the empirical analysis quoted from below, the primary finding is that roughly half of the short-term negative effects on income from rising temperatures, “are offset in the long run through adaptation.”
Almost all of the countries in the sample of 12 deviate substantially from the ideal of entrepreneurial capitalism. So the reduction by half is probably a much smaller amount of adaptation than would occur in a sample of countries that had adopted policies that allowed a flourishing of entrepreneurship.

(p. 203) Using subnational data from 12 countries in the Americas, we show that the negative crosssectional relationship between temperature and income exists within countries, as well as across countries. We then provide a theoretical framework for reconciling the substantial, negative association between temperature and income in cross section with the even stronger short-run effects of temperature shown in panel models. The theoretical framework suggests that half of the negative short-term effects of temperature are offset in the long run through adaptation.

Source:
Dell, Melissa, Benjamin F. Jones, and Benjamin A. Olken. “Temperature and Income: Reconciling New Cross-Sectional and Panel Estimates.” American Economic Review 99, no. 2 (May 2009): 198-204.

Global Warming Creates Benefit of Arctic Shipping Shortcut

GermanShipArtcticPassage.jpg “A German ship, following a Russian icebreaker, is about to complete a shipment from Asia to Europe via Arctic waters.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A1) MOSCOW — For hundreds of years, mariners have dreamed of an Arctic shortcut that would allow them to speed trade between Asia and the West. Two German ships are poised to complete that transit for the first time, aided by the retreat of Arctic ice that scientists have linked to global warming.

The ships started their voyage in South Korea in late July and will begin the last leg of the trip this week, leaving a Siberian port for Rotterdam in the Netherlands carrying 3,500 tons of construction materials.
Russian ships have long moved goods along the country’s sprawling Arctic coastline. And two tankers, one Finnish and the other Latvian, hauled fuel between Russian ports using the route, which is variously called the Northern Sea Route or the Northeast Passage.
But the Russians hope that the transit of the German ships will inaugurate the passage as a reliable shipping route, and that the combination of the melting ice and the economic benefits of the shortcut — it is thousands of miles shorter than various southerly routes — will eventually make the Arctic passage a summer competitor with the Suez Canal.
“It is global warming that enables us to think about using that route,” Verena Beckhusen, a spokeswoman for the shipping company, the Beluga Group of Bremen, Germany, said in a telephone interview.

For the full story, see:

ANDREW E. KRAMER and ANDREW C. REVKIN. “Arctic Shortcut Beckons Shippers as Ice Thaws.” The New York Times (Fri., September 10, 2009): A1 & A3.

NortheastPassageMap2009-09-26.jpg “A Shortcut Across the Top of the World.” Source of caption and map: online version of the NYT article quoted and cited above.

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”

SchumpeterAirplaneGraphic.jpg

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

IncomeAndConsumptionGraph2009-09-17.gif

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.)