Economics – Page 101 – artdiamondblog.com

Wealth from Innovation Is Nobler than Wealth from Litigation

Source of book image: http://ww4.hdnux.com/photos/15/60/06/3604871/3/628×471.jpg

(p. C7) In business, Green routinely sued her competitors. . . .
. . .
It was precisely Green’s vision of life as a zero-sum game, a match between enemies, that proved her flaw. She appreciated the idea that dollars compound, but she never seemed to grasp that the compounding of ideas, innovation, is just as important, that in certain, non-litigious, environments ideas “fructify,” to use a period verb. Litigation like Green’s prevented the kind of innovation in which she might have wanted to invest. Wealth is created when Apple beats Samsung, but more wealth is created when Apple comes up with a new phone.

For the full review, see:
AMITY SHLAES. “Quarrelsome Queen of the Gilded Age.” The Wall Street Journal (Sat., September 29, 2012): C7.
(Note: ellipses added.)
(Note: the online version of the review has the date September 28, 2012.)

The book under review, is:
Wallach, Janet. The Richest Woman in America: Hetty Green in the Gilded Age. New York: Nan A. Talese, 2012.

“Lowest-Paid Burger Flipper” Is “Better Off than King Henry”

(p. 76) After going from room to room, skipping none except the garage (that would be a project in itself), we arrived at a total of 6,000 varieties of things in our house. Since we have multiple examples of some varieties, such as books, CDs, paper plates, spoons, socks, on so on, I estimate the total number of objects in our home, including the garage, to be close to 10,000.
Without trying very hard, our typical modern house holds a king’s ransom. But in fact, we are wealthier than King Henry. In fact, the lowest-paid burger flipper working at McDonald’s is in many respects (p. 77) better off than King Henry or any of the richest people living not too long ago. Although the burger flipper barely makes enough to pay the rent, he or she can afford many things that King Henry could not. King Henry’s wealth–the entire treasure of England–could not have purchased an indoor flush toilet or air-conditioning or secured a comfortable ride for 500 kilometers. Any taxicab driver can afford these today. Only 100 years ago, John Rockefeller’s vast fortune as the world’s richest man could not have gotten him the cell phone that any untouchable street sweeper in Bombay now uses. In the first half of the 19th century Nathan Rothschild was the richest man in the world. His millions were not enough to buy an antibiotic. Rothschild died of an infected abscess that could have been cured with a three-dollar tube of neomycin today. Although King Henry had some fine clothes and a lot of servants, you could not pay people today to live as he did, without plumbing, in dark, drafty rooms, isolated from the world by impassable roads and few communication connections. A poor university student living in a dingy dorm room in Jakarta lives better in most ways than King Henry.

Source:
Kelly, Kevin. What Technology Wants. New York: Viking Adult, 2010.

21st Century Person Would Be Sick in Dickens’ 1850 London

“Anderson found Dickens World to be “surprisingly grisly” for a park that markets itself to children; he noted several severed heads and a gruesome performance of “Oliver Twist” in the courtyard. Here, a mannequin of Nancy from “Oliver Twist.”” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 48) . . . even if it were possible to create a lavish simulacrum of 1850s London — with its typhus and cholera and clouds of toxic corpse gas, its sewage pouring into the Thames, its (p. 49) average life span of 27 years — why would anyone want to visit? (“If a late-20th-century person were suddenly to find himself in a tavern or house of the period,” Peter Ackroyd, a Dickens biographer, has written, “he would be literally sick — sick with the smells, sick with the food, sick with the atmosphere around him.”)

For the full story, see:
SAM ANDERSON. “VOYAGES; The Pippiest Place on Earth.” The New York Times Magazine (Sun., February 7, 2012): 48-53.
(Note: ellipsis added.)
(Note: the online version of the story has the date February 7, 2012 (sic), and has the title “VOYAGES; The World of Charles Dickens, Complete With Pizza Hut.”)

Chinese Couples Divorce to Avoid Government Regulations and Taxes

“A police officer attempted to stop residents from rushing into a real estate trading center in Shanghai after new restrictions were announced.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A4) SHANGHAI — When the Chinese government announced new curbs on property prices this month, homeowners bombarded social networking sites with complaints. They formed long lines at property bureaus to register to sell their homes before the restrictions went into effect.

And some couples went even further: they filed for divorce.
Divorce filings shot up here and in other big cities across China this past week after rumors spread that one way to avoid the new 20 percent tax on profits from housing sales was to separate from a spouse, at least on paper.
The surge in divorce filings is the latest indication of how volatile an issue real estate has become in China in the past decade and how resistant people are to additional taxes.
. . .
On Friday, at a marriage registration center in the Pudong district, a 33-year-old woman named Frances Tao arrived with her husband. She acknowledged that they were filing for divorce, not to avoid the 20 percent capital gains tax on second homes, but to get around another restriction, which requires home buyers to put down a much higher deposit on a second home than on a primary residence.
Ms. Tao said that by divorcing, one of them would be able to purchase a first home and put down less money and get a better interest rate.
“We don’t have other choices,” Ms. Tao said. “But the government and developers continue to make a lot of money.”

For the full story, see:
DAVID BARBOZA. “In China, Checklist for a Home Seller: First, Get a Divorce.” The New York Times (Sat., March 9, 2012): A4.
(Note: ellipsis added.)
(Note: the online version of the story has the date March 8, 2012.)

Knowledge Economy Migrating to Intangible Goods and Services

(p. 67) Our present economic migration from a material-based industry to a knowledge economy of intangible goods (such as software, design, and media products) is just the latest in a steady move toward the immaterial. (Not that material processing has let up, just that intangible processing is now more economically valuable.) Richard Fisher, president of the Federal Reserve Bank of Dallas, says, “Data from nearly all parts of the world show us that consumers tend to spend relatively less on goods and more on services as their incomes rise. . . . Once people have met their basic needs, they tend to want medical care, transportation and communication, information, recreation, entertainment, financial and legal advice, and the like.” The disembodiment of value (more value, less mass) is a steady trend in the technium. In six years the average weight per dollar of U.S. exports (the most valuable things the U.S. produces) (p. 68) dropped by half. Today, 40 percent of U.S. exports are services (intangibles) rather than manufactured goods (atoms). We are steadily substituting intangible design, flexibility, innovation, and smartness for rigid, heavy atoms. In a very real sense our entry into a service- and idea-based economy is a continuation of a trend that began at the big bang.

Source:
Kelly, Kevin. What Technology Wants. New York: Viking Adult, 2010.
(Note: ellipsis in original; a graph is omitted that appears in the middle of the paragraph quoted above.)

In Latvia Deep Budget Cuts Lead to High Economic Growth

“A worker cleaned equipment at a new dairy factory outside Riga. The I.M.F. has hailed Latvia for its deep budget cuts.” Source of caption and photo: online version of the NYT article quoted and cited below.

It is interesting that the New York Times photographer (see above) chose to display the Latvian economic success story in bleak shades of grey and darkness.

(p. A1) RIGA, Latvia — When a credit-fueled economic boom turned to bust in this tiny Baltic nation in 2008, Didzis Krumins, who ran a small architectural company, fired his staff one by one and then shut down the business. He watched in dismay as Latvia’s misery deepened under a harsh austerity drive that scythed wages, jobs and state financing for schools and hospitals.

But instead of taking to the streets to protest the cuts, Mr. Krumins, whose newborn child, in the meantime, needed major surgery, bought a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia’s economy began to pull out of its nose-dive, he returned to architecture and today employs 15 people — five more than he had before. “We have a different mentality here,” he said.
. . .
Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.

For the full story, see:
ANDREW HIGGINS. “Used to Hardship, Latvia Accepts Austerity, and Its Pain Eases.” The New York Times (Weds., January 2, 2013): A1 & A6.
(Note: ellipsis added.)
(Note: the online version of the story has the date January 1, 2013.)

David Kay Johnston Defends Entrepreneurial Capitalism Against Crony Capitalism

Source of book image: http://media.npr.org/assets/bakertaylor/covers/manually-added/fineprint_custom-c26eb6a3f6c4d9bc09220769911f3cbeaa900b7f-s6-c10.jpg

I saw an informative C-SPAN interview with David Cay Johnston a while back. I had known from Johnston’s previous books and reporting, that he was devoted to exposing the outrages of crony capitalism. What the interview revealed to me was that Johnston was not opposed to capitalism in general, and in fact viewed himself as friendly to entrepreneurial capitalism.

I believe that big companies are not bad when they got and stay big by honestly earning big profits from willing and delighted consumers. But big companies are bad when, as often happens, they use their size to get the government to suppress start-up competitors or to take money from taxpayers to subsidize their activities.
I have not yet read Johnston’s latest book on the big and bad, but I expect it to present sad, but useful, examples.

Book discussed:
Johnston, David Cay. The Fine Print: How Big Companies Use “Plain English” to Rob You Blind. New York: Portfolio, 2012.

Reinhart Rogoff Result Robust: High Debt Lowers Growth Rate from 3.5 to 2.3 Percent

(p. A29) CAMBRIDGE, Mass. In May 2010, we published an academic paper, “Growth in a Time of Debt.” Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with notably lower rates of growth.
. . .
Last week, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. But they also accused us of “serious errors” stemming from “selective exclusion” of relevant data and “unconventional weighting” of statistics — charges that we vehemently dispute.
. . .
Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon.
. . .
There were just 26 cases where the ratio of debt to G.D.P. exceeded 90 percent for five years or more; the average high-debt spell was 23 years. In 23 of the 26 cases, average growth was slower during the high-debt period than in periods of lower debt levels. Indeed, economies grew at an average annual rate of roughly 3.5 percent, when the ratio was under 90 percent, but at only a 2.3 percent rate, on average, at higher relative debt levels.
. . .
The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.
In “This Time Is Different,” our 2009 history of financial crises over eight centuries, we found that when sovereign debt reached unsustainable levels, so did the cost of borrowing, if it was even possible at all. The current situation confronting Italy and Greece, whose debts date from the early 1990s, long before the 2007-8 global financial crisis, support this view.

For the full commentary, see:
CARMEN M. REINHART and KENNETH S. ROGOFF. “Debt, Growth and the Austerity Debate.” The New York Times (Fri., April 26, 2013): A29.
(Note: ellipses added.)
(Note: the online version of the commentary has the date April 25, 2013.)

The full reference to the authors’ book is:
Reinhart, Carmen M., and Kenneth Rogoff. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press, 2009.

The Costs of Green Jobs Policies

Source of book image: http://javelindc.com/home/wp-content/uploads/2012/11/regulating_to_disaster.jpg

I caught part of a C-SPAN presentation on the Regulating to Disaster book. It sounded plausible and intriguing—consistent with other evidence I have seen that “green” jobs have been over-hyped and under-delivered.
Perhaps more important, there are the high opportunity costs of the tax dollars devoted to the “green” jobs, in terms of the non-green jobs that would have been created by entrepreneurs if less of their income had been taxed away.
I hope to look at the book in the near future.

Book discussed:
Furchtgott-Roth, Diana. Regulating to Disaster: How Green Jobs Policies Are Damaging America’s Economy. New York: Encounter Books, 2012.

Analytical Solutions Require Unrealistic Assumptions that Make Models Useless for Policy

Source of book image: http://www.anderson.ucla.edu/faculty/edward.leamer/images/COVER%209120_jkt_Rev1.jpg

(p. 190) When I was a younger man, I and all of my cohort were apprehensive if we saw Ed Leamer in the audience when we were presenting a paper. His comments were blunt, incisive, and often negative. But what truly terrified us was that he was almost always right. . . .

Leamer has produced a highly original little book, with big insights and lessons for us all. He explores the tension between economics that is mathematically sophisticated and complex but often vacuous, versus economics that may be vague but which is useful and carries a message. It is frankly a remarkable work, full of insights and persuasive arguments that need to be read, debated, and taken seriously.
. . .
(p. 191) But this is no rant of an old guy. Leamer gets very specific about his notions of usefulness versus rigor. A good drum to bang on is Samuelson, an important “mathematizer.” I would strongly encourage all young trade economists and perhaps all graduate students who have been subjected to a traditional international trade course at any level, to read the section on factor-price equalization. This is beautifully done and even exciting and funny at times. As told by Leamer, the young Samuelson excoriates Ohlin for largely dismissing the possibility of factor-price equalization and then presents his (Samuelson’s) “proof” of factor-price equalization. The latter, of course, is a theorem that is mathematically correct given the assumptions, but Ohlin is talking about its usefulness in understanding the world and constructing policy. The factor-price-equalization theorem is indeed a prime example of something that is valid but not useful.
. . .
Yet at the same time, I have thought long and hard about exactly what message should be given to graduate students and assistant professors without much success. The journal publishing business puts a huge premium on rigor over usefulness and few referees or editors are inclined to take the chance inherent in accepting papers that are a bit loose in their analytical or econometric structures, no matter how exciting they might be. If you accept that, then the profession as a whole has to rethink our view of what is an important scientific contribution: I cannot simply tell graduate students to think more broadly and worry less about elegance. Some will of course deny that there is any tension, but I side with Leamer. Over and over again, I hear, read, and/or referee papers (p. 192) where, in order to get an analytical solution to a model, the author has to assume away almost every interesting feature of the problem to the point that the remaining model is uninteresting and uninformative. But that at least qualifies the paper for possible publication in Econometrica, RESTud, or JET.

For the full review, see:
Markusen, James R. “Book Review of Ed Leamer’s the Craft of Economics.” Journal of Economic Literature 51, no. 1 (2013): 190-92.
(Note: ellipses added; italics in original.)

The book under review is:
Leamer, Edward E. The Craft of Economics, Ohlin Lectures. Cambridge, MA: The MIT Press, 2012.