Global Economic Watch

Acemoglu on Institutions, Prosperity, and What Makes Poor Countries Poor

Graham Griffith — Fri, 20 Nov 2009 16:55:00 GMT

MIT economist Daron Acemoglu believes institutions matter when it comes to generating prosperity. And in analyzing what makes rich countries rich, and poor countries poor, one has to look primarily at government. Or as he writes in Esquire: "Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments."

How do we know that institutions are so central to the wealth and poverty of nations? Start in Nogales, a city cut in half by the Mexican-American border fence. There is no difference in geography between the two halves of Nogales. The weather is the same. The winds are the same, as are the soils. The types of diseases prevalent in the area given its geography and climate are the same, as is the ethnic, cultural, and linguistic background of the residents. By logic, both sides of the city should be identical economically.

And yet they are far from the same.

On one side of the border fence, in Santa Cruz County, Arizona, the median household income is $30,000. A few feet away, it's $10,000. On one side, most of the teenagers are in public high school, and the majority of the adults are high school graduates. On the other side, few of the residents have gone to high school, let alone college. Those in Arizona enjoy relatively good health and Medicare for those over sixty-five, not to mention an efficient road network, electricity, telephone service, and a dependable sewage and public-health system. None of those things are a given across the border. There, the roads are bad, the infant-mortality rate high, electricity and phone service expensive and spotty.

The key difference is that those on the north side of the border enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. On the other side, the inhabitants have institutions that perpetuate crime, graft, and insecurity.

Read What Makes a Nation Rich? One Economist's Big Answer here. And take a closer look at the accompanying map/graphic (above) by clicking here.

When Marketers Become Media Companies

Graham Griffith — Fri, 20 Nov 2009 14:58:00 GMT

Ad Age editor Jonah Bloom says "the marketer has truly become the media owner." With technology lowering "cost of entry" dramatically in the digital age, some marketers are now able to take their messages directly to consumers. In this Ad Age video, Bloom discusses some of the recent success marketers have had, and suggests these are not exceptions, but signs of a larger trend:

OECD Economic Outlook: 'Tepid' Recovery and Rising Unemployment

Graham Griffith — Thu, 19 Nov 2009 18:15:00 GMT

The Organisation of Economic Cooperation and Development's latest Economic Outlook is out today, and it is full of some mildly good--if reserved--news. The big takeaway: the recovery is on, but it is slow and unemployment will keep rising across OECD nations at least until the middle of 2010 for the US, and likely later for Euro countries. Jørgen Elmeskov, head of the OECD's Economics Department, answers some key questions about the report's findings:

Here's a look at the unemployment projections in the report:

You can watch the OECD's press conference explaining the report, and access the full report here.

Robert Pozen on Fair Value Accounting

Graham Griffith — Thu, 19 Nov 2009 13:47:00 GMT

In the November Harvard Business Review, Robert Pozen--former adviser to President George W. Bush and Massachusetts Governor Mitt Romney, and current chair of MFS Investment Management--weighs in on the debate over whether accounting rules bear some blame for the financial crisis. And he says that both sides in the argument over whether "fair value accounting" exacerbated the credit crunch a year ago may be wrong:

We do not want banks to become insolvent because of short-term declines in the prices of mortgage-related securities. Nor do we want to hide bank losses from investors and delay the cleanup of toxic assets—as happened in Japan in the decade after 1990. To meet the legitimate needs of both bankers and investors, regulatory officials should adopt new multidimensional approaches to financial reporting.

Before we can begin to implement sensible reforms, though, we must first clear up some misperceptions about accounting methods. Critics have often lambasted the requirement to write down impaired assets to their fair value, but in reality impairment is a more important concept for historical cost accounting than for fair value accounting. Many journalists have incorrectly assumed that most assets of banks are reported at fair market value, rather than at historical cost. Similarly, many politicians have assumed that most illiquid assets must be valued at market prices, despite several FASB rulings to the contrary.

You can read his article here (subscription only). You can also watch Pozen discuss the issue, along with a brief introduction to some of the ideas he puts forward in a new book, Too Big To Save, in this video from Harvard Publishing:

Daniel Gross Looks for Silver Lining on Unemployment

Graham Griffith — Wed, 18 Nov 2009 17:42:00 GMT

There is no shortage of strong writing on unemployment figures these days. Or, for that matter, projections. Nouriel Roubini, for one, is projecting things to get worse:

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession.

As a result of these terribly weak labor markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures.

The damage will be extensive and severe unless bold policy action is undertaken now.

But Daniel Gross has an interesting take at his Moneybox column for Slate. He agrees that "before things get better, they have to get worse more slowly." But he looked at the third quarter productivity numbers from the Bureau of Labor Statistics and saw some hope:

In the third quarter, productivity—econospeak for companies doing more work with the same amount of labor—rose at a 9.5 percent annual rate. We've just witnessed the fastest two-quarter productivity surge since the first year of the Kennedy administration. Economists can read these omens the way Roman priests read chicken entrails. And here's one of their explanations: Just as investors and businesspeople don't believe things could ever go wrong at the peak of the boom, they have difficulty imagining things can get better at the trough of the bust. And so they respond to rising demand not by hiring new employees but by coaxing existing employees to work harder. But just as hamsters can run only so fast on their treadmills, there are limits to productivity growth. "If you look at economies over many centuries, you can't grow productivity for 7 or 9 percent for more than two or three quarters," said Lakshman Achuthan, managing director at New York-based Economic Cycle Research Institute, whose leading employment indicators are looking up. "At a certain point, people will start to collapse at work." Should the economy expand in the fourth quarter at the same 3.5 percent annual rate it did in the third quarter—as it shows every sign of doing—companies won't have any choice but to hire, says Michael Darda, chief economist at MKM Partners. "There's an outside chance we could see job growth by the end of the year."

Read Coming Soon: Jobs! here.

American Consumers: Resetting Behavior and Refocusing the Economy

Graham Griffith — Wed, 18 Nov 2009 15:13:00 GMT

John Gerzema, Chief Insights Officer for the marketing firm Young and Rubicam, sees a major shift in the "post-crisis" behavior Americans. He says the American consumer is "de-leveraging," and he is bullish on what that means for the future of the US economy. The consumer is newly empowered, in Gerzema's view, and he outlines how this will bring about positive change in the economy in this Ted talk:

Adam Smith in 10 Minutes

Graham Griffith — Wed, 18 Nov 2009 14:20:00 GMT

Chris Berry teaches Political Theory at the University of Glasgow. And if you give him 10 minutes, he'll give you an interesting summation of the life, theories, and influence of the University of Glasgow's most famous scholar--Adam Smith. Here's an excerpt:

The seeds of Smith's two great books were sown in his professorial years. The Theory of Moral Sentiments appeared in 1759 and drew on his lectures. It went through six editions in his lifetime. Smith’s intellectual range as a lecturer was extensive. Beyond courses in philosophy and jurisprudence he also discussed history, literature and language. He maintained his interest in science and wrote an essay on the history of astronomy. This is notable not only for the breadth of Smith’s knowledge but also as an attempt to link the development of different astronomical accounts to a basic human propensity to seek order.

Although his second great book the Wealth of Nations was published in 1776 we know that he had already considered many of its leading themes at Glasgow as he lectured on as he put it: 'those arts which contribute to subsistence, and to the accumulation of property, in producing correspondent movements or alterations in law and government'. In 1787 Smith was elected Rector of the University and in a letter of thanks remarked that he remembered is professorial days as 'by far the most useful and therefore as by far the happiest and most honourable period of my life'.

If Smith of popular repute is the ‘father of capitalism’, the advocate of ‘market forces’, the enemy of government regulation and believer in something called the ‘invisible hand’ to produce optimum economic outcomes then he would be a disappointed parent. All his work is deeply steeped in moral philosophy. Indeed the simple fact that the final edition of the Moral Sentiments containing extensive revisions appeared in 1790, the year of his death, tells us is that Smith’s commitment to the moral point of view endured alongside and beyond the publication of the Wealth of Nations.

The Moral Sentiments is a leading example of a particular approach to moral philosophy – one that regards it not as sets of rationally or Divine ordained prescriptions but as the interaction of human feelings, emotions or sentiments in the real settings of human life. In many ways it is a book of social and moral psychology. What we can call economic behaviour is necessarily situated in a moral context. But more than that the key theme of the book is an opposition to the view that all morality or virtue is reducible to self-interest. Indeed his opening sentence declares that everyday human experience proves that false, he writes: "How selfish soever a man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derive nothing from it except the pleasure of seeing it".

You can read or watch the full 10-minute speech here.

(H/t Gavin Kennedy)

Ken Lieberthal: Don't Overlook the Significance of US-China Talks Centered on Global Issues

Graham Griffith — Tue, 17 Nov 2009 19:20:00 GMT

President Obama met with Chinese President Hu Jintao today, and while they announced that their two nations are working together in some critical areas--namely in halting the spread of nuclear weapons-- LA Times reporter Peter Nicholas writes today that there is still a divide on trade issues and how best to respond to the global economic crisis. While President Obama is pushing for China to open the doors for more US exports, President Hu Jintao pushed for the US to cut out protectionist measures. But apart from these specific issues, Kenneth Lieberthal, the Brookings Institution's lead China scholar, says there is one big change in these talks from previous meetings between US and China's leaders: global issues are at the center of the discussion.

SBA's Karen Mills Responds to Questions About Access to Credit

Graham Griffith — Tue, 17 Nov 2009 13:49:00 GMT

Karen Mills Administrator for the Small Business Administration, and Treasury Secretary Timothy Geithner will be holding a forum with business owners tomorrow to discuss small business financing. In advance of that forum, Mills responded to questions from small business owners in a live chat yesterday. The majority of the questions focus on access to credit and SBA backed loans:

Unemployment and its Political Impact

Graham Griffith — Mon, 16 Nov 2009 15:22:00 GMT

Ross Douthat references the below chart in his New York Times column today:

That's the chart put together by Obama Administration key advisers Christine Romer and Jared Bernstein during the push for the Stimulus Bill. Douthat refers to it as an "unfortunate chart:"

The first line — the hopeful line, the one that was used to sell $800 billion worth of stimulus — showed the rate of joblessness peaking this fall at 8 percent, and dropping swiftly thereafter. The second line — the no-stimulus scenario — showed unemployment peaking at 9 percent, holding there across 2010, and then declining in 2011 and 2012.

Now reality has produced numbers of its own. In every month since May, the unemployment rate has been roughly a percentage point higher than the chart’s grimmer, stimulus-free scenario. This October, when Obama’s advisers predicted that unemployment would stand at 8 percent with the stimulus and just under 9 percent without it, the actual jobless rate leaped to 10.4 percent.

This dire figure isn’t Barack Obama’s fault. Even in an age of near-trillion-dollar spending sprees, the president of the United States has only limited influence over the unemployment numbers. But the White House spent the winter pretending otherwise. The stimulus bill was framed and sold primarily as a jobs bill, and the Obama administration placed a substantial bet on the promise that the unemployment rate would start dropping before 2010 arrived.

The rest of Douthat's piece focuses on the political rather than the economic landscape. But if one thing is clear after these last 14 months, it is that you can not separate the two. So if Douthat is right, there may not be a lot of political capital to spend on some of the proposals floating about for Washington to tackle the unemployment problem. But that doesn't mean they aren't worth exploring, debating, considering, shooting down (circle one) here. Douthat's NYT opinion page neighbor Paul Krugman, for instance, put forward the idea of adopting "European-style employment policies" like job sharing programs. And the Roosevelt Institute is running a series of "big ideas" from economists and historians for the next two weeks. For example, L. Randall Wray, economics professor at University of Missouri-Kansas City, proposes a "New Deal-style jobs program." Read his idea here.

Planet Money Podcast: Measuring the Cash Per Clunker in Government's Cash for Clunkers Program

Graham Griffith — Mon, 16 Nov 2009 06:37:00 GMT

This Sunday's Planet Money podcast is worth a listen. Edmunds.com Chief Executive Jeremy Anwyl says the government spent a lot of cash per vehicle--$24,000 per new car, to be precise. But Council of Economic Advisers member and the White House's Stimulus point-man Austan Goolsbee's calculations are decidedly different. Princeton's Alan Blinder tries to settle the dispute. Take a listen here.

Ian MacMillan Explains a Quick Net Present Value Tool

Graham Griffith — Mon, 16 Nov 2009 06:07:00 GMT

Ian MacMillan says it is better to be "roughly right" than to be "precisely wrong." That is a driving notion behind the BareBones NPV tool that MacMillan, professor of innovation and entrepreneurship at Wharton, and Rita McGrath, who teaches at Columbia University Business School. NPV stands for Net Present Value, and the tool is designed to give innovators and investors a better sense of whether a business idea will generate necessary revenue, and for how long it will remain profitable in a highly competitive business climate. MacMillan explains the tool in this video from Ideas@Wharton:

Rita McGrath has more information available on her blog, and provides a downloadable version of the tool here.

Rethinking the iTunes Pricing Model

Graham Griffith — Fri, 13 Nov 2009 16:10:00 GMT

Here's an interesting case study for examining pricing models. There's no disputing Apple's success with its iTunes music store (unless, perhaps, you are an old-school record company executive). But Wharton School economists Ben Shiller and Joel Waldfogel have a new paper in which they argue both Apple and consumers would be better off if the the iTunes store shifted away from the "common practice of uniform pricing." If you are a subscriber to the National Bureau of Economic Research, you can read the paper here. If not, then here's an excerpt from The Economist magazine's article on the paper:

In January 2008 the researchers presented nearly 500 undergraduate students at Wharton with clips of the 50 most popular songs on iTunes earlier that month. Having listened to each clip, the students were then asked to write down the most they would be willing to pay to download the song in question. Data on more than 23,000 song valuations resulted, allowing the professors to get a sense of the actual demand curves for popular songs. Similar data were also collected in January this year, though this time some older and less popular tracks were also included.

The exercises showed that even a uniform price per song that maximised revenue among the students was quite high—$2.30 in 2008 and $1.46 in 2009. Wharton students may be particularly fond of music, but it is also possible that the market would sustain a higher uniform price than 99 cents. More important, knowing the uniform price that maximised revenue also allowed the authors to evaluate other ways to price online music.

One alternative is song-specific pricing, much favoured by record companies. (Apple has already moved a bit in this direction with its multi-tier system.) But the research suggested that this would increase profits by a mere 3%. Part of the problem was that people who valued one song highly also tended to place a high value on others. This implies that person-specific, rather than song-specific, pricing would be more efficient. But sellers’ data are not refined enough to set different prices for different people. People may resent such pricing anyway, so it could harm sellers’ brands. Crude profiling—by race or sex, say—would be illegal. In any case, the authors found that basic demographic information did not tell them much about musical tastes.

Read the full article here.

(H/t Planet Money).

Bruce Bartlett on Value Added Tax and the 'Europeanization of America'

Graham Griffith — Fri, 13 Nov 2009 13:19:00 GMT

As a domestic policy adviser to President Ronald Reagan, Bruce Bartlett was one of the key authors of supply-side economic policies that came to be known as Reaganomics. Later, he served as deputy assistant secretary for economic policy at the Treasury during the George H. W. Bush presidency. But in the last few years he has drawn the ire of some of his former Republican colleagues for his sharp criticism of President George W. Bush in op-ed columns, and especially in his book, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, in which he criticized the second Bush presidency for what he deemed "liberal economic policies."

Bartlett has a provocative new book out, The New American Economy: The Failure of Reaganomics and a New Way Forward. In the book, Bartlett pushes the idea that some economic theories fit particular times, and may not be applicable during other periods. Some of what he writes is eyebrow-raising, at the very least, for his former supply-side allies. For one, he is now pushing for the US to adopt a Value Added Tax (VAT).

In the conservative mind, the VAT, which is embedded in the prices of goods, is the foundation upon which the European welfare state rests. Without its enormous revenue-raising capacity the Europeans never could have financed their welfare states. In short, without the VAT there would be no welfare state in Europe, government would be smaller and the threat of totalitarianism would be much less, conservatives reckon.

By advocating a VAT, I am, in effect, advocating totalitarianism, many of my friends believe. If we institute a VAT it will be like pouring gasoline on the fire of big government. It will get bigger overnight. The only thing holding this country back from having a welfare state as large as Europe's, conservatives argue, is the low level of taxation that most Americans are loath to abandon. Thus in their own minds, conservatives believe that holding the line on taxes, no matter how large the deficit, is the essential prerequisite for the preservation of liberty.

The only problem with this analysis is that it has no factual basis whatsoever. If Hayek were even remotely correct, all of Europe would be one huge gulag by this time. At the very least, Europe would be mired in poverty, growth nonexistent and freedom hanging on by the thinnest of threads.

Of course, that is not the case at all. According to Freedom House, virtually every country in Europe has just as much political freedom as we do. Even organizations like the Cato (CTR - news - people ) Institute and the Heritage Foundation, which seem to think that the tax burden is the single most important measure of freedom, concede that many European countries with tax burdens that would be considered confiscatory by all conservatives and probably most Americans are in fact just about as free as we are.

We'll be watching to see whether Bartlett's writing will spark a public conversation about the potential benefits and pitfalls of instituting a VAT, and whether it would bring about the The Europeanization Of America--the title of the above cited Bartlett op-ed--and what that really means. Read the full article at Forbes.

Anita Campbell Takes to the UPS Whiteboard

Graham Griffith — Fri, 13 Nov 2009 12:57:00 GMT

We've highlighted Anita Campbell's work here at The Watch before. Campbell is editor-in-chief of Small Business Trends, a useful Website for quick-tips on running a business, or for just keeping up with the conversation among business owners. Now Campbell is stepping in front of the camera. She's recorded three UPS-sponsored whiteboard videos. Here's one--part instruction video, part pep-talk--in which she talks about taking risks on the path to success: