Monday, October 12, 2015

Iain Murray on how capitalism can help the world's poor

See World’s Poor: “We Want Capitalism” Post-Colonial Capitalism at the Bottom of the Pyramid. Iain Murray is vice president at the Competitive Enterprise Institute. Excerpts:
"The phrase “the fortune at the bottom of the pyramid” was coined by the late C.K. Prahalad, building on the work of Nobel laureate Amartya Sen. In his groundbreaking 1999 work, Development as Freedom, Sen pointed out that one of the most important aspects of development is freedom of opportunity, a vital part of which is access to capital and credit. Capital and credit, however, appear nowhere in the draft UN goals."

"Land Titling

In many countries, people could possess access to capital by virtue of the real estate they already occupy, but they are unable to prove ownership of the land due to inadequate land-titling systems or because of traditional forms of property ownership where everything belongs to the village chief. As Hernando de Soto explained in his book, The Mystery of Capital, land-titling reforms significantly benefit the poor, enabling

such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property and a host of other economic activities that drive a modern market economy.

De Soto estimates that up to $10 trillion of capital worldwide is locked away unused because of inadequate titling systems. A recent study by the Peru-based Institute for Liberal Democracy (ILD), which De Soto heads, estimated Egyptian workers’ real estate holdings to be worth around $360 billion, “eight times more than all the foreign direct investment in Egypt since Napoleon’s invasion.”
Similarly, many local assets around the world remain in common ownership — in reality, owned by no one. Initiatives such as India’s privatization of forest resources seek to address this problem by enabling the titling of assets by indigenous peoples, who can then tap into those resources for access to credit to open up new opportunities. Estimates suggest that similar initiatives could be extended to 900 million plots of land across the developing world.

There are also exciting opportunities that could arise for the public recording and utilization of such capital through the distributed public-ledger system known as the blockchain, best known for its role in the development of bitcoin. Development of the blockchain for property recording and titling would significantly reduce both the transaction costs and the widespread corruption  associated with government-controlled titling systems. Significantly, De Soto’s ILD is promoting these initiatives."

"Kenya: Mobile Phones and Payments

Despite corruption and bureaucracy, strong markets have grown up in developing countries. Kenya is a case in point. It leapfrogged the Western world’s development process for mobile communications technology. Kenyans went from having few telephones to virtually everyone having a mobile phone without needing the stage of landline infrastructure in between. A similar process is now taking place in personal finance.

Vodafone, along with its Kenyan subsidiary, Safaricom, developed m-pesa, a mobile payment and value storage system to be used on its phones. Transactions are capped at about $500, but crucially can be person-to-person, acting as digitized cash. Introduced in 2007, it had 9 million users — 40 percent of Kenya’s population — just two years later. By 2013, 17 million Kenyans were using it, with transactions valued at over $24 billion — over half of Kenya’s GDP.

M-pesa has in turn improved access to capital even more, and technology businesses are thriving all over Kenya as a result.

Kenya is not alone. The phenomenon is spreading to other African countries and to some South American countries such as Paraguay."

Estée Lauder And Her Son Are Not "Old" Money

Great letter from Don Boudreaux
"Here’s a letter to the New York Times:
In your report on generous cultural philanthropists you describe Leonard Lauder as “Old Money” (“Donors: Who They Are,” Oct. 11).  Your description is intriguing in light of today’s obsession with income inequality and its associated meme that “the rich get richer and the poor get poorer.”  In fact, Mr. Lauder – despite your depiction of him wearing a top hat of the sort donned by the cartoon mascot of the board game “Monopoly” – is unlikely to fit the description of what most people mean by “old money,” and his fortune’s history belies the meme.
Mr. Lauder’s mother, Estée, was born in Queens to immigrant parents from Hungary.  In America they ran a hardware store at which young Estée worked.  She launched her cosmetics company (the eventual source of her and her children’s fortune) in 1946 – a mere 69 years ago and when Mr. Lauder himself was already a teenager.
With America beset by “old money” such as Leonard Lauder’s, Americans have good reason to slam-shut their copies of Thomas Piketty’s tome and to reject assertions that capitalism inexorably swells the fortunes of those already rich while preventing those of only modest means from becoming rich.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030"

Angus Deaton Talks To Cato About His Book The Great Escape

Here is the link. Excerpts:
"Throughout history, the greatest episodes of human progress are what I call “the great escapes.” The most obvious dimensions are the escapes from material destitution, ill health, and premature mortality. I focus mostly on health and wealth, but it’s worth mentioning that there are many other examples as well.

Today, there are more people living under democracy, for example, than ever before. There are enormous, large-scale reductions in violence around the globe over the centuries which contribute greatly to human well-being. We’ve seen huge increases in education, particularly — but not exclusively — among women. In many parts of the world, the schools they are going to leave a lot to be desired. But it’s a start, and it reflects a trend that is quite new. Finally, I argue that increases in life evaluations have also accompanied this progress. In short, people know that their lives are better and they will tell you as much.

Now, just like in the movie, most of these episodes have only allowed some to escape — leaving many others behind — but ultimately that’s the nature of the beast. Progress does not come evenly. In that sense, it is one of the great engines of inequality. But it’s very hard to object to this sort of inequality. Why, if some escape and some don’t, is the world a worse place? Well, it’s not."

"The absence of state capacity is one of the major contributors to poverty and deprivation around the world. Without effective states working with active and involved citizens, there is little chance for the growth that is needed to abolish global poverty. Unfortunately, the world’s rich countries are making things worse. Foreign aid undermines the development of local state capacity.
This is most obvious in countries where the government receives large amounts of direct aid. These governments need no contract with their citizens, no parliament, and no tax-collection system. Why would they pay any attention to the needs of their own people? If they are accountable to anyone, it is to the donors. But even this fails in practice.

Under pressure from their own citizens — who rightly want to help the poor — wealthy countries feel the need to disburse money just as much as poor-country governments need to receive it, if not more so. What about bypassing governments and giving aid directly to the poor? The immediate effects are likely to be better, especially in countries where little government-to-government aid actually reaches the poor. And it would take an astonishingly small sum of money — about 15 U.S. cents a day from each adult in the rich world — to bring everyone up to at least the destitution line of a dollar a day.

Yet this is no solution. The world’s poor cannot forever have their health services run from abroad. What is missing from these countries is not money. Poor people need government to lead better lives; taking government out of the loop might improve things in the short run, but it would leave unsolved the underlying problem. Aid is simply racked with unintended consequences. It undermines what poor people need most: an effective government that works with them for today and tomorrow.
In short, the world is a better place than it used to be, despite the fact that many have yet to make the great escape. What can we to do to help that process along? One thing that we can do is to agitate for our own governments to stop doing those things that make it harder for poor countries to stop being poor. Reducing aid is one, but so is limiting the arms trade, improving rich-country trade and subsidy policies, providing technical advice that is not tied to aid, and developing better drugs for diseases that do not affect rich people.

Poor countries, just like their wealthy counterparts, need their own good government — not one that was thought up for them by the rest of the world. We cannot help the poor by making their already weak governments even weaker."

Sunday, October 11, 2015

A new study finds immigrants commit less crime and they learn English

See Those Assimilating Immigrants.
"“Across all measurable outcomes, integration increases over time, with immigrants becoming more like the native-born with more time in the country, and with the second and third generations becoming more like other native-born Americans than their parents were.”"(from National Academies of Sciences, Engineering and Medicine)

"Given that immigrant households are typically larger than those of native-born Americans, simple arithmetic means that the more people you have in a home, the more likely one of these people will receive some sort of government benefit."

"if you add up immigrants here legally and illegally, and then throw in the children of both groups, it works out to about 78.1 million people."

"roughly 85% of America’s foreign-born population speak a language other than English at home."

"English-language proficiency, it says, may be happening even “faster now” than it did for earlier waves of mainly European immigrants."

"“increased prevalence of immigrants is associated with lower crime rates—the opposite of what many Americans fear.” The incarceration rate for the foreign born is only a fourth of that of the native born."

"As for working, the report notes that “the least educated immigrants” are “more likely to be employed than comparably educated native-born men, indicating that they are filling an important niche in our economy.”"

A new study shows how Energy rules raise costs for consumers

See The Feds Go Turbo from the WSJ. Excerpts:
"Since 2007 the Energy Department has finished more than 25 major rules—those costing more than $100 million—and imposed more than $8 billion in annual costs, says a paper from AAF’s Sam Batkins. That doesn’t include 11 big ones that DOE hopes to polish off by next year. The Clinton Administration’s footprint totaled six major rules in eight years."

"The feds admit that tweaks can be expensive and consumers will “incur higher purchase prices.” That puts it gently, at least for a 2010 rule that by the agency’s own estimates would jack up water-heater costs by more than $450 on average.

As with every green dream, the poor suffer most. According to AAF, a family who bought a refrigerator, a furnace fan and a water heater could pay a hidden “regulatory tax” of about $620"

"By the way, the rules sail through a federally required cost-benefit test thanks to capricious accounting on the “social benefits” of reducing carbon.

Mr. Batkins checked out a 2009 microwave rule that accomplished little if anything because the sale of the food zappers dropped precipitously after the regulation took effect. It’s a similar story for air conditioning standards from 2001. The consistent result is reducing employment: The heating, ventilation and cooling industry—a perennial Energy Department target, with $4 billion in annual costs piled on since 2010—has hemorrhaged 55,000 jobs since 2001."

Saturday, October 10, 2015

What went wrong in the second half of 2008? The Fed became so focused on shoring up the financial system and worrying about rising inflation, that it lost sight of stabilizing aggregate demand

See The Courage to Act in 2008 by David Beckworth of Cato. Excerpts:
"George Selgin, for example, notes that the recovery under Bernanke’s watch was anemic. Inflation consistently undershot the Fed’s target and the real recovery was weak. We may not have experienced another Great Depression, but we sure did get a long slump. Ryan Avent makes a similar point by observing that Bernanke had a chance in late 2011 to do something bold by endorsing a NGDP target, an action that could have jolted the economy from its doldrums. But alas, Bernanke failed to muster up the courage to have what Christina Romer called his “Volker Moment”."

"As seen in the two figures below, sectors of the economy tied to housing began contracting in April 2006 while elsewhere employment growth and nominal income continued to grow. This all changed in the second half of 2008.

So what went wrong in the second half of 2008? Why did a seemingly ordinary recession get turned into a Great Recession? We believe the Fed became so focused on shoring up the financial system and worrying about rising inflation, that it lost sight of stabilizing aggregate demand. Based on theses concerns, especially the latter, the FOMC decided to do abstain from any policy rate changes during the August and September 2008 FOMC meetings. But by doing nothing at these meetings the FOMC was doing something: it was signaling the Fed would not respond to the weakening economic outlook. The FOMC, in other words, signaled it would allow a passive tightening of monetary policy in the second half of 2008.

A passive tightening of monetary policy occurs whenever the Fed allows total current dollar spending to fall, either through a endogenous fall in the money supply or through an unchecked decrease in money velocity. The decline in the money supply and velocity are the result of firms and households responding to a bleaker economic outlook. The Fed could have responded to and offset such expectation-driven developments by properly adjusting the expected path of monetary policy.

The figures below document this monumental failure by the FOMC. The first one shows the 5-year ‘breakeven’ or expected inflation rate. This is the difference between the 5-year nominal treasury yield and the 5-year TIPs yield and is suppose to reflect treasury market’s forecast for the average annual inflation rate over the next five years. The figure shows that prior to the September 16 FOMC meeting this spread declined from a high of 2.72 percent in early July to 1.23 percent on September 15. That is a decline of 1.23 percent over the two and half months leading up to the September FOMC meeting. This forward looking measure was screaming trouble ahead, but the FOMC ignored it.

One way to interpret this figure is that the Treasury market was expecting weaker aggregate demand growth in the future and consequently lower inflation. Even if part of this decline was driven by a heightened liquidity premium the implication is the same: it indicates an increased demand for highly liquid and safe assets which, in turn, implies less aggregate nominal spending. Either way, the spread was blaring red alert, red alert!

The FOMC allowed these declining expectations to form by failing to signal an offsetting change in the expected path of monetary policy in its August and September FOMC meetings. The next figure shows where these two meetings fell chronologically during this sharp decline in expectations.

As noted above, this passive tightening in monetary policy implies there would be a decline in the money supply and money velocity occurring during this time. The Macroeconomic Advisers’ monthly nominal GDP data indicates this is the case:

The Fed could have cut its policy rate in both meetings and signaled it was committed to a cycle of easing. The key was to change the expected path of monetary policy. That means far more than just the change in the federal funds rate. It means committing to keeping the federal funds rate target low for a considerable time and signaling this change clearly and loudly. With this approach, the Fed would have provided a check against the market pessimism that developed at this time. Instead, the Fed did the opposite: it signaled it was worried about inflation and that the expected policy path could tighten.

Recall that Gary Gorton provides evidence that many of the CDOs and MBS were not subprime, but when the market panicked a liquidity crisis became a solvency crisis. This is especially true in late 2008. Had the Fed responded to the falling market sentiment in the second half of 2008 the financial panic in late 2008 may have been far less severe and the resulting bankruptcies fewer. Again, the worst part of the financial crisis took place after the period of passive Fed tightening. This is very similar to the Great Depression when the Fed allowed the aggregate demand to collapse first and then the banking system followed.

So had Fed had the courage to act in 2008 the economy would be in a very different place today. Future reviewers of Bernanke’s book should keep that in mind.

P.S. For a more thorough development of this view see the book by Robert Hetzel of the Richmond Fed."

Former Obama White House economist: $15 minimum wage is a ‘risk not worth taking’

From James Pethokoukis of CEI.
"The Democratic Party platform calls for a $15 per hour national minimum wage. Hmm. Here is economist Alan Krueger, a former chairman of President Obama’s Council of Economic Advisers, on the “fight for 15,” (via a New York Times op-ed):
I am frequently asked, “How high can the minimum wage go without jeopardizing employment of low-wage workers? And at what level would further minimum wage increases result in more job losses than wage gains, lowering the earnings of low-wage workers as a whole?”
Although available research cannot precisely answer these questions, I am confident that a federal minimum wage that rises to around $12 an hour over the next five years or so would not have a meaningful negative effect on United States employment. One reason for this judgment is that around 140 research projects commissioned by Britain’s independent Low Pay Commission have found that the minimum wage “has led to higher than average wage increases for the lowest paid, with little evidence of adverse effects on employment or the economy.” A $12-per-hour minimum wage in the United States phased in over several years would be in the same ballpark as Britain’s minimum wage today.
But $15 an hour is beyond international experience, and could well be counterproductive. Although some high-wage cities and states could probably absorb a $15-an-hour minimum wage with little or no job loss, it is far from clear that the same could be said for every state, city and town in the United States. … Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking, especially because other tools, such as the earned-income tax credit, can be used in combination with a higher minimum wage to improve the livelihoods of low-wage workers.
Indeed, there is a risk-free way to boost incomes for low-wage workers. More on this subject:

So if we really, really boost the minimum wage, what happens?
By cranking up its minimum wage, LA is taking an unnecessary gamble
Economist survey suggests a better way to help low-income workers than raising the minimum wage to $15
Why are minimum wage proponents dismissing automation risk?