IMF Working Paper: Government Spending and Economic Growth

A new study from the International Monetary Fund looks at multiple episodes of government spending “booms” across 21 different countries. It does not address whether or not “in theory public investment drives could accelerate growth, but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth” (pg. 62) The answer?: “probably very little”.

This conclusion pertains to the drives – the big increases in public capital spending – not necessarily to routine levels of public investment. And furthermore the evidence here  is not about whether public capital can promote growth by averting the emergence of bottlenecks.  Major public investment campaigns continue to be advocated in several countries as a major trigger  for economic growth, and on this issue, whether they have in fact triggered growth, the evidence for a  positive effect of public capital on GDP or GDP growth is weak (pg. 62).

It further states that “it is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. If anything the cases of clear-cut booms illustrate the opposite – major drives in the past have been followed by slumps rather than booms” (pg. 4).

Matthew Klein has a really good overview in the Financial Times. Check it out.[ref]This goes along quite well with previous research on government spending and economic growth.[/ref]

 

Income Inequality, MotherJones, and Irony

First, let me say that I promise not to make a habit out of cherry picking MotherJones articles to use as a punching bag.[ref]I’m referring to this post I wrote last week, btw.[/ref] I realize it’s unhealthy to spend too much time recapitulating the perceived failures of one’s ideological opponents, but I’m violating my own rule for two reasons. First, I am more inclined to use any article as a rhetorical punching bag when I feel it is, itself, perpetuating partisanship in a particularly noxious way. Second, I think some of the issues raised in this post will be genuinely interesting and important.

So this is what I saw on MotherJones last week:

Daily Dose of Irony

I took a screen grab because it’s not just the article that I found so captivating. It’s the juxtaposition of an article about “how the superrich spoil it for the rest of us” with an advertisement for Patek Philippe watches. I’m no watch connoisseur, but that looks pretty expensive to me. Google would seem to agree:

Patek Phillippe

The cheapest watch on that list costs about what both of my family’s cars cost put together. And the most expensive literally costs more than our house did, back before the housing bubble burst when we owned our own home. So I have to wonder: what kind of person is concerned about “the superrich” and in the market for a watch that costs tens or even hundreds of thousands of dollars? Well, apparently some of the folks who read MotherJones fit that particular bill.[ref]Of course it’s possible that the ad was served to me by some process that has nothing to do with MotherJones as a magazine. If so: (1) they need to fix their algorithm (2) the rest of this article will still be interesting.[/ref]

So what makes the post more than a mere gotcha? Well, I have two serious thoughts to add that I hope elevate us beyond mere rabblerousery[ref]I, for one, think “rabblerousery” should be a word.[/ref]

The first is a quick note on inflation-adjusted dollars. One of the charts claims that if median US wages had kept pace with the economy since 1970, then they would currently be at $92,000 instead of $50,000. Mathematically, I am sure that is probably correct. But can you really compare 1970s dollars to 2010s dollars so easily? Let me ask you this: would you rather have $92,000 in 1970 or $50,000 in 2014? How about $92,000 in 1714 vs. $50,000 in 2114?

Money, it turns out, isn’t everything even when you’re talking about economics.Think about some of the things you would lose by going back to the 1970’s: the Internet, cell phones, and Game of Thrones all come to mind. But it’s not just fun and games, would you trade 1970s medicine for 2014 medicine? Would you, if you had cancer? If your child did?

2014-07-30 Car Crashes

So that’s a chart that[ref]From the National Highway Traffic Safety Administration[/ref] shows your likelihood of dying in a car crash per 100,000,000 vehicle miles traveled (VMT). You can see in the 1970s it was about 3 to 4. By 2009 it was about 1. So your chances of dying in a car crash (per mile traveled) were roughly triple or quadruple in the 1970s what they are today. This is just one off-the-top-of-my-head example of the kind of comparison that inflation-adjusted wages don’t capture.[ref]It doesn’t escape my notice that a large part of the reason for increasing safety is government regulation, which is (broadly considered) a left-leaning policy. If that admission softens the tone of this piece: good.[/ref]

My point is just that there actually isn’t a way to compare our lives in the 1970s with the 2000s in a way that allows any kind of meaningful analysis. Inflation is calculated by economists who first create a bundle of goods (gasoline, food, clothes, etc.) that is supposed to be more or less representative of what a person or household buys, and then track the change in price of that bundle of goods over time. That’s the best they can reasonably do, and for a fairly consistent commodity (like wheat) it does OK. But it fails to address increases in product quality (e.g. a laptop in 2014 is not the same animal as a laptop in 2004), not to mention new products (e.g. a laptop in 2014 vs… ? in 1974), not to mention increases in public goods (like better air quality, perhaps) that are not captured by any bundle of goods that a person purchases. In short: saying that median income has stagnated doesn’t actually tell you if people are better or worse off, or at least, not nearly as clearly as MotherJones might want you to think.

The second thing to consider, and this one will not be very popular, is the question of why the median wages haven’t risen much over the last 40 years. MotherJones specifies that it’s “the superrich,” but that’s not a theory it’s a slogan. It’s designed to make people feel better, not to explain things. Here, on the other hand, is a theory that might actually offer some plausible explanation: the increasing numbers of women in the workplace suppress wages.[ref]Hey, I told you it wasn’t going to be popular. That doesn’t mean it’s not true.[/ref] This is econ 101: when supply (the number of workers, in this case) goes up then prices (the wages a worker earns, in this case) go down. The HuffPo conveniently has some numbers pegged to 1970 for comparison:

In terms of sheer numbers, women’s presence in the labor force has increased dramatically, from 30.3 million in 1970 to 72.7 million during 2006-2010. Convert that to percentages and we find that women made up 37.97 percent of the labor force in 1970 compared to 47.21 percent between 2006 and 2010.

At least some [ref]How much? I won’t try to guess or research that question for this piece.[/ref] of the wage stagnation therefore comes from women entering the work place. That’s not the only effect, by the way. At least one economic paper (based on dramatic changes in female participation in the workplace around World War II) found that not only did wages go down when women entered the workplace, but that wage inequality increased between high and low incomes and even that the gender pay gap increased. This might sound like ultra-right-wing propagandizing, but none less than Elizabeth Warren has contributed significantly to the understanding that women entering the work force has had negative impacts on our economy. In The Two Income Trap, Warren basically argued that (1) dual-income families are less financially secure than single-income families because if there is no insurance policy[ref]Meaning: that if worker loses his or her job in a single-income family, the other spouse can go to work to make up at least some of the difference, but in a 2-income family there is no Plan B.[/ref] and (2) dual-income families have bid up the cost of living (especially homes) to a point where single-income families can’t really compete anymore, which creates a vicious cycle. MotherJones covered this back in 2004, by the way, and they asked the book’s coauthor Amelia Tyagi about the apparently right-wing narrative she seemed to endorse:

MJ.com: Some conservative commentators might see this as evidence that the mother should return home.

AT: [Laughs] Right. Of course, the notion that mothers are all going to run pell-mell back to the hearth and turn back the clock to 1950 is absurd. But that aside, a big part of the two-income trap is that families have basically bid up the cost of living. Housing is a big example. A generation ago, an average family could buy an average home on one income. Today you can’t do that in three-quarters of American cities. We all know that housing prices are going up, but what most people don’t realize is that this has become a family problem. Housing prices are rising twice as fast for families with kids.

It’s telling that Tyagi replies to MotherJones’ comment with laughter and then sets the question aside. That’s because the evidence is actually pretty clear: two-income families have significant costs for our society. And let me be equally clear: my point is not that we should send all women back home. As far as the evidence presented so far is concerned, an equally prudent strategy (from a socio-economic standpoint) would have been to stick with single-income family structure, but to have men become the primary caregiver in 1/2 of the families, just as one possible example.

My point isn’t that the left-wing view is wrong and the right-wing view is right. My point is that reality doesn’t care about your politics. Or mine. If we really want to do our level best to fix problems, that means we’ve got to be more willing to entertain explanations and solutions that depart from everybody’s narrative and agenda. Who benefits politically from the fact that two-income families are bad for the country? I’m not sure anybody does, but if it’s true (and it seems to be true) then it’s important to know so. Maybe it will help us invent some new policy that will make things better, but at least it will help us avoid snake oil policies that will do no good.

Something else I like about this line of argument–and this does appeal to the conservative within me–is that it underscores the tragic vision conservatives have for our world. Want to improve society by making the work place more egalitarian on gender grounds? OK, but there are going to be costs. And some of those costs will be: stagnant wages, an increased gender pay gap, and increased income inequality.

Or, you know, you could ignore research that is politically uncomfortable and just blame the superrich. While you try to sell them luxury watches.

Look, my big problem with MotherJones has nothing to do with the fact that it is liberal. I will admit that doesn’t endear them to me, but there are lots of liberals I admire and respect (some of whom comment here.) If you want to see what really gets to me about MotherJones, just glance back at the very first line of the article. Or, to save you time, I’ll quote it here:

Want more rage?

No, MJ. I don’t think that’s what America needs right now. But thanks for being open and honest about what–even more than luxury watches–it is that you’ve got on offer.

Immigration and the Poor

Pretty much
Pretty much. The claims provoking this sign tend to be untrue.

Immigration is in the news again with the influx of Central American children across U.S. borders. Some of the responses to these child immigrants have shown the ugly side of American nationalism. This skepticism toward immigration can be traced back to several of the Founding Fathers, including Benjamin Franklin, Thomas Jefferson, Alexander Hamilton, George Washington, and John Jay.[ref]Historian Thomas E. Woods, Jr. discusses their various concerns in his 33 Questions About American History You’re Not Supposed to Ask (New York: Three Rivers Press, 2007). However, some anti-immigration Americans assume immigrants are predominantly criminals, which the evidence doesn’t bear out. Furthermore, we often ignore how our own policies (such as the War on Drugs) helps create undesirable environments from which these immigrants want to escape.[/ref] However, even the skeptics among the Founders expressed the benefits of immigration. But I’m not particularly interested in cherry-picking Founders statements. What I am interested in is alleviating global poverty. Here are a few links that cover a variety of studies demonstrating increased immigration does just that:

  • Economist David Henderson, writing in a 2012 issue of The Freeman, notes, “Boston University economist Patricia Cortes, in a study published in the Journal of Political Economy, found that cities with larger influxes of low-skilled immigrants had lower prices for labor-intensive services such as dry cleaning, childcare, housework, and gardening. In a later study, Cortes and coauthor Jose Tessa found that these low-price services allowed Americans, especially women, to spend more hours working in high-skilled, high-paying jobs.The gains from eliminating barriers to immigration are huge. In a recent article in the Journal of Economic Perspectives, economist Michael Clemens finds that getting rid of all immigration restrictions worldwide would approximately double world GDP.” He continues, “…Harvard University economist Lant Pritchett’s observ[es] that the average gain from a lifetime of microcredit in Bangladesh, such as that provided by Nobel Peace Prize winner Mohammed Yunus’s Grameen Bank, is about the same as the gain from eight weeks working in the United States. Asks Pritchett, “If I get 3,000 Bangladeshi workers into the US, do I get the Nobel Peace Prize?” …Pritchett found that if rich countries allowed just a 3 percent increase in their labor forces through immigration, the world’s have-nots would benefit by $300 billion a year, and the residents of the rich countries would benefit by $51 billion a year.”
  • The Economist reports on a brand new study that “offer[s] ammunition for fans of more open borders. In 19 out of 20 countries, the authors calculated that shutting the doors entirely to foreign workers would make the native-born worse off. (Never mind what it would do to the immigrants themselves, who benefit far more than anyone else from being allowed to cross borders to find work.) The study also suggests that most countries could handle more immigration than they currently allow. In America, a one-percentage point increase in the proportion of immigrants in the population made the native-born 0.05% better off. The opposite was true in some countries with generous or ill-designed welfare states, however. A one-point rise in immigration made the native-born slightly worse off in Austria, Belgium, Germany, Luxembourg, the Netherlands, Sweden and Switzerland. In Belgium, immigrants who lose jobs can receive almost two-thirds of their most recent wage in state benefits, which must make the hunt for a new job less urgent. None of these effects was large, but the study undermines the claim that immigrants steal jobs from natives or drag down their wages.”[ref]This actually offers evidence for Milton Friedman’s initial point about immigration and the welfare state.[/ref]
  • Lydia DePillis at The Washington Post reports on two new papers that demonstrate immigrants fill labor gaps, complement existing capital, tech, and labor, and that this complementarity increases production and consequently wages.

Be sure to read and research the actual studies.

More on the Minimum Wage

minimum wageWe’ve written a lot about minimum wage hikes here at Difficult Run. Here’s another to add to the list: economist David Neumark (who has published extensively on minimum wage) has an op-ed in The Wall Street Journal arguing that minimum hikes may indeed go to low-wage workers, this very different from saying they go to low-income families. “One might think that low-wage workers and low-income families are the same,” Neumark writes. “But data from the U.S. Census Bureau show that there is only a weak relationship between being a low-wage worker and being poor, for three reasons” (reasons that are “descriptive evidence” and “not disputed by economists”):

  1. “[M]any low-wage workers are in higher-income families—workers who are not the primary breadwinners and often contribute a small share of their family’s income.”
  2. “[S]ome workers in poor families earn higher wages but don’t work enough hours.”
  3. “[A]bout half of poor families have no workers, in which case a higher minimum wage does no good.”

The amount of low-wage workers from poor families dropped from 85% in 1939 to 17% by the early 2000s due to changes in social safety nets and family structure. Evidence indicates that only 18% of the benefits of a national minimum wage of $10.10 would go to poor families, while 29% would “go to families with incomes three times the poverty level or higher.” The benefits for poor families decline to 12% at 15 dollars, while benefits for the well-off would increase to 36 percent. Neumark further explains that “most studies…fail to find any solid evidence that higher minimum wages reduce poverty.”

He concludes, “The desire to help poor and low-income families is understandable. But increasing the minimum wage is a misguided way to do it.”

Essays on McCloskey

Over at the Online Library of Liberty there is an excellent group of essays covering economist Deirdre McCloskey’s work on the “Bourgeois Era”:  The Bourgeois Virtues: Ethics for an Age of Commerce (2006), Bourgeois Dignity: Why Economics Can’t Explain the Modern World (2010), and the forthcoming Bourgeois Equality: How Betterment Became Ethical, 1600-1848, and Then Suspect (2015).

The full amount of essays are still in the process of being posted, but so far you can read ones by economists Don Boudreaux, Joel Mokyr, and John Nye. Boudreaux captures many of my own feelings about McCloskey’s work, while Mokyr and Nye provide some excellent feedback and criticism.

Definitely worth checking out.

William Easterly: Poverty Is a Moral Problem

Christianity Today has an excellent interview with economist William Easterly on his new book The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor. In it, Easterly explains that poverty is a moral problem that cannot be easily fixed by technocratic solutions. The answer comes from treating the poor with the same dignity as everyone else. He explains,

I realized our attitude towards the poor is so often condescending and paternalistic. We think of them as helpless individuals. We don’t respect their dignity as individuals.

The next step was not to just avoid paternalism or condescension but actually to go back to first principles and think about the rights of the poor and what role those rights play in development. Economists’ research actually does give the institutions associated with individual rights a lot of the credit for the development in the West and the rest of the world. This combined with my own moral awakening that these rights are a desirable good in and of themselves. Whenever we violate them, we set back development.

Check it out.

 

Catholics Against Capitalism

Kevin Williamson has an article over at National Review that expresses many of the feelings I’ve had regarding some of the more hostile, self-righteous religious critics of capitalism. The article discusses the recent “panel of Catholic intellectuals and clergy, led by His Eminence Oscar Andrés Maradiaga,” that was “convened to denounce a political philosophy under the headline “Erroneous Autonomy: The Catholic Case against Libertarianism.” The conference was mainly about free-market economics rather than libertarianism per se…” But as Williamson notes, “There is something about the intellectually cloistered lives of religious professionals that prevents them from engaging in anything but the most superficial way with the 21st-century economy.” But then he just lays it out:

The implicit economic hypothesis [of the panel] is that producing a certain amount of goods more efficiently — in this case, with less labor — makes the world worse off. (“Why not use spoons?”) The reality is the opposite, and that is not a matter of opinion, perspective, or ideology — it is a material reality, the denial of which is the intellectual equivalent of insisting on a geocentric or turtles-all-the-way-down model of the universe.

The increasingly global and specialized division of labor and the resulting chains of production — i.e., modern capitalism, the unprecedented worldwide project of voluntary human cooperation that is the unique defining feature of our time — is what cut the global poverty rate in half in 20 years. It was not Buddhist mindfulness or Catholic homilies that did that. In the 200,000-year history of Homo sapiens, neither of those great religious traditions, nor anything else that human beings ever came up with, made a dent in the poverty rate. Capitalism did.

Production and resources are important. “If the Good Samaritan had been the Poor Samaritan,” explains Williamson, “with no resources to dedicate to the stranger’s care, then the poor waylaid traveler would have been out of luck. All the good intentions that we may muster are not half so useful to a hungry person as a loaf of bread.” The fact that “men of the cloth, of all people, should be blind to what is really happening right now on the global economic scale is remarkable, ironic, and sad. Cure one or two people of blindness and you’re a saint; prevent blindness in millions and you’re Monsanto.” What is really happening is this: “there is no poverty in the capitalist world comparable to poverty in the early 18th century, much less to the poverty that was nearly universal in Jesus’ time. Our people are clothed, fed, and housed, and the few shocking exceptions, as with the case of the neglected mentally ill, are shocking because they are exceptions.”

It boils down to “how you intend to fulfill the Lord’s command to feed His sheep — with rhetoric or with bread…”

On the Selfishness of Sweatshop Anxiety

2014-06-11 London Apartment

So apparently someone wants to rent this tiny London apartment (pictured above) for $1,230/month. Outrage ensues.

Now, the weird thing is that it’s perfectly reasonable to imagine someone wanting to rent that apartment for that price.[ref]I’m not sure about the exact price, of course, but I hear London is pretty expensive. And isn’t microhousing a thing these days? So where’s the outrage coming from?[/ref] I once had to commute up to the Northern Virginia area while my family lived in Williamsburg for work every week. I was lucky enough to have a kind friend with a guess suite, but if I hadn’t had recourse to that, such a tiny little domicile would have been perfect. I seriously investigated living out of my car before my benefactor appeared.

Think about it this way: if someone offers to pay that money for that apartment it is because they have evaluated their alternatives and found that to be the best course of action for them. In what world does eliminating the best course of action someone has available help that person? When someone makes a reasoned consideration that a course of action is the best course of action available, then some do-gooder stepping in to prevent them from taking that course of action is by definition harmful.[ref]Unless you think that the person is incompetent to make their own decision. Which, baring mental illness or a child, just adds “patronizing” next to “harmful”.[/ref]

I think the intuition is that if someone is willing to pay $1,230 for such a tiny apartment, then they must have pretty crappy alternatives. And that is true. But taking away the apartment doesn’t actually improve that person’s prospects. It just removes the evidence of their misfortune from public view. This isn’t about helping anyone any more than placing spikes where homeless people sleep is about helping homeless people. And yes: that’s a real thing. In London they don’t want you to rent out a tiny, cheap apartment but they also don’t want you to sleep on the pavement, either. This looks less like compassion for the poor and a lot more like spraying your house for ants. You don’t really care if the spray kills them or helps them or hurts them, as long as they aren’t in your house anymore.

I call this “Sweatshop Anxiety” because that’s sort of the biggest example of the problem. The thought of poor people in third world countries working long hours in terrible conditions makes rich Westerners want to shut down sweatshops. Which helps the poor… how?

I’m not saying there’s nothing we can do. I’m just saying that reducing options probably almost never helps.

Manhattan Institute: New Volume on Income Inequality

A brand new volume of essays on income inequality was recently published by the Manhattan Institute and is available for free online. Economist Diana Furchtgott-Roth introduces the volume with the following:

Claims of ever-increasing shares of wealth going to top earners are a perennial complaint. This year, partly due to the publication of Thomas Piketty’s Capital in the Twenty-First Century, discussions of inequality are preoccupying policymakers and political pundits.

Today Economics21.org is releasing Income Inequality in America: Fact and Fiction, a series of essays from leading experts on different aspects of measuring inequality. For Winston Churchill, inequality was an unavoidable part of economic life in capitalist societies. “The main vice of capitalism,” said the British Prime Minister, whose youngest daughter, Lady Mary Soames, died last weekend at the age of 91, “is the uneven distribution of prosperity. The main vice of socialism is the even distribution of misery.”

In conclusion, she states, “Empirical analysis shows that many commonly accepted ideas about income inequality are false or overstated. If policy recommendations are to be effective, they must be informed by an accurate picture of the current situation. Income Inequality in America: Fact and Fiction offers the empirical tools for such an analysis.”

Check it out.

Americans Don’t Know Global Poverty Has Declined

Americans are missing out on one of the greatest stories in the history of mankind:

According to a recent Barna Group survey…more than eight in 10 Americans (84%) are unaware global poverty has  [decreased by more than half in the past 30 years]. More than two-thirds (67%) say they thought global poverty was on the rise over the past three decades.

Similarly, while both child deaths and deaths caused by HIV/AIDS have decreased worldwide, many Americans wrongly think these numbers are on the rise: 50% of US adults believe child deaths have increased since 1990, and 35% believe deaths from HIV/AIDS have increased in the past five years.

Despite the very real good news, more than two-thirds of US adults (68%) say they do not believe it’s possible to end extreme global poverty within the next 25 years. Sadly, concern about extreme global poverty—defined in this study as the estimated 1.4 billion people in countries outside the US who do not have access to clean water, enough food, sufficient clothing and shelter, or basic medicine like antibiotics—has declined from 21% in 2011 to 16% in 2013.

It turns out that practicing Christians are more likely to believe it’s possible to end extreme global poverty in the next 25 years: “Practicing Christians under 40 are the most optimistic at nearly half (48%), with practicing Christians over 40 slightly higher than the general population (37%) compared to 32% of all adults).” But people are hesitant to give more for reasons ranging from belief in the inevitability of poverty’s existence to distrust in corrupt foreign governments. [ref]Unfortunately, the Barna Group doesn’t even mention the impact of liberalized markets and globalization on extreme poverty. This is exactly what Nathaniel and I cover in our SquareTwo article.[/ref]

Check out the full article.