Friday, June 24, 2011

"The Data Says 'No'"

Journalist Fareed Zakaria has a disappointing article in Time Magazine entitled "How Today's Conservatism Lost Touch With Reality." The disappointment does not come from a disagreement with the overall point. I find that most political battles rely solely on rhetoric and, as Zakaria puts it, "abstract theories" that have little to do with practical application and do nothing more than provide bumper sticker slogans (pounding your fist and declaring "Freedom!" is not viable strategy). What is disappointing is the fact that Zakaria's argument is mainly economic, yet actual data is replaced with the very rhetoric and wave-of-hand dismissals he condemns. Zakaria, quite astonishingly, asks, "What is the evidence that tax cuts are the best path to revive the U.S. economy?" The implication is that evidence is lacking: a position that is blatently false.

In a December 2010 issue of The Wall Street Journal, Stanford’s Michael Boskin provided an extensive list of recent studies from Columbia, University of Chicago, Stanford, UC Berkeley, University of London, and others that support the notion that reduced taxes and decreased government spending bring about economic growth. Some have interpreted this as a movement toward a new economic consensus. The research of Harvard's Alberto Alesina and Silvia Ardagna on fiscal policies spanned 21 countries and roughly 40 years. Their findings indicate that economic expansion occurred under reduced taxes, while recessionary periods were under tax hikes. A 2010 study by Swedish economist Andreas Bergh and Oxford's Martin Karlsson found that increased government spending (surprise, surprise) reduces economic growth, even in Bergh's own country (the poster child of social democracy). 



Economist Thomas Sowell writes,

When the tax rate on the highest incomes was 73 percent in 1921, that brought in less tax revenue than after the tax rate was cut to 24 percent in 1925. Why? Because high tax rates that people don't actually pay do not bring in as much hard cash as lower tax rates that they do pay...Then and now, people with the highest incomes have had the greatest flexibility as to where they will put their money. Buying tax-exempt bonds is just one of the many ways that "millionaires and billionaires" avoid paying hard cash to the government, no matter how high the tax rates go...Even more so today than in the 1920s, billions of dollars can be sent overseas electronically, almost instantaneously, to be invested in other countries--creating jobs there, while millions of Americans are unemployed...Despite political demagoguery about "tax cuts for the rich," in human terms the rich have less at stake than working people. Precisely because the rich have so many ways of avoiding taxes, a high tax rate is likely to do them far less harm than it does to the economy, on which millions of people depend for jobs. 

Zakaria's foreign evidence (e.g. China, Germany) lacks a sense of proportion. The “German Miracle” is largely due to the elimination of price controls and the slashing of marginal tax rates following World War II and Nazi rule. China's success includes a number of factors, but owes much to the economic reforms of the late 1970's that began liberalizing their markets. Of course, things like trade, technology, culture, and so forth play a role in economic success, but to look at these countries and assume more government is the answer is historically irresponsible. America’s own welfare state has been expanding since the early 20th century thanks primarily to FDR's New Deal. The ideologies of the Progressive Era infected Democrats and Republicans alike and changed the way present-day Americans view the role of the state. America has been slowly moving away from a market-friendly economy, while emerging markets have been doing the opposite.

Zakaria's best argument is that of government investing in technology, but perhaps he is unaware of our politicians' complaints of “jobs lost” because of the iPad or ATMs. Compared to the massive spending of the past decade, cutting both taxes and government spending appears to be the best way to go.

Thursday, June 16, 2011

Liberty & Dignity: Extreme Poverty's Bottom-Up Solution


The following is a recent scholarship essay I wrote addressing the question, "Do you think it is possible to end extreme poverty in the next 30 years? If so, how?" The accompanying videos were obviously not part of the original:


Global poverty is a passionate subject for many and serves as the driving motive behind numerous international policies. Extreme poverty, defined by the World Bank as less than $1.25 a day, in particular draws the attention of the public. Is it possible to eradicate extreme poverty worldwide in the next 30 years? If we speak solely of what is possible, then my answer is a resounding ‘yes’. When it comes to what is plausible, I’m a bit more reserved. In a sense, I find my outlook summarized nicely by science writer Matt Ridley, who considers himself a “rational optimist”:


The rich have got richer, but the poor have done even better. The poor in the developing world grew their consumption twice as fast as the world as a whole between 1980 and 2000…Despite a doubling of the world population, even the raw number of people living in absolute poverty...has fallen since the 1950s. The percentage living in such absolute poverty has dropped by more than half to less than 18 percent. That number is, of course, still all too horribly high, but the trend is hardly a cause for despair: at the current rate of decline, it would hit zero around 2035, though it probably won’t. The United Nations estimates that poverty was reduced more in the last fifty years than in the previous 500.[1]


The reason extreme poverty “probably won’t” be stamped out in the next 30 years is because of the popular view that we in developed nations need to “do something.” This “something” ends up being anything that, as Cameroonian journalist Jean-Claude Shanda Tonme notes, does nothing more than "amuse[s] the crowds” and “clear[s] their own consciences."[2] To make matters worse, the strains of Progressive Era economics tend to infect most well-intentioned Western plans to raise the poor out of poverty. These progressive values include the fallacious idea that efficiency and sustainable growth are achieved through centralized planning and bureaucratic hierarchy.[3] This mindset ignores the one thing that I believe can bring about permanent economic growth in underdeveloped countries: homegrown, liberalized economic systems.


In the final days of World War II, economist and social scientist Friedrich von Hayek published an article in The American Economic Review criticizing heavy central planning in government policy. The future Nobel laureate described what he calls the “rational economic order” as being "determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess."[4] No central authority possesses all available knowledge necessary to utilize all available resources in a society. This knowledge is instead widely dispersed among millions of individuals. Taking into consideration the evolving needs and wants of society, "it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them…We need decentralization because only thus can we ensure that the knowledge of the particular circumstances of time and place will be promptly used."[5] In short, centralized planning fails not only in practice, but also in principle.



In his now famous critique of foreign aid (specifically $2.3 trillion over five decades), economist William Easterly embraces these same Hayekian concepts as the foundational elements of true foreign development. Distinguishing between Planners (i.e. top-down administrators) and Searchers (i.e. bottom-up adapters), Easterly advocates for more decision-making being placed in the hands of local Searchers. Familiar with and immersed in local conditions and resources, these Searchers become capable of two things Planners typically are not: feedback from and accountability to those in need. By remaining close to the customers, Searchers can discover new and innovative ways of providing the needs and desires of the people.[6] However, Searchers play an even more critical role in developing nations: the adaptation and/or uncovering of capitalistic and democratic values (concepts that are usually associated with the West) within their own traditions.



For permanent growth to even be possible among these various cultures, two things must be readily available: (1) economic liberty and (2) dignity for the bourgeoisie (i.e. the professional and educated class). Economist and historian Deirdre McCloskey explains that


dignity is a sociological factor, liberty an economic one. Dignity concerns the opinion that others have of the shopkeeper. Liberty concerns the laws that constrain him…Liberty without dignity…makes for activity without faithful self-esteem…A leading example in European history is that of the Jews, liberated legally during the eighteenth and nineteenth centuries but not accorded dignity—with the dismal result of Russian pogroms and Viennese anti-Semitic politics and the Final Solution. Likewise, dignity without liberty makes for status without hope, merely another version of the hierarchy of olden times, as in the overregulated guild towns of Venice or Lubeck in their maturity.[7]


McCloskey argues impeccably that it was the rhetoric surrounding markets and innovators that sustained the tenfold increase in average global per capita income since the Industrial Revolution. No longer were businessmen scorned by their peers. It is this same change in attitude, says McCloskey, which has led to the recent economic growth of China and India. If this dignity is to be achieved in underdeveloped countries, it will be done through the lenses of their own cultures and traditions.


My view is simple: give innovators the respect they deserve and the freedom they need by which to operate. While this view leaves little for outside Planners to do, it is one that history has validated in the case of the modern West and other recent successes. We should trade in ideas that make us feel good about ourselves for ideas that work. And though Live 8’s Bob Geldof may think critics like me “are just being stupid,” I can’t help thinking his declaration that “something must be done, even if it doesn't work” is not the smartest approach to such a detrimental problem.[8]


References:


1. Matt Ridley, The Rational Optimist: How Prosperity Evolves (New York: HarperCollins, 2010), 15 (emphasis mine).


2. Jean-Claude Shanda Tonme, “All Rock, No Action,” The New York Times (July 15, 2005).


3. For a review of Progressive Era economic reform, see Thomas C. Leonard, “American Economic Reform in the Progressive Era: Its Foundational Beliefs and Their Relation to Eugenics,” History of Political Economy 41:1 (2009).


4. F.A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35:4 (1945): 519.


5. Ibid.: 524.


6. See William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York: Penguin Press, 2006).


7. Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (Chicago: University of Chicago Press, 2010), 11.


8. Gethin Chamberlin, “Nice Concert. But Can It Really Save Millions From Dying?Scotsman.com News (July 4, 2005).