Archive for the 'Poverty' Category

Two Economic Models For The Poor

Leftists like to portray the European economic model as more “poor” friendly than the United States  economic model. But that depends on what your preferences are: if you are poor and would prefer less disposable income with more government services, then yes, the European model would be preferable. However, if you are poor and would prefer more disposable income with less government services, then no, the European model would not be preferable. It all depends on your preferences.

Economist Tim Taylor, in contrasting government redistrubition trends around the world points this out:

On the tax side, the U.S. tax code is already highly progressive compared with these other countries. The OECD published at 2008 report called “Growing Unequal: Income Distribution and Poverty in OECD Countries, which states (pp. 104-106): “Taxation is most progressively distributed in the United States, probably reflecting the greater role played there by refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit. … Based on the concentration coefficient of household taxes, the United States has the most progressive tax system and collects the largest share of taxes from the richest 10% of the population. However, the richest decile in the United States has one of the highest shares of market income of any OECD country.After standardising for this underlying inequality … Australia and the United States collect the most tax from people in the top decile relative to the share of market income that they earn.”

This finding is surprising to a lot of Americans, who have a sort of instinctive feeling that Europeans must be taxing the rich far more heavily. But remember that European countries rely much more on value-added taxes (a sort of national sales tax collected from producers) and on high energy taxes. They also often have very high payroll taxes to finance retirement programs. These kinds of taxes place a heavier burden on those with lower incomes.

The Deregulation Era And Developing Countries

Lefties often label the era from the late 1970′s to today as the era of deregulation where wages stagnated, income inequality increased, and overall the rich got richer at the expense of the poor. They argue that we should go back to the economic era from roughly the end of WWII, to the late 1970′s. That was an era of unprecedented economic growth, rise in wages, and reduced inequality.

Now, there are various answers that could be given to such claims (see here, here, here and here for a few) but my favorite is to look at the ‘deregulation era’ from the eyes of poor people around the world. If your concern is the worlds truly poor – those living in absolute poverty – the ‘deregulation era’ is an absolute god sent.

Take Hans Rosling, who gave a Ted Talk on this very thing – showing how our preconceived notions of poor countries are extremely outdated, see here. He shows that many countries, especially in Asia, but also Latin America and Africa, that have been poor for so long are now quickly moving up the economic ladder. But this was in 2007, the leftist replies, surely it’s outdated, no?

But then a couple of prominent economists noticed the same thing. MIT’s Maxim Pinkovskiy and Columbia’s Xavier Sala-i-Martin published a paper showing:

The conventional wisdom that Africa is not reducing poverty is wrong. Using the methodology of Pinkovskiy and Sala-i-Martin (2009), we estimate income distributions, poverty rates, and inequality and welfare indices for African countries for the period 1970-2006. We show that: (1) African poverty is falling and is falling rapidly; (2) if present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time; (3) the growth spurt that began in 1995 decreased African income inequality instead of increasing it; (4) African poverty reduction is remarkably general: it cannot be explained by a large country, or even by a single set of countries possessing some beneficial geographical or historical characteristic. All classes of countries, including those with disadvantageous geography and history, experience reductions in poverty. In particular, poverty fell for both landlocked as well as coastal countries; for mineral-rich as well as mineral-poor countries; for countries with favorable or with unfavorable agriculture; for countries regardless of colonial origin; and for countries with below- or above-median slave exports per capita during the African slave trade.

The authors explain their findings here. The New Republic as well as Blue Matter blog comment here and here.

Matthew Yglesias quotes another study from the World Bank:

Just over 25% of the world’s population (1.4B people), lived in extreme poverty in 2005, according to a report released this month from the World Bank (”Global Economic Prospects 2009: Long-term prospects and poverty forecasts“). This has fallen from 42% in 1990, when the bank first published its global poverty estimates. All regions of the world have seen gains. Rapid economic growth east Asia in particular has led to a dramatic decline in global poverty. In China the share of the population getting by on $1.25 a day, or less, fell from 60% to 16%.

The Economist magazine has more here.

Matthew Yglesias later comments:

Amidst all these problems in the United States, it’s worth recalling that for much of the world these are actually the best of times…

American politics is, naturally, going to remain focused primarily on the problems of Americans. But ultimately the problems of poor people in the developing world are much more severe than any of our problems, and growth in poor countries is extremely good news.

Even the Huffington Post picked up on the drastic change:

In the 1990s, “people could only feed themselves, and some even starved. Children could not afford to go to school, and many could not even finish primary school,” said Liu Jiandang, a 41-year-old former farmer. “Now, we’ve got paved roads, new houses, phones and vehicles. I run a hotel that can host 20 to 30 tourists and some rooms have TV sets, air conditioners, hot water and bathrooms.”

With her profits topping 50,000 yuan ($7,000) a year, Liu can afford to send her 19-year-old son to vocational college and her 10-year-old daughter to primary school. “Our lives are so much better than before,” she said.

Okay – you say, but surely the financial crisis has reversed most of these trends, right? The answer is no. According to Dani Rodrik, professor at Harvard Universities International Development program, writes:

For the first time ever, developing countries as a group grew have been growing faster than industrial countries. Not only that, as the figure makes clear, the growth differential between the two groups has been widening in favor of the poor countries.

And it isn’t just China, India, and a few countries that have been doing well. For a change, Africa and Latin America actually experienced some convergence with rich countries over the last decade.

Many analysts have projected these trends forward and predict rapid global growth, largely off the back of emerging and developing nations. In the words of a Citigroup report, “this time will be different.”

He provides this eye opening graph:

The Growth Of The Poor

Notice the dramatic turnaround, starting around the 1980′s and moving upwards quickly thereafter. This is all GREAT news from a developing countries perspective and it seems like the great recession hasn’t slowed it down!

What would the future look like if this trend is to continue? Tim Taylor gives the numbers:

To get a sense of the change, compare the rank order of the economies of the world in 2009 and 2050.  In 2009, the U.S. is the world’s largest economy. By 2050, U.S. economy will be about 2.5 times as large–and is projected to be in third place in absolute size, behind China and  India.  What other countries move up the rankings notably by 2050? Brazil, Mexico, Indonesia, Turkey, Nigeria, and Vietnam. To my 20th century mindset, some of those countries just don’t seem like global economic heavyweights. Time to start adjusting my mind to the coming realities.

More can be found on his blog post here.

The private sector is catching on too, as Alan Taylor, a Senior Adviser at Morgan Stanley wrote in Foreign Affairs magazine:

A broad range of economic figures suggest that emerging markets are catching up to developed markets. As the Great Recession fades, this trend is likely to continue. The emerging-market history of low growth and high volatility is fading, while developed markets are experiencing more instability and financial impairments. Emerging markets have decreased their debt-to-GDP ratios, even as developed markets, including the United States and some in Europe, are letting theirs rise. In a sign of convergence between emerging and developed markets, health and schooling levels in emerging-market countries are now comparable to those seen in developed markets around 1975, with the gap continuing to narrow. And average levels of political and economic freedom in emerging markets have also improved dramatically in the last two decades. Although emerging markets have not yet achieved parity with developed markets…they now appear more stable and better positioned to enjoy sustained growth than they did a generation ago.

Even Jay Ulfelder is convinced, he writes:

To my mind, the trends Alan Taylor identifies are the start of the big development story of the 21st century. After a century in which the global political economy was primarily characterized by the yawning gap in wealth and power between the so-called First and Third Worlds, that gap is finally narrowing. Economic growth is accelerating in countries long mired in a “poverty trap,” and the economic and political benefits of that trend are extending to more and more of the world’s human population. Hundreds of millions of people still live in abject poverty, under authoritarian rule, or both, but the share of the global population living in deep poverty is notably lower than it was just a couple of decades ago, and the economic takeoffs occurring in many long-poor countries suggest that trend is only broadening.

I leave you with a quote from a study on this very thing from the Brookings Institute (pdf) :

The greatest surprise, however, is the one taking place in Sub-Saharan Africa. Between 1980 and 2005, the region’s poverty rate had consistently hovered above 50 percent. Given the continent’s high population growth, its number of poor rose steadily. The current period is different. For the first time, Sub-Saharan Africa’s poverty rate has fallen below 50 percent. The total number of poor people in the region is falling too.

If you consider all humans of equal value, regardless of race or nationality, the ‘deregulation era’ has to be considered a great era and a positive change over previous periods of human history – and this is true, even assuming the worst case assumptions of the liberals and lefties of the world.

Update: More here, here and here(pdf).

Quote Of The Day

“I do get the point that if you are young and idealistic and want your work to have a goal of alleviating poverty, working for a typical business may seem unlikely to relate to your objective. But it’s hard to know. Has poverty in India and China been reduced more by the action of aid agencies or by the fact that those countries are now embedded in the supply chains of U.S. service and manufacturing firms?” — Arnold Kling 

Quote Of The Day

“The typical person in the top 5 percent of the Indian population, for example, makes the same as or less than the typical person in the bottom 5 percent of the American population. That’s right: America’s poorest are, on average, richer than India’s richest — extravagant Mumbai mansions notwithstanding.” — Catherine Rampbell, writing in the New York Times book review about “The Haves and the Have-Nots”a book written by World Bank economist and development specialist Branko Milanovic

Milton Friedman On The Responsibility To The Poor

[youtube:http://www.youtube.com/watch?v=Rls8H6MktrA&feature=player_embedded]
Just as true in 1978 as it is today.

The Effects Of Unemployment Insurance

Each unemployed person has a “reservation wage”–the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

Consider, for example, an unemployed person who is accustomed to making $15.00 an hour. On unemployment insurance this person receives about 55 percent of normal earnings, or $8.25 per lost work hour. If that person is in a 15 percent federal tax bracket and a 3 percent state tax bracket, he or she pays $1.49 in taxes per hour not worked and nets $6.76 per hour after taxes as compensation for not working. If that person took a job that paid $15.00 per hour, governments would take 18 percent for income taxes and 7.65 percent for Social Security taxes [DRH note: this should be Social Security plus Medicare], netting him or her $11.15 per hour of work. Comparing the two payments, this person may decide that an hour of leisure is worth more than the extra $4.39 the job would pay. If so, this means that the unemployment insurance raises the person’s reservation wage to above $15.00 per hour.

That was from Larry Summers, the Director of the White House’s National Economic Council for President Barack Obama. Full post here.

Credit Card Economics

When Obama proposed his credit card regulations, economic theory predicted what would happen: harm those with less than perfect credit scores (primarily the poor). Bryan Caplan, professor of economics at George Mason University, explained it best when he wrote:

” When you make lending to high-risk people less attractive, the result is not worse terms for low-risk people who have been profitable all along. The result is that high-risk people get less credit. They used to be able to get credit despite their credit-unworthiness by paying extra; if the law forbids this, why lend to them?”

How did this prediction fare with reality? Very well, according to this Yahoo Finance article:

During the past nine months, credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.

The only way this bill makes sense is in assuming that regulators, centered in Washington, know more about the cost/benefit analysis of the poor than the poor themselves do. An assumption that comes easy to politicians and technocrats in Washington.

Quote Of The Day

“About 10 percent of infants die in their first year of life in Africa — still shockingly high, but considerably lower than the European average less than 100 years ago, let alone 800 years past. And about two thirds of Africans are literate — a level achieved in Spain only in the 1920s.” – Charles Kenny writing in Foreign Policy, link via Tyler Cowen

Quote Of The Day

” When you make lending to high-risk people less attractive, the result is not worse terms for low-risk people who have been profitable all along.  The result is that high-risk people get less credit.  They used to be able to get credit despite their credit-unworthiness by paying extra; if the law forbids this, why lend to them?” — Bryan Caplan, professor of economics on the Real Unintended Consequences of New Credit Card Regulations

The Invisible Hand vs Charity

One of the major problems I have with Chicano Studies is its overemphasis on altruistic ventures as opposed to “personal gain”. Becoming a community organizer, for example, is more encouraged than becoming an engineer. This was particularly important to me last year when my sister, being in her junior year of high school, was applying to colleges. Though she had already decided on engineering as her intended major, she was having doubts and was considering a profession that “makes a difference”.

I explained to her that engineering can also be used to make a difference, the two are not mutually exclusive. I also said that when you compare engineering to the highly inefficient means of “making a difference” common among chicano studies students, like community organization, one can make a very strong argument that engineering makes more of a difference – and in the process, you can make a good living doing it.  She didn’t seem convinced and I could tell that I needed to explain my point better. Unable to do so at the time I resorted to reminding her that there is a field in engineering that may allow her to design better prosthesis, and being that my dad lost his leg from the knee down in a work accident, she could possibly make his life and people like him better.

That satisfied her but I still thought I needed a better way to explain my point. The blog post I did later on the topic, titled “In Praise Of Personal Interest” did a better job, I wrote:

…if charity is your goal, with extra money [you would make by being an engineer] you can provide valuable resources, fund efficient charities, be a stronger role model to the next generation (three people in my family want to be engineers now, just because of my experience), provide a better future for your children, assist your family out, or, just as importantly, be a testament to those around you that hard work and dedication pay off, that there is a way out of the ghetto.

Lastly, unlike nonprofits, even if altruism is not your goal, capitalism works in such a way that when pursuing personal interest “you are led, as if by an invisible hand, to do things that improve the lives of others”.

Still though, I felt like I could have explained myself better. My point does not come across as clearly as I’d like it to. Well to my surprise, while riding my bicycle to work yesterday, I was listening to a bloggingheads podcast with Philosopher Peter Singer and economist Tyler Cowen about alleviating poverty when Cowen asks Peter Singer a question that I would have asked him if I was doing the podcast, namely: what advice would you give to an 18 year old in college who has read Peter Singers book, is convinced that making a difference matters, and is considering a career as an engineer in the cell phone industry because she sees what a difference cell phones are making to the poor in Africa? Would that career choice, from an altruistic perspective, make more of a difference than, say, a person who makes 40k/year and gives 15% to the poor in India? What if the engineer never gives a dime to charity?

What answer do you think Peter Singer gave? Click below to see the exchange (full video, which is highly recommended, can be found here). It is a good answer, and in the end, it moves me a step closer to finally explaining my point better.  Maybe I should forward this to my sister?

“The Rich” Vs “Government”: Who Should Get More Money?

Scott Sumners, a professor of economics at Bentley University, in one of his lengthy posts, made this parenthetical statement:

[BTW, Bill Gates essentially taxed middle class consumers all over the developed world, and is giving almost all of the money to the disadvantged in poor countries. That's something governments don't do, and yet for his "monopoly profits" he is despised by many on the left. Nor does this fact show up in the so-called "income distribution" data that is taken seriously even by economists who should know better.]

To which Arnold Kling commented:

There is a huge contest going on between politicians and rich people over who should get to spend their money. Most of us have no direct stake in the outcome–as neither politicians nor rich people, we will not have the choice.

But I think we really ought to be rooting for the rich people. That is, we should root for lower taxes and less government spending. Government is one of the worst charities in the world. It advertises that it is going to give money to worthy causes, but very little money goes to programs that are aimed at people in need, and not many of those programs hit their targets. All of the bleeding hearts who are thrilled by the idea of government closing tax loopholes and taking more money from rich people should do an empirical analysis of who benefits from government spending and who benefits from the spending of rich people.

It’s a point worth emphasizing.

Bill Easterly Is Blogging

Developmental economist Bill Easterly has a blog called Aid Watch.

He starts off:

Today, I foist a new blog called Aid Watch on the blogosphere. The objective is to be brutally honest when aid is not helping the poor, but also praising it when it is.

The blog can be found here.

Quote Of The Day

“Mr. Obama and the Democrats who favor labor standards in trade agreements mean well, for they intend to fight back at oppressive sweatshops abroad. But while it shocks Americans to hear it, the central challenge in the poorest countries is not that sweatshops exploit too many people, but that they don’t exploit enough. Talk to these families in the dump, and a job in a sweatshop is a cherished dream, an escalator out of poverty, the kind of gauzy if probably unrealistic ambition that parents everywhere often have for their children…sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade.” — Nicholas Kristof , writing in the New York Times

Quote Of The Day

“Fifty percent of the variance in inequality in lifetime earnings is determined by age 18. The family plays a powerful role in shaping adult outcomes that is not fully recognised by current American policies. As programs are currently configured, interventions early in the lives of disadvantaged children have substantially higher economic returns than later interventions such as reduced pupil-teacher ratios, public job training programs, convict rehabilitation programs, adult literacy programs, tuition subsidies, or expenditure on police. This is because life-cycle skill formation is dynamic in nature. Skill begets skill; motivation begets motivation. Motivation cross-fosters skill, and skill cross-fosters motivation. If a child is not motivated to learn and engage early on in life, the more likely it is that when the child becomes an adult, he or she will fail in social and economic life. The longer society waits to intervene in the life cycle of a disadvantaged child, the more costly it is to remediate disadvantage.” –James J. Heckman, nobel laureate and Professor of Economics at the University of Chicago, discussing the achievement gaps in todays society

The Argument Against Regulations

Bacon-wrapped hot dogs are common in downtown Los Angeles and especially in Mexican border cities. Tijuana, for example, has a vendor at almost every corner. Well now, apparently, Los Angeles is trying to ban the cart sale of these very delicious bacon-wrapped hot dogs.

As a huge fan of bacon-wrapped hot dogs (I’ve eaten more than ten in one TJ night before), I couldn’t pass up the opportunity to use this recent regulation as an argument against regulations in general (though not all regulations). It is a perfect illustration of the standard argument against regulations: reduces consumers choices, benefits the well-off and established sellers, and harms competition. All, of course, in the name of saving the consumer from himself…government paternalism at its finest.

However, those of us that eat bacon-wrapped hot dogs in much less regulated settings (Mexico, for example) know who these regulations really benefit (not the consumer!).

Milton Friedman On Race, Poverty And Government

[youtube:http://www.youtube.com/watch?v=7HMEFsmpKMc]

From an old speech but just as relevant today as it was then.