Every few years, the OECD conducts an international student evaluation called the Programme for International Student Assessment (PISA). In the latest round of testing (2006), the United States scored statistically significantly below the OECD average in both math and science (the reading portion was not counted due to a printing error in the test booklet), as well as below many non-OECD countries. The results of this study, combined with the meritocracy-enhancing effects of globalization, do not bode well for the economic future of the United States.
With globalization's help, meritocracy is on the rise. With the technological and infrastructural advances in communication over the past fifteen years, the significance of geographical location has fallen. The proliferation of high-speed internet access and falling software prices have helped shape a world where many jobs can be done from anywhere. Consequently, competition for many jobs has shifted to a global scale. While these developments are encouraging for economic efficiency; for the US economy, they are less so.
A basic lesson of economics is that standard of living depends on the level of productivity. Shifting from older, less productive industries, to newer, cutting-edge industries increases productivity, and thus standard of living. Thus, the strongest economies are those with the most brainpower, on the cutting-edge of innovation and productivity. In the recent past, this has been the United States. Recent trends in globalization and the recent PISA results, indicate that US's term as the world's strongest economy could be nearing its end. Specifically, a significant threat appears to be brewing in east Asia as China, Korea, and Japan are all among the top scorers in math and science.
The new global dynamics of our world will present the US with an unprecedented level of economic competition in terms of innovation and knowledge. The US has been detrimentally complacent in coming to terms with this reality. Regrettably, real change in the form of education reform will probably only come once the consequences of this complacency become tangible.
PISA Results: OECD PISA 2006 Report.
Saturday, January 30, 2010
Saturday, January 23, 2010
Dubious Defense of Protectionism
I recently came across an interesting article in the French magazine Marianne by Maurice Allais, the sole French Nobel Prize winner in economics (1988). The article is titled "Contre les tabous indiscutes", which literally translates to, "Against Unmentionable Taboos". As the title would indicate, it is a defense of what he perceives to be "unmentionable taboos". One such defense, that I will discuss here, and find particularly problematic, is that of protectionism.
Allais claims that protectionism has been deemed taboo as a result of the G20's doctrinal approach to free trade. He proceeds to counter this taboo while outlining both good and bad forms of protectionism. For Allais, bad protectionism occurs between two countries with similar incomes, while good protectionism occurs between countries with disparate incomes. For Allais, good protectionism is justified by wage and production cost disparities. He doubts higher income countries' ability to compete with lower wages in developing countries. He cites the vast outsourcing he believes is causing French unemployment to rise, and what he vaguely terms "aggravated social situations". Allais argues an absence of his brand of protectionism will destroy industry in richer countries, sending unemployment skyward. In addition, Allais contends developing countries will be helped as they will not have to deal with corporations leaving as soon as wages rise.
As a Frenchman, Allais' primary concern appears to be rising unemployment in France. While his concerns are normal, his responses to and prescriptions for these concerns are misplaced. At one point in his article, Allais points out that free trade is not an end in and of itself, that it is simply a means to an end. This is true, yet Allais fails to recognize this same notion with respect to French industry. At one point, Allais writes, "To me, it's scandalous that companies close sites in France, only to open new ones in areas with lower costs." For me, this is not scandalous at all; in fact it makes sense. Allais ignores a critical aspect of capitalism: creative destruction. Capitalism in operation is never in stasis, resources are constantly shifting, and this includes industries. To think there is some normative set of industries for a certain country is to miss the quintessence of capitalism. The apt response is not to give a crutch to a specific industry, but to shift to new industries, new sources of comparative advantage. If Allais feels government action is necessary, perhaps his government can promote and expedite innovation, smooth the shift to something new.
Allais paints a picture of a future France devoid of industry, with millions of French out of work with nothing to do. This is a static view of economic reality. Are those millions unemployed not free to find work in a more competitive industry, perhaps start their own business, or learn new skills? In other words, adapt? Protecting inefficient domestic industry helps a specific industry in the short-run, at the expense of future economic competitiveness and standard of living. While this trade-off may sound abstract, future economic uncompetitiveness can manifest itself in many forms; including the unemployment Allais fears.
Allais claims that protectionism has been deemed taboo as a result of the G20's doctrinal approach to free trade. He proceeds to counter this taboo while outlining both good and bad forms of protectionism. For Allais, bad protectionism occurs between two countries with similar incomes, while good protectionism occurs between countries with disparate incomes. For Allais, good protectionism is justified by wage and production cost disparities. He doubts higher income countries' ability to compete with lower wages in developing countries. He cites the vast outsourcing he believes is causing French unemployment to rise, and what he vaguely terms "aggravated social situations". Allais argues an absence of his brand of protectionism will destroy industry in richer countries, sending unemployment skyward. In addition, Allais contends developing countries will be helped as they will not have to deal with corporations leaving as soon as wages rise.
As a Frenchman, Allais' primary concern appears to be rising unemployment in France. While his concerns are normal, his responses to and prescriptions for these concerns are misplaced. At one point in his article, Allais points out that free trade is not an end in and of itself, that it is simply a means to an end. This is true, yet Allais fails to recognize this same notion with respect to French industry. At one point, Allais writes, "To me, it's scandalous that companies close sites in France, only to open new ones in areas with lower costs." For me, this is not scandalous at all; in fact it makes sense. Allais ignores a critical aspect of capitalism: creative destruction. Capitalism in operation is never in stasis, resources are constantly shifting, and this includes industries. To think there is some normative set of industries for a certain country is to miss the quintessence of capitalism. The apt response is not to give a crutch to a specific industry, but to shift to new industries, new sources of comparative advantage. If Allais feels government action is necessary, perhaps his government can promote and expedite innovation, smooth the shift to something new.
Allais paints a picture of a future France devoid of industry, with millions of French out of work with nothing to do. This is a static view of economic reality. Are those millions unemployed not free to find work in a more competitive industry, perhaps start their own business, or learn new skills? In other words, adapt? Protecting inefficient domestic industry helps a specific industry in the short-run, at the expense of future economic competitiveness and standard of living. While this trade-off may sound abstract, future economic uncompetitiveness can manifest itself in many forms; including the unemployment Allais fears.
Thursday, January 14, 2010
Krugman on Europe
Paul Krugman recently penned this article in The New York Times comparing the United States and Europe. The crux of his argument is that European-style social democracy does not sacrifice anything in terms of economic dynamism when compared to the relatively more liberal (in the classical sense) United States. As a result, he claims the United States can learn from Europe and shed its fear of the stagnancy that is commonly thought to accompany the welfare state. However, Krugman's argument is remiss and has several weaknesses.
The general point he attempts to get across is that Europe is not that bad, and offers more welfare options for its citizens. Europe is not that bad, there are certainly worse places to live. But, that does not mean the US should increase taxes and welfare programs either. The US and Europe have different preferences, and one could argue that our governments reflect these preferences. Also, there is a surprising dearth of evidence that argues welfare is actually helpful for those who receive it. As an economist should know, just because a program intends to do help people, does not automatically mean it correctly aligns all relevant incentives (See "Poverty Traps" a couple posts down). At first Krugman's article appears lazy. Especially when he concludes with the vague notion that there is no trade-off between social justice and progress. These terms are far from clearly defined, and he does not even attempt to do so in his article. In the end, Krugman's article transcends its apparent laziness and reveals itself for what it is: blind promotion.
Since 1980, per capita real G.D.P. — which is what matters for living standards — has risen at about the same rate in America and in the E.U. 15: 1.95 percent a year here; 1.83 percent there.This is Krugman's attempt to forge a link between European-style social democracy and economic dynamism comparable to the United States. However, Krugman clumsily ignores his own words and avoids mentioning the per capita GDP values, instead opting for the more convenient growth rates. According to the IMF's 2008 PPP adjusted GDP per capita numbers, the 2008 average for the EU 15 was $38,174, and $47,440 for the US. This is not an insignificant difference. In addition, if both percentage growth rates are similar, while the actual per capita incomes are different, the larger income will gain more relative to the smaller income. This can hardly be considered equal, and seriously undermines Krugman's argument.
Taxes in major European nations range from 36 to 44 percent of G.D.P., compared with 28 in the United States. Universal health care is, well, universal. Social expenditure is vastly higher than it is here.After Krugman's sleight of logic earlier, he takes his conclusions to the extreme by claiming taxes do not affect incentives to work, invest, and innovate. Coming from an economist, the idea that you can tax people and not impact incentives to work, invest, and innovate is cavalier. When you increase taxes, it does not affect everyone's decisions, it affects decisions at the margin. This does not mean an economy with 8-16% higher taxes morphs into a regressive, decaying economy, only that marginal investment, work, and saving decisions are impacted.So if there were anything to the economic assumptions that dominate U.S. public discussion — above all, the belief that even modestly higher taxes on the rich and benefits for the less well off would drastically undermine incentives to work, invest and innovate — Europe would be the stagnant, decaying economy of legend. But it isn’t.
The general point he attempts to get across is that Europe is not that bad, and offers more welfare options for its citizens. Europe is not that bad, there are certainly worse places to live. But, that does not mean the US should increase taxes and welfare programs either. The US and Europe have different preferences, and one could argue that our governments reflect these preferences. Also, there is a surprising dearth of evidence that argues welfare is actually helpful for those who receive it. As an economist should know, just because a program intends to do help people, does not automatically mean it correctly aligns all relevant incentives (See "Poverty Traps" a couple posts down). At first Krugman's article appears lazy. Especially when he concludes with the vague notion that there is no trade-off between social justice and progress. These terms are far from clearly defined, and he does not even attempt to do so in his article. In the end, Krugman's article transcends its apparent laziness and reveals itself for what it is: blind promotion.
Monday, January 11, 2010
Mankiw Test Question
Every so often, Greg Mankiw, an economics professor at Harvard posts an introductory economics test question on his blog. Here's the link to one such question...
Click on the image below for my answer
I am by no means omniscient in this matter, so be sure to comment if you came up with different answers.
Click on the image below for my answer
I am by no means omniscient in this matter, so be sure to comment if you came up with different answers.
Saturday, January 9, 2010
Poverty Traps
There is a lot of talk in economic and sociological circles about so-called "poverty traps". While the two fields might define the term differently, the jist in both fields is that a confluence of certain factors, whether cultural, social, or economic, can serve to perpetuate poverty. Thus the term "poverty trap", as those in poverty can find it more difficult than it should be to escape.
Many people, myself included, believe in helping those in need. As a result of this human tendency, and democracy, our government reflects this desire to help others. One of the most prominent government programs helping low income people is the Earned Income Tax Credit (EITC), which essentially gives varying tax credits based on marital status, income, and number of children. While well-intentioned, some economists believe that tax-based programs like the EITC are at the core of the apparent self-perpetuating poverty cycle. The EITC, while designed to offset the burden of regular income taxes, can end up creating a disincentive to earn income beyond the EITC threshold due to a sharp increase in the effective marginal tax rate as the EITC phases out.
When someone is no longer eligible for a tax credit due to higher income, the lost credit is essentially a tax. For example, if $100 more of income causes you to lose $10 of tax credit, you have effectively been taxed 10% on that additional $100. So, your effective marginal tax rate has increased by 10%. This spike in the effective marginal tax rate due to a loss of credit, combined with the fact that many credits phase over a higher income tax bracket, can create a formidable incentive to avoid taking a higher income. Sometimes, it makes economic sense for someone to turn down a higher paying income to maintain eligibility for the EITC. Clearly this defeats the purpose. The raison d'etre of the EITC is to help working people earn more, not force them to remain in stasis.
While the EITC and many other welfare programs are politically appealing, tampering with the tax code can often have unintended consequences. Making it more expensive for low income people to escape poverty is just one of those unintended consequences. For example, someone phased out of the EITC earning income just over the threshold will be paying higher effective marginal tax rates than other taxpayers in their bracket. One reform option is that once someone is phased out of EITC, their effective marginal tax rate needs to be adjusted to match the income bracket they are in (as in the note in the following paragraph). Another fairly obvious, yet important, option is to question whether the EITC is worth having at all. In considering any reform option, the most important consideration is the tradeoff - what are we giving up?
Click on the image below for a numerical example of how the EITC creates distorted incentives. In this example, the effective marginal tax rate on the $36,000 should be adjusted to 15% instead of the 30% it is under current tax code.
Many people, myself included, believe in helping those in need. As a result of this human tendency, and democracy, our government reflects this desire to help others. One of the most prominent government programs helping low income people is the Earned Income Tax Credit (EITC), which essentially gives varying tax credits based on marital status, income, and number of children. While well-intentioned, some economists believe that tax-based programs like the EITC are at the core of the apparent self-perpetuating poverty cycle. The EITC, while designed to offset the burden of regular income taxes, can end up creating a disincentive to earn income beyond the EITC threshold due to a sharp increase in the effective marginal tax rate as the EITC phases out.
When someone is no longer eligible for a tax credit due to higher income, the lost credit is essentially a tax. For example, if $100 more of income causes you to lose $10 of tax credit, you have effectively been taxed 10% on that additional $100. So, your effective marginal tax rate has increased by 10%. This spike in the effective marginal tax rate due to a loss of credit, combined with the fact that many credits phase over a higher income tax bracket, can create a formidable incentive to avoid taking a higher income. Sometimes, it makes economic sense for someone to turn down a higher paying income to maintain eligibility for the EITC. Clearly this defeats the purpose. The raison d'etre of the EITC is to help working people earn more, not force them to remain in stasis.
While the EITC and many other welfare programs are politically appealing, tampering with the tax code can often have unintended consequences. Making it more expensive for low income people to escape poverty is just one of those unintended consequences. For example, someone phased out of the EITC earning income just over the threshold will be paying higher effective marginal tax rates than other taxpayers in their bracket. One reform option is that once someone is phased out of EITC, their effective marginal tax rate needs to be adjusted to match the income bracket they are in (as in the note in the following paragraph). Another fairly obvious, yet important, option is to question whether the EITC is worth having at all. In considering any reform option, the most important consideration is the tradeoff - what are we giving up?
Click on the image below for a numerical example of how the EITC creates distorted incentives. In this example, the effective marginal tax rate on the $36,000 should be adjusted to 15% instead of the 30% it is under current tax code.
Friday, January 8, 2010
Comparative Advantage Explained
Every year, Christmas dinner preparations always seem to create family tension. My dad, a restaurateur by trade, orders everyone around the kitchen on different tasks while he attends to the centerpiece of the meal: the filet of beef. However, a combination of my dad's imperious demeanor and everyone else's reluctance to be bossed around usually ends in a family spat. A common rejoinder to an unsolicited prandial directive is: "why don't you just do it all yourself?" The appropriate retort, it occured to me this year, is: "comparative advantage."
Bren (my dad) is clearly the best cook in the house. He holds the absolute advantage in all aspects of meal preparation, from seasoning the potatoes, sauteing the brussel sprouts, to cooking the beef filet to juicy perfection. The reason he does not just take care of cooking the whole meal is because he faces the constraints of time, and we must consider what he gives up when he devotes time to different tasks.
The way the tasks are divided depends on each family member's opportunity cost for each task, or what they have to give up to complete each task. For illustrative purposes let's say there are three family members: mom, dad, and son, with three tasks to be completed: beef, sprouts, and potatoes. Dad cooks a mean beef filet (compared to mom and son), while his potatoes and sprouts are only marginally better than mom's and brother's. So, in exchange for a significantly better beef filet, we sacrifice only marginally worse potatoes and sprouts.
Essentially, each family member acts like an individual country in the kitchen producing their own good, which is then exchanged for other people's goods (at the buffet line). The overall quality of the dinner can be thought of as the overall welfare and sum of gains from trade.
Overall welfare increases (gains from trade) as an extra producer joins the kitchen because the total available work time increases. The constraint has been expanded, allowing room for overall welfare to increase. In reality, other constraints likely have an effect too. For example, cooking ability might be another constraint considered in addition to time, that would affect each person's opportunity costs.
Click on the image below for a numerical follow-up to the above example...
Bren (my dad) is clearly the best cook in the house. He holds the absolute advantage in all aspects of meal preparation, from seasoning the potatoes, sauteing the brussel sprouts, to cooking the beef filet to juicy perfection. The reason he does not just take care of cooking the whole meal is because he faces the constraints of time, and we must consider what he gives up when he devotes time to different tasks.
The way the tasks are divided depends on each family member's opportunity cost for each task, or what they have to give up to complete each task. For illustrative purposes let's say there are three family members: mom, dad, and son, with three tasks to be completed: beef, sprouts, and potatoes. Dad cooks a mean beef filet (compared to mom and son), while his potatoes and sprouts are only marginally better than mom's and brother's. So, in exchange for a significantly better beef filet, we sacrifice only marginally worse potatoes and sprouts.
Essentially, each family member acts like an individual country in the kitchen producing their own good, which is then exchanged for other people's goods (at the buffet line). The overall quality of the dinner can be thought of as the overall welfare and sum of gains from trade.
Overall welfare increases (gains from trade) as an extra producer joins the kitchen because the total available work time increases. The constraint has been expanded, allowing room for overall welfare to increase. In reality, other constraints likely have an effect too. For example, cooking ability might be another constraint considered in addition to time, that would affect each person's opportunity costs.
Click on the image below for a numerical follow-up to the above example...
Thursday, January 7, 2010
Welcome
At times the datasphere can seem like an infinite void. Oftentimes, when I plug in to the world wide web, I feel that I only access an infinitesimal fraction of all the available information that I would be interested in. This is because I am, only accessing an infinitesimal fraction. I view the blogging movement as (in part) a response to this surfeit of data and info. In one sense, blogs serve to direct readers towards articles/data/info that they seek, but would not have found otherwise. In another important sense, blogs give voice to the digital masses - creating an online forum for cultural and societal discussion and debate.
In this spirit, this blog will attempt to engage these two valuable aspirations of the blog medium, with a focus on economics. This blog will direct readers towards thought-provoking, and insightful economic media, as well as offer (brief) commentary on the various articles and ideas I link to. Comments and advice are more than welcome.
In this spirit, this blog will attempt to engage these two valuable aspirations of the blog medium, with a focus on economics. This blog will direct readers towards thought-provoking, and insightful economic media, as well as offer (brief) commentary on the various articles and ideas I link to. Comments and advice are more than welcome.
Subscribe to:
Posts (Atom)