Category: Economic Growth

James Gwartney Offers Advance Praise for Openness to Creative Destruction

Discovery, innovation, and dynamic change are vastly underappreciated by both economists and the general public. Professor Diamond explains how discovery and development of new products and lower cost production methods of the past 250 years have transformed our lives and promoted human progress beyond even the dreams of our ancestors. Further, these dynamic improvements are continuing today at an even more rapid rate. This book brings the what, why, and how of human progress alive, and it does so in an understandable and entertaining manner. It is a must read for both the scholar and interested layperson.

James Gwartney, Professor of Economics, Florida State University. Co-author of Economics: Private and Public Choice, Economic Freedom of the World, and other works.

Gwartney’s advance praise is for:
Diamond, Arthur M., Jr. Openness to Creative Destruction: Sustaining Innovative Dynamism. New York: Oxford University Press, forthcoming June 2019.

Idyllic Golden-Age Hunter-Gatherers

(p. A8) Before he was killed by an isolated tribe on a remote Indian Ocean island, John Allen Chau, a young American on a self-propelled mission to spread Christianity, revealed two things: that he was willing to die, and that he was scared.
. . .
He tried to give gifts. A boy shot an arrow at him. He expressed fear, fatalism, frustration and some humor.
The people Mr. Chau chose for his mission are among the most impenetrable communities in the world, known for their intense hostility to outsiders. They have killed or tried to kill many outsiders who attempted to step on their rugged island 700 miles off India’s mainland, where they are one of the last undiluted hunter and gatherer societies.
. . .
Mr. Chau was trying to accomplish the impossible. The people on North Sentinel have not accepted anyone outside their society. Anthropologists, filmmakers and government officials have tried to approach them. Just about all have been driven back by bows and arrows.
. . .
The fishermen said he had told them to give the letter to a friend, in case he did not come back.
In one passage, he asked God if North Sentinel was “Satan’s last stronghold.” In another: “What makes them become this defensive and hostile?”
“It’s weird — actually no, it’s natural: I’m scared,” Mr. Chau wrote. “There, I said it. Also frustrated and uncertain — is it worth me going a foot to meet them?”
He added, “I don’t want to die!”
Still, he went back.
On the afternoon of Nov. 16, the fishermen told police officers, Mr. Chau reassured them that he would be fine staying on the island overnight and that the fishermen could go. They motored out, leaving Mr. Chau alone for the first time.
When they passed by the island the next morning, they saw the islanders dragging his body on the beach with a rope.
No one knows what exactly happened. Police officials said the islanders most likely killed him with bows and arrows.
Mr. Chau’s body is still on the island, but several police officers said they were worried about retrieving it, lest the same thing happen to them.

For the full story, see:
Jeffrey Gettleman, Hari Kumar and Kai Schultz. “American’s Last Letter Before Being Killed by Tribe on a Remote Indian Island.” The New York Times (Saturday, Nov. 24, 2018): A8.
(Note: ellipses added.)
(Note: the online version of the story has the date Nov. 23, 2018, and has the title “A Man’s Last Letter Before Being Killed on a Forbidden Island.”)

Chinese Entrepreneurs Anxious Over Growing Government Control of Private Enterprise

(p. A15) HONG KONG — The comments were couched in careful language, but the warning about China’s direction was clear.
China grew to prosperity in part by embracing market forces, said Wu Jinglian, the 88-year-old dean of pro-market Chinese economists, at a forum last month. Then he turned to the top politician in the room, Liu He, China’s economic czar, and said “unharmonious voices” were now condemning private enterprise.
“The phenomenon,” Mr. Wu said, “is worth noting.”
Mr. Wu gave rare official voice to a growing worry among Chinese entrepreneurs, economists and even some government officials: China may be stepping back from the free-market, pro-business policies that transformed it into the world’s No. 2 economy. For 40 years, China has swung between authoritarian Communist control and a freewheeling capitalism where almost anything could happen — and some see the pendulum swinging back toward the government.
. . .
China’s leadership turned to entrepreneurs in the late 1970s, after the government had led the economy to the brink of collapse. Officials gave them special economic zones where they could open factories with fewer government rules and attract foreign investors. The experiment was an unparalleled success. When extended to the rest of the country, it created a growth machine that helped make China second only to the United States in terms of economic heft.
Today, the private sector contributes nearly two-thirds of the country’s growth and nine-tenths of new jobs, according to the All-China Federation of Industry and Commerce, an official business group. So pressures on private businesses could create serious ripples.
“The private sector is experiencing great difficulties right now,” wrote Mr. Hu, the retired minister, who as the son of a former top Communist Party leader is often a voice for reform in China, in an essay posted online last Thursday. “We should try our best not to replicate the nationalization of private enterprise in the 1950s and the state capitalism.”
. . .
Private entrepreneurs are loath to speak out for fear of attracting official condemnation. But signs of distress aren’t hard to find.
Last month, Chen Shouhong, the founder of an investment research firm, asked a group of executive M.B.A. students — many of whom already owned publicly listed companies — to choose between panic and anxiety to describe how they feel about the economy. An overwhelming majority chose panic, according to a transcript. Mr. Chen declined to be interviewed.
. . .
Xiao Han, an associate law professor in Beijing, cited one of Aesop’s fables, of a man trying and failing to stop a donkey from going over a cliff.
“Before long,” Mr. Xiao said, “we’ll probably find a body of a China donkey under the cliff.”

For the full story, see:
Li Yuan. “China Muscles In on Its Free-Market Prosperity.”The New York Times (Thursday, Oct. 4, 2018): A1 & A12.
(Note: ellipses added.)
(Note: the online version of the story has the date Oct. 3, 2018, and has the title “Private Businesses Built Modern China. Now the Government Is Pushing Back.”)

Deregulation Can Revive 3% Economic Growth

(p. A17) Growth deniers are declaring that America’s economy has lost its ability to grow at 3% above inflation. If that’s the case, maybe we should go back to where we lost 3% growth and retrace our steps until we find it. For only with 3% or higher growth does America experience measurable progress in poverty reduction, strong job creation and income growth. If 3% growth is irretrievably lost, so is the American Dream.
Did America actually experience 3% real growth to start with? Yes. In the postwar era, the U.S. averaged 3.4% annual growth from 1948 through 2008. We averaged 3% growth for half of the George W. Bush presidency (2003-06). From 2009-12, the Obama administration, the Congressional Budget Office and the Federal Reserve all thought they saw 3% growth just around the corner. If the possibility of 3% growth is gone forever, it hasn’t been gone very long.
. . .
While Obama apologists like to claim that labor-productivity and labor-supply factors preclude 3% growth, most of the growth constraints we face today are directly attributable to Mr. Obama’s policies.
. . .
A tidal wave of new rules and regulations across health care, financial services, energy and manufacturing forced companies to spend billions on new capital and labor that served government and not consumers. Banks hired compliance officers rather than loan officers. Energy companies spent billions on environmental compliance costs, and none of it produced energy more cheaply or abundantly. Health-insurance premiums skyrocketed but with no additional benefit to the vast majority of covered workers.
In a world of higher costs, productivity plummeted. Productivity measures the production of things the market values that flow from the employment of labor and capital. Try listing the Obama-era regulatory requirements that generated the employment of labor and capital in ways that actually produced something you buy.
. . .
Bad policies–not bad luck or a loss of God’s favor–have driven down labor productivity and the labor supply. We can change those policies.
. . .
With 3% growth, the American dream is achievable and virtually anybody willing to work hard can live it. Let 3% growth die and a lot of what we love most about our country will die with it.

For the full commentary, see:
Phil Gramm and Michael Solon. “Finding America’s Lost 3% Growth; If the country can’t grow like it once did, then the American Dream really is irretrievably lost.” The Wall Street Journal (Monday, Sept. 11, 2017): A17.
(Note: ellipses added.)
(Note: the online version of the commentary has the date Sept. 10, 2017.)

“The Ultimate Resource” Is the Human Mind

(p. A13) Fifty years ago this month, Mr. Ehrlich published “The Population Bomb.” In it he portended global cataclysm–unless the world could be persuaded to stop producing so many . . . well . . . people. The book sketched out possible scenarios of the hell Mr. Ehrlich believed imminent: hundreds of millions dying from starvation, England disappearing by the year 2000, India doomed, the average American’s lifespan falling to 42 by 1980, and so on.
Mr. Ehrlich’s book sold three million copies, and his crabbed worldview became an unquestioned orthodoxy for the technocratic class that seems to welcome such scares as an opportunity to boss everyone else around.
. . .
Enter Julian Lincoln Simon.
Simon was a professor of business and economics at the University of Illinois at Urbana-Champaign. In 1981, when this columnist first met him, Julian would smile and say the doom-and-gloomers had a false understanding of scarcity that led them to believe resources are fixed and limited.
. . .
In 1981 he put his findings together in a book called “The Ultimate Resource.” It took straight aim at Mr. Ehrlich. In contrast to the misanthropic tone of “The Population Bomb” (its opening sentence reads, “The battle to feed all humanity is over”), Julian was optimistic, recognizing that human beings are more than just mouths to be fed. They also come with minds.
. . .
. . . , human beings constantly find new and creative ways to take from the earth, increase the bounty for everyone and expand the number of seats at the table of plenty. Which is one reason Paul Ehrlich is himself better off today than he was when he wrote his awful book–notwithstanding all those hundreds of millions of babies born in places like China and India against his wishes.

For the full commentary, see:
William McGurn. “MAIN STREET; The Population Bomb Was a Dud; Paul Ehrlich got it wrong because he never understood human potential.” The Wall Street Journal (Tuesday, May 1, 2018): A13.
(Note: ellipses in first quoted paragraph, in original; ellipses in rest of quotes, added.)
(Note: the online version of the commentary has the date April 30, 2018.)

The Julian Simon book, mentioned above, is:
Simon, Julian L. The Ultimate Resource. Princeton, NJ: Princeton University Press, 1981.

Cuomo’s Buffalo Billion Fails to Cure Buffalo Blight

(p. A18) BUFFALO — More than six years ago, Gov. Andrew M. Cuomo announced his bold vision for New York’s second largest and perhaps longest-suffering city.
“We believe in Buffalo. Let’s put our money where our mouth is,” Mr. Cuomo said, announcing an economic development package of $1 billion. “That is a big ‘B’ — standing for Buffalo and standing for billion.”
. . .
“I think the Buffalo Billion sounds better than it probably turned out to be,” said Isaac Ehrlich, a SUNY distinguished professor of economics at the University at Buffalo.
Indeed, while construction work blossomed in early years, economists note broader employment growth in the city and region has consistently lagged behind the nation as a whole, as well as behind other Rust Belt cities, despite gains during the nation’s nine-year recovery. Perhaps more troubling, recent reports suggest that the job market essentially slowed to a crawl last year, as activity in manufacturing, retail and business services sectors flagged.
. . .
George Palumbo, an economics professor at Canisius College in Buffalo, said that the gleaming new buildings at the medical campus “take nice pictures,” but said the development was also illusory.
“You don’t have to go very far from that neighborhood to see Buffalo blight,” he said, “not Buffalo billion.”

For the full story, see:
Jesse McKinley. “Six Years Later, Cuomo’s ‘Buffalo Billion’ Project Yields Uneven Results.” The New York Times (Tuesday, July 3, 2018): A18.
(Note: ellipses added.)
(Note: the online version of the story has the date July 2, 2018, and has the title “‘Cuomo’s ‘Buffalo Billion’: Is New York Getting Its Money’s Worth?”)

Growing Percent of Firms in Developed Countries Are Zombies

ZURICH–The number of profit-constrained “zombie” firms has risen sharply since the late 1980s, according to research published Sunday by the Bank for International Settlements, a sign of the lingering effects from ultralow interest rates since the financial crisis.
Zombie firms are generally defined as companies that can’t service their debt from profits during an extended period. These types of companies, which first gained attention in Japan decades ago and have since gained prevalence in Europe, steer resources away from healthier parts of the economy, weighing on productivity and economic growth.
“The prevalence of zombie firms has ratcheted up since the late 1980s,” according to a paper published Sunday by the Switzerland-based BIS, a consortium of central banks, in its quarterly review of financial market developments.
Under a broad definition–the ratio of earnings before interest and taxes to interest paid is less than one for three-straight years in companies more than 10-years old–the percentage of zombie companies rose from 2% in the late 1980s to 12% in 2016. The data used by the authors covered 14 developed economies including the U.S., Japan, Germany and France.
And they seem to stay that way for longer. The authors found that whereas in the late 1980s zombie firms had a 60% chance of staying in that condition the following year, the probability reached 85% in 2016. Low interest rates have helped these firms stay afloat by reducing their financial pressure to reduce debt.
“Lower rates boost aggregate demand and raise employment and investment in the short run. But the higher prevalence of zombies they leave behind misallocate resources and weigh on productivity growth,” the authors wrote.

For the full story, see:

Brian Blackstone. “Rise of the Zombies: Ranks of Non-Viable Firms Up Sharply Since 1980s, Study Says; Low rates have helped these firms stay afloat by reducing their financial pressure to reduce debt.” The Wall Street Journal (Sunday, Sept. 23, 2018 URL: https://www.wsj.com/articles/rise-of-the-zombies-ranks-of-non-viable-firms-up-sharply-since-1980s-study-says-1537718401?mod=searchresults&page=1&pos=2
(Note: at least as of Oct. 1, 2018, this article appears only to have been published online.)

The study published in BIS Quarterly Review, and mentioned above, is:
Banerjee, Ryan Niladri, and Boris Hofmann. “The Rise of Zombie Firms: Causes and Consequences.” BIS Quarterly Review (Sept. 2018): 67-78.

Low Interest Rates Increased Zombie Firms After Economic Crisis of 2008

ZombieFirmsIncreaseGraph2018-10-03.png

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

(p. A1) Italian clothing maker and retailer Stefanel SpA became famous for its knitted coats and cardigans.

Many economists, investors and bankers know Stefanel as something starkly different: a zombie company. It has posted an annual loss for nine of the last 10 years and restructured its bank debt at least six times, including several grace periods when Stefanel only had to pay interest on what it owed.
After booming during Italy’s post-World War II expansion, Stefanel and its lumbering factories were overwhelmed by Spanish fast-fashion giant Zara and then battered by the economic slowdown that hit Italy in 2008.
Stefanel is still alive but staggering. So are hundreds of other chronically unprofitable, highly indebted companies being kept afloat with new infusions from lenders and shareholders, especially in Southern Europe.
Economists and central bankers say zombies undercut prices charged by healthier competitors, create artificial barriers to entry and prevent the flushing out of (p. A10) weak companies and bad loans that typically happens after downturns.
Now that the European economy is in growth mode, those zombies and their related debt problems could become a drag on the entire continent.
“The zombification of the corporate sector and banks [is] a risk for future living standards,” Klaas Knot, a European Central Bank governor and the head of the Dutch central bank, said in an interview.
. . .
In some ways, zombie firms are an unintended side effect of years of easy money from the ECB, which rolled out aggressive stimulus policies, including negative interest rates, to support lending and growth. Those policies have been sharply criticized in some richer eurozone countries for making it easier for banks to keep struggling corporate borrowers alive.

For the full story, see:
Eric Sylvers and Tom Fairless. “Zombie Companies Haunt Europe’s Economic Recovery.” The Wall Street Journal (Thursday, November 16, 2017): A1 & A10.
(Note: ellipsis added.)
(Note: the online version of the article has the date Nov. 15, 2017, and the title “A Specter Is Haunting Europe’s Recovery: Zombie Companies.”)

“Much Less” Poverty in U.S. Now Than 30 Years Ago

(p. A15) Instead of focusing on reported incomes, our work measures poverty based on consumption: what food, housing, transportation and other goods and services people are able to purchase. This approach, which captures the effect of noncash programs and accounts for the known bias in the CPI-U, demonstrates clearly that there is much less material deprivation than there was decades ago.
Other indicators support this finding. According to the American Housing Survey, the poorest 20% of Americans live as the middle class did a generation ago as measured by the square footage of their homes, the number of rooms per person, and the presence of air conditioning, dishwashers and other amenities. In terms of housing problems like peeling paint, leaks and plumbing issues, today’s poor haven’t quite matched the living standards of the 1980s middle class, but they are getting close.

For the full commentary, see:
Bruce D. Meyer and James X. Sullivan. “Hardly Anyone Wants to Admit America Is Beating Poverty; The White House tells the truth, but partisans on both sides are wedded to the idea of failure.” The Wall Street Journal (Tuesday, Aug. 7, 2018): A15.
(Note: the online version of the commentary has the date Aug. 6, 2018.)

A Dinner to Remember

(p. 6) The economist Dambisa Moyo, author most recently of “Edge of Chaos,” loves Agatha Christie’s “detestable, bombastic, tiresome, egocentric little creep” Hercule Poirot.
. . .
You’re organizing a literary dinner party. Which three writers, dead or alive, do you invite?
1) Vikram Seth, the economist turned novelist. His “A Suitable Boy” remains one of my all-time favorite books. 2) Ayn Rand, the philosopher and novelist. I am drawn to her irreverence — a woman ahead of her time. 3) Maya Angelou, the poet who penned “Still I Rise” and “Phenomenal Woman” … enough said.

For the full interview, see:

Dambisa Moyo. “‘BY THE BOOK; Dambisa Moyo.” The New York Times Book Review (Sunday, April 29, 2018): 6.
(Note: ellipsis between sentences added; ellipsis internal to sentence, and bold question, in original.)
(Note: the online version of the interview has the date April 26, 2018. The first sentence and the bold question are by the unnamed writer-interviewer. The answer after the bold question is by Moyo.)

Moyo’s book, mentioned above, is:
Moyo, Dambisa. Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth, and How to Fix It. New York: Basic Books, 2018.