Those Godless Canadians

A new study from the NBER looks at the The Effect of Education on Religion: Evidence from Compulsory Schooling Laws. The abstract reads,

For over a century, social scientists have debated how educational attainment impacts religious belief. In this paper, I use Canadian compulsory schooling laws to identify the relationship between completed schooling and later religiosity. I find that higher levels of education lead to lower levels of religious participation later in life. An additional year of education leads to a 4-percentage-point decline in the likelihood that an individual identifies with any religious tradition; the estimates suggest that increases in schooling can explain most of the large rise in non-affiliation in Canada in recent decades.

So are education and religion complements or substitutes? They could be substitutes in that both science and religion try to explain the world around us and as the population becomes more educated the understanding of the scientific explanation grows in the population and this drives out the religious explanation. But they could be complements since many religions place strong emphasis on education and learning. Just think of how many religious based schools and universities there are.

The evidence in the paper suggests that the two are substitutes .... at least for Canadians.

What can the government do about growth?

A new NBER working paper is out on Public Policy, State Business Climates, and Economic Growth. The paper, by Jed Kolko, David Neumark, Marisol Cuellar Mejia, has an abstract which reads,

State business climate indexes are a popular means of summarizing the "bundles" of state policies that might affect state economic growth. But the rankings of states' business climates vary wildly, raising questions about what these business climate indexes measure, and hence about which policies they capture are more important determinants of state economic growth. Business climate rankings tend to focus on policies related either to productivity, or to taxes and other costs of doing business. States that rank poorly along one of these dimensions often rank quite highly on the other. Business climate indexes that focus on productivity-related variables have essentially no predictive power for economic growth. In contrast, business climate indexes focusing on taxes and costs predict growth of employment, wages, and Gross State Product. Looking at sub-indexes that disaggregate the policies captured by the taxes-and-cost related indexes, two types of policies are associated with faster economic growth: less spending on welfare and transfer payments; and a more uniform and simpler corporate tax structure. But factors beyond the control of policy, like a state's industry mix, population density, and weather, have a stronger relationship with economic growth than even the tax-and-cost-focused business climate indexes. (emphasis added)

So state governments in the U.S. can do some things to help growth but the things that are outside the government's control are the big factors in growth. There could be a lesson there.

But may be the strangest finding is that productivity-related variables have essentially no predictive power for economic growth. After all isn't the whole argument made here in New Zealand that we need increases in productivity to increase growth?

Why would you want to set up a business in Washington?

Washington Business Journal reports,

Walmart foes on Thursday released a massive list of demands they expect the world's largest retailer to accept, in a legally binding contract, before locating in the District. The stipulations run the gamut from a living wage ($12.50 an hour) to transit benefits ($50 per employee per month) to parking minimums (up to 2.5 free or low-cost spaces per 1,000 square feet of building space).

[...]

Among the demands, the group wants Walmart to:

* Pay every employee the D.C. living wage, currently $12.50 per hour.
* Provide $50 a month in public transportation subsidy to every employee.
* Employ at least 65 percent of its D.C. employees on a full-time basis.
* Not ask job applicants about previous criminal convictions.
* Use project labor agreements to construct its stores.
* Fund all infrastructure improvements made necessary by its stores.
* Provide free shuttle transportation to and from the nearest Metro station to each D.C. store every 10 minutes.
* Commit to traffic alleviation studies.
* Provide up to 2.5 free or low-priced parking spaces per 1,000 square feet of building space.
* Provide secure, accessible bicycle parking, car sharing and bike sharing for workers and shoppers.
* Not sell firearms or ammunition.
* Employ no less than two off-duty D.C. police officers on its premises at all times.
* Abide by a "code of conduct with regard to its employees' freedom to choose a voice on the job without interference."
* Fund workforce training programs for D.C. residents, and use training programs as its primary avenue for hiring D.C. residents.
* Hire at least 40 percent of its employees at each store from the ward in which the store is located.
* Make "ongoing contributions to a fund managed by a council of community stakeholders" that will provide incentives and support to local small businesses.
* Make ongoing payments for community funds controlled by "community advisory councils" for education and faith-based programs.

Apart from anything else who demands traffic alleviation and free or low-priced parking? There does seem to be a contradiction here. You end up feeling sorry for Walmart.

Great leap forward?

There is an interview with Alexander J. Field, an economist at Santa Clara University, and the author of “A Great Leap Forward,” which argues that the terrible years of the Great Depression actually set the stage for the post-World War II boom, in the New York Times.

Q. You make the novel claim that the Great Depression years were good — or at least important — for the American economy. How so?

Mr. Field: In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input. Almost all of the increase in output per hour is attributable to technological and organizational advance. As I said in the title of my 2003 American Economic Review article, the 1930s were indeed the most technologically progressive decade of the century.

The conventional wisdom is that the war somehow magically transformed the doom and gloom of the Depression into the U.S. standing like a colossus astride the world in 1948. My counterargument is that potential output expanded by leaps and bounds between 1929 and 1941, and it was this expansion in capacity that both helped us win the war and established the foundations for postwar prosperity.

Q. What were the key innovations of the 1930s?

Mr. Field: What’s notable about the Depression years is the very broad range of advance. One can’t point to a single or even a few innovations that somehow defined the era. Nonetheless, notable new products included the DC-3, a plane introduced in 1936 that revolutionized commercial aviation; television, developed with venture capital funding during the 1930s and rolled out at the 1939-40 World’s Fair; and nylon stockings, introduced in May 1940, with 63 million pair sold the first year.

A number of products available in the 1920s moved from low-penetration boutique goods to mass-produced commodities. Case in point: mechanical refrigerators. Less than 3 percent of U.S. households had them in 1929, and they were expensive and unreliable, requiring extensive after-market service. In 1941, 44 percent of households had mechanical refrigeration, including 56 percent of urban households.

Automobiles saw major refinements in the 1930s. Heaters, radios, low-pressure balloon tires, and four-wheel hydraulic brakes all became standard. The decade saw the development of options we often consider standard today — power steering, automatic transmission, front-wheel drive, and V-8 engines. Aside from product innovation, significant process innovation occurred across the industrial sector.

And in contrast to the 1920s, advance was not limited almost entirely to manufacturing. Highway design in the 1930s excited engineers as much as did the information “superhighway” in the 1990s. The U.S. route system, built almost entirely during the Depression, represented a huge improvement over what had preceded it, with big benefits for transportation and distribution.

Organizational innovation also played a role. In railroads, treaties now allowed unlimited freight interchange. Rolling stock — railroad cars — from one road could move onto tracks owned by another, and while there, discharge and pick up cargo, and even be repaired in a “foreign” yard. The agreements and uniform tariff schedules that permitted this were critical in enabling U.S. railroads to carry more freight and almost as many passengers in 1941 as they did in 1929, using many fewer employees, cars, and locomotives.

Somehow I can't see everybody agreeing with Field, so it will be interesting to follow the debate on this book.

The economics of enough

In this audio from VoxEU.org Diane Coyle talks to Viv Davies about her new book 'The Economics of Enough: How to Run the Economy as if the Future Matters'. The book addresses the need to create a sustainable economy - how to consider tomorrow's needs as well as today's. It covers a broad range of issues, from the banking crisis to climate change, and sets out some of the initial, practical steps that will be needed to build a future economy that is based on a true sense of value.

EconTalk this week

Ariel Rubinstein of Tel Aviv University and New York University talks with EconTalk host Russ Roberts about the state of game theory and behavioral economics, two of the most influential areas of economics in recent years. Drawing on his Afterword for the 60th anniversary edition of Von Neumann and Morgenstern's Theory of Games and Economic Behavior, Rubinstein argues that game theory's successes have been quite limited. Rubinstein, himself a game theorist, argues that game theory is unable to yield testable predictions or solutions to public policy problems. He argues that game theorists have a natural incentive to exaggerate its usefulness. In the area of behavioral economics, Rubinstein argues that the experimental results (which often draw on game theory) are too often done in ways that are not rigorous. The conversation concludes with a plea for honesty about what economics can and cannot do.

Markets in everything

One effect of the growth in ICTs is the development of markets which otherwise would be difficult if not impossible to organise. This is from Bloomberg:

Lots of bandwidth and $5,000 can get anyone an hour with Nobel Prize-winning economist Gary Becker.

A couple more computer clicks can also remake a tennis serve, fix a golf swing and provide tips on how to out-bluff the poker world’s top pros.

Becker, a University of Chicago professor who won the Nobel Prize in Economics in 1992, will be selling his time on ExpertInsight.com, a website offering one-to-one video chats with leaders, which opened yesterday. He’ll join people such as economics professors Jeffrey Miron of Harvard University and Laurence Kotlikoff of Boston University, “Freakonomics” co- authors Steven Levitt and Stephen Dubner, poker celebrities Patrik Antonius and Tom Dwan, and tennis coach Jeff Salzenstein.

The U.S. - Europe productivity gap: lessons for New Zealand?

It has long been accepted that the U.S. has had a productivity growth boom since the mid 1990s. Average annual labour productivity growth (measured as GDP per hour of work) in the U.S. accelerated from 1.2 percent in the 1973-1995 period to 2.3 percent from 1995 to 2006. Conversely, the 15 European Union countries that constituted the union up to 2004 experienced a productivity growth slowdown between these two time periods. For these 15 countries as a group, labour productivity growth declined from an annual rate of 2.4 percent during the period 1973-1995 to 1.5 percent during the period 1995-2006. This raises the obvious question of, Why the difference in productivity performance?

A common answer to this question is that the European productivity slowdown is attributable to the slower emergence of the knowledge economy in Europe compared to the U.S. But this just moves the question back one step, Why has the U.S. invested more in the knowledge economy, mainly in the form of information and communication technologies (ICTs), than Europe?

van Ark, O'Mahony, and Timmer (2008) argue that the answer to this later question involves issues related to the functioning of European labour markets and the high level of product market regulation in Europe. The relevance to New Zealand should be obvious.

van Ark, O'Mahony, and Timmer (2008: 31-2) state,

When put into a comparative perspective, the productivity slowdown in Europe is all the more disappointing as U.S. productivity growth accelerated since the mid 1990s. The causes of the strong U.S. productivity resurgence have been extensively discussed [...]. In the mid 1990s, there was a burst of higher productivity in industries producing information and communications technology equipment, and a capital-deepening effect from investing in information and communications technology assets across the economy. In turn, these changes were driven by the rapid pace of innovation in information and communications technologies, fuelled by the precipitous and continuing fall in semiconductor prices. With some delay, arguably due to the necessary changes in production processes and organizational practices, there was also a multifactor productivity surge in industries using these new information and communications technologies-in particular in market services industries [...]

In Europe, the advent of the knowledge economy has been much slower since the mid 1990s.

So what is the relationship between the knowledge economy, ICT investment, and the labour market and market competition/regulation?

van Ark, O'Mahony, and Timmer (2008: 31-2) continue,

[...] a more flexible approach towards labor, product, and capital markets in Europe would allow resources to flow to their most productive uses. Crafts (2006) discusses the increasing evidence that restrictive product market regulations, in particular those limiting new entry, hinder technology transfer and have a negative impact on productivity [...]

Crafts (2006) argues that consistent with endogenous growth models, there appears to be quite strong evidence that regulations which inhibit entry into product markets have an adverse effect on total factor productivity (TFP) growth in OECD countries. He goes on to explain that regulation is likely to have its most important effects through changing the incentives to invest and to innovate. If regulation reduces the net returns to investment and innovation, then endogenous growth theory predicts that it will reduce TFP growth. An additional important reason for adverse effects on TFP growth is that regulation increases barriers to entry.

Bartelsman, Gautier, and de Wind (2010) show a relationship between labour markets, ICTs and productivity.

In their paper they argue that the extent to which a country can benefit from the advantages of risky technologies (in the main ICTs) depends on the institutional arrangements on firing and bankruptcy. The more employment protection there is, the more costly it is to exercise the job destruction or firm exit option. This mechanism can explain why the US was better able to explore the benefits of the new information technology starting in the mid 1990s. In the paper van Ark, O'Mahony, and Timmer argue that a change in the nature of technological opportunities in the mid 1990s interacted with cross region differences in employment protection to become a prominent cause of the observed divergence in productivity between the U.S. and the E.U. The emergence of accelerating improvements in computing power coupled with steepening adoption rates of communications technology resulted in a large variance in realised productivity and profits for firms choosing to use these technologies. The increase in variance is good for aggregate productivity and appealing to individual firms because good news is unbounded while bad news is bounded by the option to exit or fire workers. When in the mid-nineties these technological opportunities arose, the expected net benefits of exploring this technology were higher in counties with low employment protection legislation, e.g. the U.S, because the option to shut down was less costly. van Ark, O'Mahony, and Timmer give robust evidence that in countries with high employment protection legislation, high-risk innovative sectors (which are associated with intensive ICT use) are relatively small. The negative relationship also holds between other exit frictions (i.e. low cost recovery of capital for exiting firms) and the relative size of risky sectors. van Ark, O'Mahony, and Timmer explain the empirical findings using a matching model with endogenous technology choice, i.e. firms can choose between a risky (ICT related) and a safe technology. In this calibrated model, high firing or exit costs reduce the number of jobs in the risky sector, lower productivity in the risky sector, and lower aggregate productivity.

So the lessons for New Zealand? If we really do want to increase our productivity and catch-up with Australia then we should look at our use of ICTs and the relationship between that and competition in our markets, the way and how much we regulate markets, our bankruptcy laws and the amount of labour protection legislation we have in place.

• Bartelsman, Eric J, Pieter A Gautier, and Joris de Wind (2010), "Employment Protection, Technology Choice, and Worker Allocation", CEPR Discussion Paper 7806.
• Crafts, Nicholas. 2006. “Regulation and Productivity Performance.” Oxford Review of Economic Policy, 22(2): 186–202.
• Van Ark, B, M O'Mahony, and M Timmer (2008), “The productivity gap between Europe and the US: trends and causes”, Journal of Economic Perspectives, 22(1):25-44

In-house or market transaction?

For a multinational corporation one question relevant to the decision as to how to carry out production in a non-home market is whether to keep production inside the firm, by operating a wholly owned foreign subsidiary, or to outsource in some way, e.g. replying on a foreign supplier for components or to licence their know-how or brand image to a foreign party. Obviously there are advantages and disadvantages to both methods of production which in any given case have to be traded off. But will a company ever do both? Will it ever use both in-house production and at the same time use independent firms?

The answer is yes. An example is the Italian multinational Pirelli who manufactures both tyres and cables but its tyres are produced in wholly owned foreign plants and its cables are made by a foreign licensee. Why does one company use two different methods of production? After all if in-house (independent firms) is good for cables, why not tyres?

The answer seems to be to do with the dissipation of firm-specific assets, knowledge in this case. Pirelli developed a new method of manufacturing tyres, the Modular Integrated Robotised System (MIRS), which is a completely computer managed production process which requires no labour input. Foreign factories utilising this technology - in the UK, Germany and the US – are wholly owned subsidiaries. The reason for this is to protect proprietary knowledge in the MIRS technology. That is, Pirelli want to make it as difficult as possible for other firms to learn about their technology. In contrast when it comes to the production of their Afumex cables, which guarantee higher safety standard in case of fire than traditional cables, the technology is licensed to independent firms. In this case the basic technology is widely known and the innovative components of Afumex are protected by patents.

So when you have knowledge that you don't want other people to know you keep production in-house but where knowledge is already well known or can be protected in other ways, e.g. patent or copyright, then independent firms can be used.

Carpe Diem on earth day

Mark Perry at the Carpe Diem blog says,

"Of the estimated 1 billion people who will observe Earth Day worldwide this year, few will know about the progress that has been made. Fewer still will know how it was made. The media, uninterested in looking at the real story, will simply credit the environmental movement for the improvements.

Buried beneath all the badgering and fear-mongering about lavish Western lifestyles is a reality that the stuck-on-green left won't talk about and the average American isn't aware of: The world, especially in developed nations, is a cleaner — and greener — place than it was when the environmental movement began [...].

Topping the agenda of today's environmentalist groups is the pulling down of market economies, the raising up of central planning for egalitarian goals, forced lifestyle changes and the vilification — in hopes of the elimination — of signs of wealth.

None of these advance the planet's environmental health. But capitalism has. Through wealth generated by the free market, we have enough resources to move beyond the subsistence economies that damage the environment, enough disposable income to fund clean-up programs, enough wealth to scrub and polish industry.

Only in advanced economies can the technology needed to recycle hazardous waste or to replace dirty coal-fired power plants with cleaner gas or nuclear plants be developed. That technology cannot be produced in centrally planned economies where the profit motive is squelched and lives are marshalled by the state.

There's nothing wrong with setting aside a day to honor the Earth. In fairness, though, it should be complemented by Capitalism Day. It's important that the world be reminded of what has driven the environmental improvements since Earth Day began in 1970."

Environmental goods are normal goods: as we become wealthier we demand more of them. So if you want to improve the environment make people richer. This capitalism seems better at than any other economic system.

Cheese producer blames milk price for factory closure

This claim is being reported by RadioNZ

An award-winning cheese producer has closed one of its factories, blaming the rising price of milk and the system for charging for it.

Kaimai Cheese Company has closed its Te Mata factory and cafe in Havelock North.

Executive director Wyatt Creech says the state of the market makes it impossible for a company to be in anything except a very small artisan cheese business.

Mr Creech says the Fonterra dairy co-operative is able to back-charge if milk goes up during a season, which means the company has to sell a product without knowing what the final price of milk will be.

The first thing I find myself asking is why agree to a contract with a "back-charge" condition in it? And how long has this type of contract been used? If it is common type of contract which has been used for sometime then I can't see how the contract with Fonterra is the issue here. It seems more likely that the real issue is that world milk prices are high and cheese companies have to pay the market price for their inputs. Second if supply from Fonterra is the problem why not get milk from another source? Some entrepreneur could take advantage of the situation and offer an alternative supply of milk to firms like these cheese manufacturers. Third if companies are worried about supply then why not vertically integrate? Control over input supply is a common reason given for vertical integration.

A question

but not from me, its from Steven Landsburg and is about taxing the rich. Or more to the point not being able to tax the rich.

Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.

Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.

Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.

Ah, says Ms. Stevens — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of Ms. Steven’s confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.

So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else?

So, who pays the tax?

Hint: it isn't Mr Kendrick.
Hint 2: Money isn't wealth

Interesting blog bits

1. Matt Nolan on Black markets, crime, and costs

   Counting spending on illegal drugs as a “cost” to the economy is nonsensical – and that is what they have done hear. If the Australian government is annoyed it isn’t getting the tax revenue from it (which seems to be their focus), the solution is to legalise drugs and tax them.

2. Roger Kerr on Government Size And Economic Growth

   The Treasury’s focus is almost exclusively on deadweight costs and public sector productivity. The omission of any material discussion of rent-seeking, and public choice issues in general, is extremely important. The Treasury’s general framework presumes that governments spend money in order to overcome ‘market failures’ and fails to consider the more plausible proposition that they spend money in order to get re-elected or to favour their most important constituencies. There is no assessment of the level of spending that could be justified on genuine public interest grounds. Basically, incentives in the government sector are not a problem, so the paper implicitly assumes.

3. Lynne Kiesling on Next Restaurant: pricing and ticketing innovation redux

   Why are such savvy entrepreneurs as Achatz and Kokonas letting secondary sellers capture so much of the surplus that they have created?

4. Mark J Perry on Debunking the Mercantilist Trade Doctrine

   The general public, politicians, the media, and even some economists have bought into a false mercantilist doctrine that: a) exports are good for the economy and b) imports are bad for the economy, which therefore implies that: c) trade deficits are bad for the economy and d) trade surpluses are good for the economy.

5. Roger Kerr on Wages in China's Manufacturing Sector

   A positive relationship between productivity and wages. Or the days of cheap labour in China are coming to an end.

6. Peter Boettke gives Advice to Undergraduates
7. Tim Harford says Don’t blame the (mostly) efficient markets hypothesis

   The EMH has several forms. The weakest says that not only is past performance no guarantee of future performance, but nothing about the way a share’s price has bounced around in the past tells you anything about how it will move in the future. The strongest says that the market price is the correct price: that all privately and publicly available information that might be relevant to the value of a share is already reflected in today’s price. The weak form tells you not to listen to stock pickers who point to recently soaring shares. The strong form tells you not to bother doing any research into shares, because it cannot possibly do you any good.

8. Matthias Bauer, Peter Draper and Andreas Freytag on The “Seoul Consensus” on development: Substantial progress for sub-Saharan Africa or paperwork again?

   The global financial crisis also struck many developing countries, particularly in sub-Saharan Africa. In 2010, the G20 agreed on a “Seoul Action Plan”, which addresses the problems of the world’s poorest. This column analyses its message for sub-Saharan Africa. It argues that the G20 should really start energising the Doha round, taking fiscal stabilisation seriously, ensuring that exchange rates float, and guaranteeing that quantitative easing stops.

9. Matthias Bauer, Peter Draper and Andreas Freytag on After the “Seoul Consensus”: Ways to help sub-Saharan Africa return to pre-crisis economic performance

   The economic fate of developing countries since the global crisis has been in doubt. In the second of two columns on the “Seoul Consensus”, the authors argue that industrialised economies are not in a position to take the lead in initiatives to strengthen economic policy rationality on a global scale. Emerging economies should take the lead and push for the conclusion of the Doha Round.

10. Gary Becker on How to (and not to) Help Poor Families in Developing Countries Cope with Rising Food Prices

    During the current sharp run up in food prices, several food-exporting countries have banned, or greatly restricted, the ability of farmers to export their produce. This lowers the price of food to urban consumers in these countries, and thereby helps the urban poor. However, such bans reduce the prices received by poor farmers of these countries. This reduces their incentives to raise their production of food, and makes these farmers worse off. It also raises the cost of food to families in food-importing countries, and thereby hurts the poor in these countries. Since farmers in developing countries are generally much poorer than those who live in cities and other urban communities, the poor may overall be made worse off when countries greatly restrict their food exports.

Taming leviathan

The Economist magazine as an article noting that how to slim the state will become the great political issue of our times. An issue that governments in New Zealand could do a lot more about.

Attitudes to the big state have swung to and fro, from the liberal attack on patronage in the 19th century to the embrace of the social-democratic consensus after the second world war to Thatcherite privatisation in the 1980s. There are some signs that another rethink is imminent: witness the budget cuts in the euro zone, the battle between Wisconsin’s governor and the public-sector unions and David Cameron’s “Big Society” rhetoric. There is even the probability that the state’s share of GDP may slip back in the short term, as the recovery lifts the overall economy. But many efforts at reform are timid—witness the mendacious budgets produced in Washington by both Barack Obama and the Republicans and their refusal to touch entitlements. If nothing is done other than slimming a few departments, Leviathan will be on the march again.

Why? Because, despite all that rhetoric from the tea-partiers, big government is not just the fault of self-interested bureaucrats and leftist politicians. Conservative voters, even if they don’t like taxes, have kept on demanding that the state does more. Just as the left has built hospitals, announced endless programmes to help the poor and indulged the teachers’ unions, the right has built prisons, announced wars on drugs and terror, and indulged generals, farmers and policemen. And there are also two structural causes of big government. First, productivity in the state sector, especially in fields like education and health, has lagged behind the private sector. And second, there has been a huge increase in “social transfers”, especially benefits for the middle classes and the elderly.

To lose weight, governments have to do two things: learn how to do more with less, which means modernising the state, and cut back on what they offer, which among other things means tackling the social transfers. Both are inevitable, but the first offers the best chance of immediate gains.

The Economist ends the article by arguing,

Ideally, the next round of Western elections—especially the presidential one in America—will focus on that. Slimming the state is not an easy conversation. But consider the alternative: an ever fatter state, ever less freedom and ever higher taxes. In the 1990s much was made of the idea that capitalism had got so footloose that states were bound to get slimmer to compete for corporate favours. In fact companies proved more loyal than expected—and the state went on one last splurge. But talent and capital are getting more mobile; and the demographic pressure of those ageing populations is mounting. The ever larger state cannot go on for ever. It will stop.

One only hopes that the Economist is right.

What motivates entrepreneurs?

For pot entrepreneurs it appears to be a combination of money and a cause:

In many ways, medical marijuana entrepreneurs are no different than any other business start-ups: They need a business plan, venture capital and a fair dose of fortitude.

They also are likely to have something not generally found in most small-business owners: an activist streak.

More than half (58 percent) of those in the burgeoning industry say they started their businesses to promote expansion of medical marijuana or outright legalization, according to a report released last month analyzing the growing market. Only 12 percent said “financial opportunity” was their primary motivation.

As a comparison a survey conducted by the National Federation of Independent Business looking a business in general found that 29 percent of people making money was their primary motivator for starting a business.

Jeffrey Miron, director of undergraduate studies at Harvard's Economics Department, finds the data on cannabis entrepreneurs interesting — but not surprising.

"This has been a suppressed industry for decades. People have had to worry about jail time and asset forfeiture. So it is understandable that the people in this industry have a passion for social change," said Miron, who has studied and written extensively about drug prohibition. "And let's be very clear here: Making money and activism aren't mutually exclusive. They can do both."

So pot growers are entrepreneurs, both economically and socially.

There are no solutions only trade-offs

or so said Tom Sowell. At Offsetting Behaviour Eric Crampton notes that, Some days, you just can't get rid of a dictator. He writes,

The New York Times suggests one impediment to getting rid of Qaddafi is that there's no place to which he can flee and consider himself safe from prosecution.

Qaddafi of course should be prosecuted in a first best world. But if we're choosing among second best worlds, the one where he has an exit option and lives on without being punished - and his people are freed - rather likely dominates the one where he doesn't and has to fight on 'till the end.

The trade-off here seems to be between making sure that would be dictators know they will be held accountable for their actions which (hopefully) will make it less likely that they will become dictators in the first place and the fact that holding dictators accountable makes it less likely they will want to give up power.

A trade-off for which there is no first-best solution.

Does economic growth reduce poverty?

Not according to the OECD. Sam Bowman at the Adam Smith Institute blog writes,

The OECD’s annual Society at a Glance report was released this week. The TUC’s Touchstone blog had a post up earlier, highlighting the OECD’s claim that economic growth has not reduced poverty:

However, economic growth and poverty have not been strongly related within the OECD in the past generation. There is little evidence of a relationship between poverty and household income growth in either a positive or negative direction. For example, Ireland has had very rapid income growth over the period and a large rise in poverty, while income growth has stagnated in Belgium in combination with a considerable reduction in poverty.

Bowman then highlights one odd feature of the OECD study,

A bigger problem is the definition of poverty, which is relative and considered within single countries. It’s quite misleading to claim that Irish economic growth didn’t reduce poverty. The OECD uses a relative definition of poverty – the "percentage of persons living with less than 50% of median equivalised household income". Poor people in Ireland (and Belgium) are a lot less poor than they were thirty years ago with regard to the options they have available to them. The gap between them and the rich might be wider, but this matters less to most people than their life expectancies, economic security levels, and other absolute values. Saying that economic growth made poor people a lot richer but rich people even more rich is quite different to saying that “economic growth and poverty have not been strongly related within the OECD in the past generation”.

With a relative measure of poverty the poor will always be with us, no matter how rich we all are.

Bowman ends by pointing out,

The standard measure of inequality, the Gini coefficient, gives Tanzania and Malawi a more “equal” score than New Zealand and Japan. I know where I’d rather be, rich or poor. The measure of inequality itself is not worthless, but defining poverty as inequality within one country certainly is. By any measure of actual outcomes, economic growth is good for the poor. And if a measure of poverty doesn’t reflect that, it’s a bad measure.

A free book well worth your time

at least according to Gregory Mankiw. The book is Policy and Choice: Public Finance through the Lens of Behavioral Economics by William J. Congdon, Jeffrey R. Kling, and Sendhil Mullainathan. It is available from the Brookings Institution Press here.

An interesting question is what effect will making it available free on the web will have on sales of the "real" book version.

Rational voters & democratic failure

A video of the famous (infamous?) 2007 debate between Bryan Caplan and Donald Wittman on "Rational Voters & Democratic Failure" is now available.

Bryan Caplan-Donald Wittman Debate from GMU Econ Society on Vimeo.

Is anyone surprised by this result?

From a new NBER working paper, Coups, Corporations, and Classified Information by Arindrajit Dube, Ethan Kaplan and Suresh Naidu. NBER Working Paper No. 16952

We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves.There is no effect in the case of the widely publicized, poorly executed Cuban operations, consistent with abnormal returns to coup authorizations reflecting credible private information. We also introduce two new intuitive and easy to implement nonparametric tests that do not rely on asymptotic justifications.

It will come as no surprise to anyone to learn that during the Cold War covert operations conducted by intelligence agencies were a key component of superpower foreign policy. In particular in the case of the U.S., many of these operations were carried out with the expressed goal of replacing "unfriendly" regimes. Such regimes were often ones that had expropriated multinational U.S. based corporate property. These operations were planned under extreme secrecy. Given corporate property was always restored to the multinational after a successful regime change, these operations were potentially profitable to companies which had been nationalised previously.

If foreknowledge of these operations was truly secret, then pre-coup asset prices should not reflect the expected future gains - assuming the coup would be successful. However, what this paper shows is that not only were U.S.-supported coups valuable to partially nationalized multinationals, but also, asset traders arbitraged supposedly "top-secret" information concerning plans to overthrow foreign governments.