Steady as she goes

Why does it so often fall on the Economist to remind us of what common sense tells us already? In this case, that development aid that is given STEADILY is more important than the QUANTUM of development aid given. And in fact, widely volatile development aid (for example, the massive swings in aid that can occur before and after a country arrives on the United Nations Security Council) can actually have a deleterious effect. How can we expect a country to plan for capital investment when they don’t know whether the next dime will materialize?

A new paper, by Oya Celasun of the IMF and Jan Walliser of the World Bank, suggests that failing to honour promises can in fact be more harmful than not offering any money in the first place. The authors examined yearly aid commitments, not long-term ones of the Make Poverty History variety. They show how unpredictable such aid flows are. The paper finds that the average absolute difference between aid promised and aid given was equal to 3.4% of each sub-Saharan African nation’s GDP between 1990 and 2005. That is far greater than in any other region of the world. In countries that had experienced war, the fluctuations were particularly marked, partly because of shrinking economies: in Sierra Leone the swings were equivalent to 9% of GDP. It is also a myth, the authors show, that donors always give less than they promise: they are both capriciously generous, as well as capriciously stingy. During the same period, rich countries exceeded their yearly aid commitments to sub-Saharan Africa by an average of 1% of each recipient country’s GDP.

“Don’t worry, we’ll get to it next year:”

But more often than not, unpredictability is not the recipient’s fault but the donor’s, because of either changing governments or reallocations of aid to causes that are more fashionable than poverty relief, such as climate change. Frequently aid gets lost in a jungle of red tape. A survey of aid donors cited in the study found that 29% of delayed or lost disbursements were because of administrative problems in the donor countries.

Instead of being critical, I will try to be solutions focused here. Why not a long-term commitment mechanism for international development aid, to ensure that countries could use said development aid in capital investments? OF course, this would need to be “pre-funded” — i.e., it would require a lump sum payment up-front to fund all future commitments. Why? Because politicians are terrible at maintaining the unfunded commitments made by their elected predecessors (unless you are talking about Social Security or Medicare).

Inflation

Who is so hardened of heart and so untouched by a feeling of humanity that he can be unaware, nay that he has not noticed, that in the sale of wares which are exchanged in the market, or dealt with in the daily business of the cities, an exorbitant tendency in prices has spread to such an extent that the unbridled desire of plundering is held in check neither by abundance nor by seasons of plenty….

Diocletius, 310 AD, as the Roman Empire crumbled around him.

Pick a Door

The New York Times revisits an absolutely classic problem — the Monty Hall Problem in a neat article about humans handle cognitive dissonance. I get this wrong nearly every time I try it, despite learning it in my statistics class and repeated the problem several times at different points in my life. I have excerpted the description of the problem entirely, but for the answer, you will need to refer to the original article.

Here’s how Monty’s deal works, in the math problem, anyway. (On the real show it was a bit messier.) He shows you three closed doors, with a car behind one and a goat behind each of the others. If you open the one with the car, you win it. You start by picking a door, but before it’s opened Monty will always open another door to reveal a goat. Then he’ll let you open either remaining door.

Suppose you start by picking Door 1, and Monty opens Door 3 to reveal a goat. Now what should you do? Stick with Door 1 or switch to Door 2?

….

Before you write, at least try a few rounds of the game, which you can do by playing an online version of the game.

I’ll leave it at that — this one should give you well enough fodder for dinner table conversation tonight.

Who should pay taxes?

I recently received this email forward from a friend of mine. I’ve attached the forward and my response below.

—–

1. Dems want to increase marginal tax rate at highest end. And decrease the lower rates “applicable to middle class”

2. lst thing: doing this also decreases tax rates paid by rich at all levels but top marginal rate. That is because rich pay in each of the lower brackets as they work up to highest marginal rate

3. So, cutting “middle” rates results in very large loss of revenue

4. Now, need to look at impact on revenues of increasing the highest tax rate on the riches of the rich.

5. BTW, 99% of all taxpayers pay at only 10% rate. So cutting their rate is just dead bang revenue loss of major proportions.

6. Now  what actually happens to tax receipts by income tax bracket when tax rates change? What will happen if increase top bracket?

- The highest marginal income tax rate in 1980 was 70%. Today it is 35%. In the year Ronald Reagan took office (1981) the top 1% of income earners paid 17.58% of all federal income taxes. Twenty-five years later, in 2005, the top 1% paid 39.38% of all income taxes.

- From 1981 to 2005, the income taxes paid by the top 1% rose to 2.96% of GDP, from 1.59% of GDP. There was also a huge absolute increase in real tax dollars paid by this group. In 1981, the total taxes paid in 2005 dollars by the top 1% of income earners was $94.84 billion. In 2005 it was $368.13 billion

-From 1981 through 2005, the share of all income taxes paid by the bottom 75% of all income earners (as reported on the individual income tax returns) declined to 14.01% from 27.71%. As a share of GDP, total taxes paid by the bottom 75% fell to 1.05% from 2.50%. The bottom 75% of all taxpayers today pay less than 35% of all the taxes paid by the top 1% of all income earners.

- With the Kennedy tax cuts of the 1960s, when the highest tax rate fell from to 70% from 91%, the story was the same. When you cut the highest tax rates on the highest-income earners, government gets more money from them, and when you cut tax rates on the middle and lower income earners, the government gets less money from them.

- Turns out that average EFFECTIVE rate on top 1% does NOT change regardless of what Congress does to the ACTUAL rate.  Top rich guys figure out ways of using accts,lawyers,to control the rate they pay.

7. So over the last 25 years, the bottom 75% of all taxpayers’ tax payments fell and their tax rates fell. This is the group the Democrats are targeting for tax cuts.

The important point here is that, over the last 25-plus years, as top tax rates dropped,  the only group that experienced an increase in income taxes paid as a share of GDP was the top 1% of income earners. Even the top 2%-5% of income earners saw a decline in the GDP share of their income taxes paid.

For the low- and middle-income earners, the effective average tax rate has tumbled over the past 25 years, and so have tax revenues no matter how they’re measured.

Using recent data, in other words, it would appear on its face that the Democratic proposal to raise taxes on the upper-income earners, and lower taxes on the middle- and lower- income earners, will result in huge revenue losses on both accounts

It is EXACTLY the opposite of what should be done. EXACTLY  -

—–

Here is my response, for what it’s worth:

The facts

The facts, as laid out below, are essentially correct. The portion of taxes paid by the Top 1% of income earners has gone up at the same time as their effective tax rates have fallen, both average (i.e., the total amount of tax paid divided by the total amount of income) and marginal (i.e., the tax paid on each incremental dollar earned). The way tax system works is that the tax rate increases as you move into different income bands – e.g., if you make less than $30,000 the tax rate might be 10%, if you make $50,000 per year, then you would pay 10% on the first $30,000 you earned and 15% on the next $20,000 (i.e., $50,000 - $30,000 = $20,000). This system is uniform and applies to all taxpayers (assuming you don’t pay the AMT, another kettle of fish altogether).

Why?

What explains the paradox of why the top 1% of income earners have been paying more taxes (both absolutely and relatively) while their effective tax rates have been going down?

They’re incomes have been growing faster than average, and a lot faster than the incomes of the poorest Americans. I ran some #’s, and from 1980 -2005, reported adjusted gross income (AGI) of the top 1% of earners rose 8.7% per year, while the reported AGI of the bottom 50% of earners rose only 3.5% per year (nominally). This fact is crucially left out of the argument below.

What explains the differential in earnings growth for the top 1% of earners and the bottom 50% of earners?

The argument below implies that there is a CAUSAL LINK between a decrease in the tax rate on the top 1% of earners and an increase in the taxes that they pay. The classic argument for why this might be the case is that a reduction in taxes encourages people to work more because they get to keep more of each dollar they earn. In extreme cases, this is certainly true. Before Kennedy, the tax rate on the highest income earners was actually 90%. Would you ever risk starting a new venture that could make millions of dollars if you knew the government was going to keep 90% of the gain? No. This argument is less compelling when you think about Bush’s most recent tax cuts, which cut taxes on high earners from something like 35% to 27% (I’m sure I’m getting the #’s wrong, but this is roughly right). Without any statistical evidence to support me, I believe such a cut does not nearly as much “bang for the buck” in terms of freeing the creativity and entrepreneurial spirit among America’s top earners.

Why else might we have seen a decrease in the tax rate on the top 1% of earners and an increase in the taxes that they pay. There would have to be some exogenous change in the economy (i.e., not related to the tax regime) to bring this about. I can think of several, but the most obvious are globalization and technological change, both of which have tremendously favored highly skilled workers at the expense of the poor. I would argue that top earners would have grown their incomes faster than bottom earners over the past 20 years REGARDLESS OF ANY CHANGE IN TAX RATES. The truth is: now more than ever it pays really well to be really smart and really well-connected, because the rewards for being at the top are ever more attractive, on a relative basis.

The truth is probably a combination of both of these forces.

What should we do about it now?

Unfortunately, your friend is right – a reduction in income taxes for the middle classes will be hugely costly, because it impacts a larger number of taxpayers, both the top 1% and the middle class. But this debate is really about what kind of country we want to live in: one that will grow more slowly and more equitably (higher taxes for the rich and lower taxes for the middle class) or one that will grow faster, probably across the board, but more inequitably (lower taxes across the board, especially for activities that produce massive gains for the economy, such as carried interest for private equity funds and capital gains).

I choose the latter, but with safeguards to ensure that those who are lose out are eased into the transition. Tax rates are a blunt instrument, whereas the government has any number of policy tools available to help redress inequality (if that is what we agree we should do).

Venturing into uncharted territory, here are a few proposals. We don’t need a middle-class tax cut – this is actually a costly, populist move that enables the Democrats to rail against the rich without really addressing some of the fundamental problems in our economy. Here are a couple things that I think would cost less, both in dollar terms and in terms of reduced growth prospects for the American economy. They are equally redistributive, too, in that they favor poor and middle-class taxpayers over rich taxpayers.

- Reduce taxes for the middle class but add an incremental sales tax across the board (with exemptions for key items such as bread, milk, and diapers). Why do we tax income at all? Is “working” an activity that we want to deter? No. It makes much more sense to tax consumption—we can use this revenue to offset the tax cuts for the middle class, without deterring the incentive of skilled, wealthy professionals to create new ventures and take entrepreneurial risks.

- Eliminate Social Security entirely for those who make above $200,000 (inflation-adjusted) per year. Social Security is a safety net for poor pensioners, not a substitute for your private savings account. So, if you earn over $200,000 per year in 3 of the 5 years prior to becoming eligible for Social Security, you are no longer eligible for Social Security payments. (There’s probably a better way to organize this, but this is just one idea). I know plenty of people who would willingly HAND BACK THEIR SOCIAL SECURITY CHECKS if the government would let them and if they felt that the government would spend them wisely.

- Get healthcare costs under control, perhaps by creating a universal healthcare system, which explicitly subsidizes health care for the poor. If we can reduce the effective health care spending of the poor and the middle class, this has just as much of an effect on increasing their disposable incomes as reducing the tax rate.

- Privatize the lottery. Government run lotteries are one of the most regressive taxes we place on our citizens. Do you know anyone who makes over $100,000 per year who plays the lottery? No. Only poor people play it, which is why there is a lotto shop on every corner in Harlem. By running the lottery and keeping the proceeds for itself, the government is sanctioning a hugely regressive tax – why not privatize it and see what happens? It will still cater to poor people (unfortunately, the willingness to pay for “hope in a ticket” is higher among the poor than among the rich), but a publicly-lister lottery company would be driven to innovate, perhaps even finding ways to convince me to play it.

In summary

In short, the facts laid below are right. Their implications are right and wrong – right that a tax cut for the middle class would bite into a budget that is already in deficit and wrong that there is definitely a causal link between lower tax rates (at these levels) and higher earnings from America’s top earners. However, Democrats repeated calls for tax increases for the rich and cuts for the middle class miss the point – we should not focus on constantly redistributing the pie, but rather focus on how to grow the pie as fast as possible. Once we’ve grown it (and we demonstrate that we can continue to grow it), then we can implement targeted redistributive policies (such as those suggested above).

Kelo decision begins to bite

Normally, I take the same level of interest in Supreme Court decisions that I do in Vogue – mildly interesting for a cultural perspective, but will only impact my life if someone i know becomes involved. But Kelo vs. the City of New London is downright scary. This is an old one (the decision came down in 2005) but as with many Supreme Court cases, the ramifications are only being felt throughout the American economy. Basically, Kelo says that the government has the right to seize land from private individuals for private development purposes, providing that fair compensation is paid to the private individuals. Sounds innocuous, right?

Check out this little story from my old lunch-time stomping grounds, Port Chester, NY, featured in Forbes….

n 1999 Port Chester established a redevelopment area, in which new projects could be built only after getting approval from a village-designated private individual, Gregory Wasser, to whom the municipality inexplicably delegated its regulatory authority. In 2003 two owners of a plot within the redevelopment zone, Bart Didden and Domenick Bologna, asked Wasser for permission to build a CVS pharmacy. According to Didden and Bologna, Wasser responded: Either pay me $800,000 to build, give me a piece of the action, or I’ll have the village take the property. The day after they spurned the offer, Port Chester did indeed start the takings process. Wasser then arranged for Walgreen to develop the site.

This little episode represents a sorry example of what political actors can legally do with unchecked condemnation power. Why, one might ask, wasn’t Wasser’s land grab an unconstitutional taking for private purposes? (Didden sees it as extortion; Wasser defends his actions as promoting urban renewal.) This constitutional question of when takings are “for public use” has been front and center since the Supreme Court’s 2005 decision in Kelo v. City of New London, which allowed the city to take private homes for private development.

This seems to me to be a serious threat to American competitiveness. No joke — anyone who questions the value of private property to economic development need only read Hernando de Soto’s The Mystery of Capital.

I’m left wondering how such a decision came out of a supposedly conservative-minded Supreme Court? Isn’t this decision the exact opposite of small-government conservatism?

the price of water

For those of you who love free markets, i really would like you to have a think about whether we are appropriately pricing water. I would argue that we are drastically under-pricing water, especially in places where we need to be thinking intelligently about how to ration water. My water bill last month was $6.41. I can double my usage of water, run my dishwasher with one plate in it, and give myself a ride in the laundry machine, and my bill will not be more than $15.00. What incentive do I have to save? So I leave the taps running, and so do you.

The FT today intelligently argues for the need for a more appropriate water-pricing regime. You want instant ROI –

If the number of people lacking safe drinking water were halved, at a cost of about $10bn, the world would benefit by $38bn in annual economic growth, according to the United Nations Development Programme.

(Of course, you have to trust UNDP’s ability to assess cost-benefit for this. :))

Now, in order to fix this problem, we may need to tackle that other bugbear, the farm lobby.

Farmers in Spain are estimated to pay a price for water that is only about 2 per cent of its real cost. Rice and wheat farmers in California’s central valley use one-fifth of the state’s water but the low prices they pay represent a yearly subsidy estimated at $416m for 2006.

….

Mr Krupp acknowledges that there would be legal and governance problems and vested interests to be overcome – particularly the farming lobby, as agriculture receives the best treatment almost all over the world when it comes to water rights and pays less for its water than any other industry. He says: “There is no question that we have much to do to ensure that water trading occurs in a way that is cost-effective and prevents undue windfalls. We also need to ensure that water transfers don’t hurt rural communities, low-income populations or the environment. An effective system of cap-and-trade for water will require lots of metering and enforcement.”

For those of you who care about climate change, ask yourselves this: in 50 years, would you rather live in a world that is 0.5 degrees warmer, on average, or a world where we are running out of water.

 

 

Live in California? Consider Ottoman Turkish Empire Settlement Payments

Wow…. there is actually a tax credit on my CA tax return for Ottoman Turkish Empire Settlement Payments. I’m glad to see I’m not the only one who finds this laughably frustrating.

What Microloans Miss

Here here to James Surowiecki for his recent piece in the New Yorker on what microfinance can and can’t deliver. It’s not a piece meant ot bash microfinance, but rather to remind us that the real lever to remove mass numbers of folks from poverty is economic growth, and in particular, the small and medium-sized enterprises that tend to arise and grow as a result of economic growth.

What poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”

I couldn’t agree more. Finding a way to finance those companies in the “missing middle” is, I believe, one of the greatest remaining challenges in the poverty fighting game. Ultimately, this means more than $500 loans repayable in 6 months.

The problem is a dearth not just of lenders but also of people willing to buy an ownership stake in companies, like the angel investors and venture capitalists that American entrepreneurs often rely on. Microfinance has led us to focus on lending, but it can be hard for young companies to get big purely on bank loans, which consume cash flow that could be reinvested in the business. Supplying the missing middle will require backers who want to invest in companies rather than just lend to them.

Thanks, Reuben.

Dear Amazon.com, please save the online wine business!

Amazon.com has announced that they will enter the online wine business, the FT reports. For any who’ve ever tried to order wine online, you are certainly familiar with the numerous vexations associated with this trade, including crazy state-by-state shipping restrictions, incredibly high shipping charges, and opaque pricing. The FT notes some of the travails of Wine.com, the largest online wine retailer:

Wine.com has a long history of financial problems, illustrating the challenges of dealing with state restrictions on shipping wine shaped in the 1930s after the end of Prohibition. The retailer can ship wine to customers in only 26 states and is obliged to operate 10 different warehouses that buy from state-licensed wholesalers, increasing its costs.

A 2005 Supreme Court ruling has led to an easing of restrictions on shipping by vineyards.

But Tom Wark of the Speciality Wine Retailers Association said new legislation required by the ruling has led some states to tighten restrictions on out-of-state online retailers.

Some smaller e-commerce sites have been shipping wine to customers in defiance of state laws, taking advantage of the difficulty state regulators face in identifying unmarked small shipments to individuals.

IT’s chaos out there, as I realize every time I try to order a present for a friend or to save some money by buying wine from cheaper alternatives than the extortionist wine retailers in New York City. Thus far, I have had pretty good luck at Empire Wine (despite one corked bottle) and DrinkUpNY.

the downside of wind energy

it’s hard not to chuckle at this gem about a power outage caused by a sudden, inexplicable loss of wind power.

Electric Reliability Council of Texas (ERCOT) said a decline in wind energy production in west Texas occurred at the same time evening electric demand was building as colder temperatures moved into the state.

The grid operator went directly to the second stage of an emergency plan at 6:41 PM CST (0041 GMT), ERCOT said in a statement.

System operators curtailed power to interruptible customers to shave 1,100 megawatts of demand within 10 minutes, ERCOT said. Interruptible customers are generally large industrial customers who are paid to reduce power use when emergencies occur.

No other customers lost power during the emergency, ERCOT said. Interruptible customers were restored in about 90 minutes and the emergency was over in three hours.

ERCOT said the grid’s frequency dropped suddenly when wind production fell from more than 1,700 megawatts, before the event, to 300 MW when the emergency was declared.

In addition, ERCOT said multiple power suppliers fell below the amount of power they were scheduled to produce on Tuesday. That, coupled with the loss of wind generated in West Texas, created problems moving power to the west from North Texas.

Amusing, but also, I think, a dangerous portent of what the push into renewable energy might mean for the sustainable, uninterrupted supply of power that we take for granted today. I hope we can work this one out….

The downside of the market for organs

Just a few days ago, I wrote about the viability and desirability of the market for organs. Then, this little piece comes out in the New York Times. This is awful, truly the worst of all scenarios, where individual rights are being violated and procedures are done hastily and with poor medical supervision. Here’s a sampling of how this market works:

Two weeks ago, he was approached by a bearded man as he waited at the early-morning labor market by the Old Delhi train station, he said. The man offered him an unusually generous deal: one and a half months’ work painting, for a little less than $4 a day, with free food and lodging.

Mr. Mohammed said he was driven four or five hours, to a secluded bungalow, where he was placed in a room with four other young men, under the watch of two armed guards.

“When I asked why I had been locked inside, the guards slapped me and said they would shoot me if I asked any more questions,” Mr. Mohammed said, lying in a hospital bed, wrapped in an orange blanket, clenching his teeth and shutting his eyes in pain. He said the men were given food to cook and periodically nurses would take blood samples.

One by one, he said, they were taken away for operations.

“They told us not to speak to each other or we would pay with our lives,” he said. “I was the last one to be taken.”

Unbelievably to some, this vignette argues to me the need for clear regulation enabling the sale and purchase of organs, or kidneys at least. This situation reminds me a good deal of the market for prostitution, which I have also written about. In both markets, the evidence of a poorly organized market, including forced sale of goods and services and frequent rule by violence, is used to suggest that the market should be made entirely illegal– i.e., we should never be allowed to sell organs or to sell our bodies for sex.

To me, one can interpret this evidence as arguing for the other extreme, that we should have fully legalized markets for the sale of organs and the sale of sex. I am not sure this is the right solution either, but this story in India, I think, is the worst of all possible scenarios. And there other potential bad outcomes: see CATO’s thoughts here, on some other organ donation misdeeds. While they may be stepping over the line by calling an opt-out program for organ donation (rather than the current opt-in program) a “Federal organ grab,” I come back to the fundamental question that I began with. If current markets for organ donation are not working, which they clearly are not, why not give a market-based solution a shot?

Own a major leaguer

From the Cincinnati Enquirer:

Randy Newsom would like you to own a chunk of his potential major-league career. It’ll cost you only 20 bucks.

Here’s what you get: a share of a 25-year-old, sidearming relief pitcher who was an all-star in Double-A last summer and who just threw seven scoreless innings in the Arizona Fall League. Ideally, Newsom wants to start the season in Triple-A, pitch well, then get a midseason call-up from the Cleveland Indians.

Here’s what he gets: your money and, hopefully, the money of others, up to $50,000, to help him continue to develop as a player without having to work an offseason job or pray the engine doesn’t drop out of his 1998 Chevy with 160,000 miles on its odometer.

As the author notes, for you to get your twenty bucks back, Randy Newsom will have to earn $1.25 million over the course of his major league career. If he makes the majors and sticks, he should surpass this easily. The minimum major league salary in 2006 was $380,000, and the average salary was $2.7 million. If the average major league career is 4 years (just a guess) and Newsom is an average major leaguer, then you need to believe he has at least an 11% probability of making the majors and having an average career just to have a “expected value neutral” bet. That seems a stretch to me.

Having said that, he openly admits this is not a financial transaction.

As Newsom explains: “It’s not the stock market. If you’re doing this solely for financial reasons, it’s probably not the investment for you. If you’re doing it because you love baseball and want to know you helped a player get to the majors, it’s worth thinking about.”

So why not?

(Thanks, Grant)

Am I the only one left who still supports NAFTA?

A recent article discussing the dire poverty of Mexican corn farmers, and how to resolve it, reminded me of what I see as a growing consensus that NAFTA needs to be revisited, or even repealed. This scares me — I view NAFTA as one of the great, lasting achievements of Bill Clinton’s presidency, an example of how far-reaching, comprehensive trade treaties should be negotiated and implemented (as compared to the piecemeal and highly targeted trade treaties negotiated over the past six years, such as those with Peru and Guatemala)

Has NAFTA been good for Mexico?

Since 1994 Mexico’s non-oil exports have grown fourfold, while the stock of foreign direct investment has expanded by 14 times. Even the country’s farm exports to its NAFTA partners have risen threefold.

Has NAFTA been good for the U.S.? CATO has a nice encomium on NAFTA summarizing the benefits. They start with the fact that the U.S. economy is about 20 times as large as Mexico’s. They also note that much of the impetus behind NAFTA, oft-forgotten today, was political — a U.S. desire to secure democracy in Mexico. On that front, NAFTA has contributed to a resounding success for democracy in Mexico, with two peaceful transitions of leadership since its agreement in 1994.

So why the resistence? To my mind, it’s part and parcel of the protectionist, populist economic policies that constituents and politicians tend to embrace in times of economic chaos. Yes, we are heading towards (or possibly already in) a recession. No, it’s not because of NAFTA, our membership in the WTO, or the worthwhile contributions we make to the United Nations budget every year.

Important perspective as we watch our IRAs melt down

Is the world really becoming worse for the majority of mankind? We argue that it is not.

Some much-needed perspective from the Economist, as stock markets continue to plunge downwards, populist economics dominates the Republican and Democratic primaries, and experts remind us that the human race is destroying the planet. In the midst of this, the Economist looks at three pieces of data:

the underlying social conditions in poor countries; poverty alleviation over the past decade; and the incidence of wars and political violence. By those measures the world seems to be in rather better shape than most people realise.

This article is a great reminder of what we have gained over the past 20 years…. and what we stand to lose if we walk away from the forces that have helped us get there: free trade, deepening of capital markets, immigration, pro-entrepreneur tax and legal regimes, and technological innovation.

First things first: the world has grown faster for longer over the past five years.

Last year the global economy entered its fifth year of over 4% annual growth—the longest period of such strong expansion since the early 1970s. Despite financial turmoil and soaring oil and commodity prices, world growth barely dipped in 2007 and trade grew at 9%, even though trade talks fell apart.

This growth has also helped alleviate poverty. The World Bank (yes, the voice of the poor!) even says so:

A World Bank study of 19 poor countries concluded that every 1% increase in national income per head translates into a 1.3 point fall in extreme poverty.

What have the results been? A massive reduction in dire poverty, by nearly any measure you wish to apply in nearly every region of the world (with Africa the notable and unfortunate exception).

In China 25 years ago, over 600m people—two-thirds of the population—were living in extreme poverty (on $1 a day or less). Now, the number on $1 a day is below 180m. In the world as a whole, a stunning 135m people escaped dire poverty between 1999 and 2004. This is more than the population of Japan or Russia—and more people, more quickly than at any other time in history.

How about this?

In 2007 Unicef, the United Nations child-welfare body, said that for the first time in modern history fewer than 10m children were dying each year before the age of five. That is still an awful lot but it represents a fall of a quarter since 1990. Life expectancy has increased a bit in low- and middle-income countries. The long march to literacy is nearing an end: three-quarters of people aged 15-25 were literate in 1975; now the rate is nearly nine-tenths.

Wait, but I thought all this global growth was leaving behind the poor, increasing inequality between the “haves” and “have-nots?”

The evidence that the rich have done best is certainly compelling. Inequality has risen in both rich and poor countries. It is thus a sharp break from the pattern established between 1950 and 1990, when there was a general decline in inequality, notably in East Asia, where the tigers managed to combine fast growth with relatively equal incomes.

But it is not so clear that globalisation—in the sense of opening up to trade and foreign investment—is to blame. Ukraine and Poland both opened themselves in the 1990s. Yet inequality rose in Poland and fell in Ukraine. Globalisation, it seems, sometimes increases inequality, sometimes reduces it.

I’ve reproduced below a chart that you should feel free to bust out at your next cocktail party. Basically, it shows that in developing countries, technological progress is almost entirely responsible for any increase in inequality between rich and poor (in developed countries, technological progress and globalization share equal responsibility).

The Economist, as usual, puts the argument better:

A more plausible culprit for rising inequality seems to be technological progress (see chart below). This is associated with inequality in poor countries because in emerging markets the people best able to take advantage of new technology are those who already have an education and who are usually among the richest in society. The more technological progress, therefore, the better the well-off do.

But to limit technology to reduce inequality would be a cure worse than the disease. Technology in its broadest sense—the flow of new ideas—is the only way of getting growth rates up to 5-10% a year, the rate which enables poor countries to catch up with the West. Without it, growth would be dependent on labour and capital inputs, and growth would be just a few percent. To reduce technological progress—even supposing one could do it—would be to condemn poor countries to stay poor.

In fact, since the mid-1990s, the incomes of the poorest fifth have risen everywhere except, marginally, in Latin America, where they have been affected by the after-shocks of debt crises. In Asia, the real incomes of the poorest fifth rose 4% a year; in Africa, by 2% a year, faster than the rise for other income groups.

The result is that the number of very poor people in the world is falling fast—even though many critics continue to believe that the poor have not really benefited from growth. In 1990 those on $1 a day accounted for more than a quarter of the population of developing countries. By 2015, on current rates, the proportion of very poor people should have shrunk to 10%. Moreover, these monetary measures probably understate the real gains from things such as lower child mortality, safer water, literacy and other social achievements. A rich man appreciates his extra cash but this does not compare with what a poor family gains from seeing an infant survive childhood or learn to write.

The general reduction in the numbers of the very poor weakens the perceived link between globalisation and inequality. Across the world, if not within nations, globalisation can be claimed to be making people more equal, not less. This is mainly because China and India, with their 2.5 billion people, are growing fast and narrowing the gap with rich countries.

Last but not least, as much as the wars in Iraq and Afghanistan, as well as the on-going War on Terror, seem to dominate the news, the Economist reminds us that the world, is a whole, is seeing less strife than ever before.

The number of conflicts (both international and civil) fell from over 50 at the start of the 1990s to just over 30 in 2005 (definitions are obviously fluid; these are the ones used by scholars at the universities of Uppsala and British Columbia for a project called the “Human Security Report”). On their definitions, the number of international wars peaked during the 1970s and has been falling slowly since. The number of civil wars continued to rise until about 1990 and then fell precipitately. In total, the death toll in battle fell from over 200,000 a year in the mid-1980s to below 20,000 in the mid-2000s.

In short, there’s a lot going wrong with the world: possible recession, a seemingly endless Iraq war, seized up capital markets that risk undermining the very basis of the capitalist system (the granting and receiving of credit). But let’s not forget how far we’ve come — and how we get here.

A market for organs: any day now

I realize that this issue is about #37 on the list of things that need to be fixed in this country, but still an important one: let’s pay organ donors. It looks like some consensus is finally building around this idea, if it’s actually being considered in American medical journals.

Nearly 100,000 Americans are waiting for an organ transplant. Every day, the wait for 17 of those people ends in death.

It is a wait that could be drastically shortened or even eliminated if a market for live and cadaveric organs were allowed to operate, according to a paper co-authored by Nobel Prize-winning economist Gary S. Becker, PhD, and published last year in the Journal of Economic Perspectives.

Dr. Becker and co-author Julio Jorge Elias, PhD, estimate that a $15,000 payment for kidneys would increase the number of transplants by 44%, to about 20,000 a year. It would take nearly $40,000 in cash to donors to net a two-thirds jump in the number of liver transplants, to more than 8,600 a year.

In the case of kidney transplants, the donor payment would add just 9.5% to the cost of a transplant, while liver transplants would cost 11.2% more.

Prediction: my (currently non-existent) children will be teenagers before this idea actually comes to be.

Thanks, Dosh.

Selling sex

Just when I’ve had enough doom and gloom about America’s failing political system and failed economic palliatives, the Economist redeems itself with this gem, on the economics of prostitution. I’ll give you a snippet her, but you’ve gotta read the whole thing. This is economics (or something like it) at its best: bringing data and a theory of incentives to bear on a hard-to-understand real world phenomenon.

Mr Levitt presented preliminary findings* from a study conducted with Sudhir Venkatesh, a sociologist at Columbia University. Their research on the economics of street prostitution combines official arrest records with data on 2,200 “tricks” (transactions), collected by Mr Venkatesh in co-operation with sex workers in three Chicago districts.

The results are fascinating. Almost half of the city’s arrests for prostitution take place in just 0.3% of its street corners. The industry is concentrated in so few locations because prostitutes and their clients need to be able to find each other. Earnings are high compared with other jobs. Sex workers receive $25-30 per hour, roughly four times what they could expect outside prostitution. Yet this wage premium seems paltry considering the stigma and inherent risks. Sex without a condom is the norm, so the possibility of contracting a sexually transmitted infection (STI) is high. Mr Levitt reckons that sex workers can expect to be violently assaulted once a month. The risk of legal action is low. Prostitutes are more likely to have sex with a police officer than to be arrested by one.

Sex with robots?

David Levy, a researcher of artificial intelligence and apparent master of the titillating title, has recently published a book called, Love and Sex with Robots in which he claims that by 2050, humans will have robots as companions, both personal and sexual. PC World (and many othes) has picked up on the story and got a coveted interview with the robot prognosticator.

“By mid-century, I don’t think the difference between robots and humans will be any more than the difference between people who live in Maine and people who live in the bayou of Louisiana,” he noted. “People will be surprised to know that robots will have emotions like ours and they’ll be sensitive to our emotions and needs.”

But what about the robot sex, doc?

Yes, Levy was quick to say that humans will have sexual relationships with robots, perhaps within five years — sooner than most might think.

Good to know. Dr Levy is 62 years old — a fairly convenient age to start making predicitions for 43 years into the future. Keep up the good work.

This forecast, though, reminds me of an infamous debate I once had over (1) whether it would ever be possible and (2) if it would ever be considered morally allowable to have sex with a hologram. On (1), I will defer to the nanotechnologists and the  hologrosophers. On (2), I will defer to my significant other. As for Dr. Levy, he has the following to offer:

 If your predictions about the technology come true, will you be having sex with robots?

I would certainly want to try one just out of curiosity. I don’t believe that I would want to keep one for regular interactions because I’m happily married and don’t feel the need for one.

And would your wife accept that?

I wouldn’t feel like I was cheating on her. We haven’t discussed this because it’s hypothetical, but I think she would just perceive it as another form of masturbation.

Would you mind if she tried one?

No, no. Why not?

Quote of the day

This is such a great one, I had to include it.

“Words ought to be a little wild for they are the assault of thought on the unthinking.”

– John Maynard Keynes, quoted in the London Independent and cited in The Week

Wind power in Malawi

It’s hard not to be excited by this recent story of William Kamkwamba, a Malawian who took the initiative to electrify his family’s home himself, using wind power. Why?

“I was thinking about electricity,” says Mr. Kamkwamba, explaining how he got hooked on wind. “I was thinking about what I’d like to have at home, and I was thinking, ‘What can I do?’ “

The story is simple, but I found the article missing a few critical observations. Here is the basic outline:

Mr. Kamkwamba’s wind obsession started six years ago. He wasn’t going to school anymore because his family couldn’t afford the $80-a-year tuition.

When he wasn’t helping his family farm groundnuts and soybeans, he was reading. He stumbled onto a photograph of a windmill in a text donated to the local library and started to build one himself. The project seemed a waste of time to his parents and the rest of Masitala.

“At first, we were laughing at him,” says Agnes Kamkwamba, his mother. “We thought he was doing something useless.”

The laughter ended when he hooked up his windmill to a thin copper wire, a car battery and a light bulb for each room of the family’s main house.

The family soon started enjoying the trappings of modern life: a radio and, more recently, a TV. They no longer have to buy paraffin for lantern light. Two of Mr. Kamkwamba’s six sisters stay up late studying for school.

“Our lives are much happier now,” Mrs. Kamkwamba says.

A few points to note. First, he had time to read. Other members of his family were able to work productively and therefore probably are not infected with the HIV virus. Second, he had a good idea, based on his reading and problem-solving. He was able to consider making an investment of time and energy in a project that would deliver substantial benefits in the future. I take this to mean that he is not starving. Third, he didn’t ask anyone for a grant to build his windmill, he just did it. He didn’t even think that USAID might be interested in funding such a project (I bet they would).

Feel free to ignore the story and just watch the video.

Thanks, Dad.

If you’re disgusted with our choices for President, be thankful you’re not South African

For those who think that Obama is too inexperienced, Hillary is a Machiavellian power-monger, Romney is a flip-flopper, Giuliana is unstable, and McCain is too old, take a look at the choices offered to South African voters. The Economist recently highlighted the tragic state of South African domestic politics as they ramp up to next year’s presidential election. The process itself is as flawed as the electoral college — the African National Congress, the country’s ruling party since the end of apartheid in 1994 and a virtual certainy to win every election, decides the presidential nominee, and hence, the future president, in a closed meeting of its members.

Turn to the candidates. On the one hand, Thabo Mbeki has been a steady hand at the helm of the economy, but his secretive, clique-ish management techniques have been off-putting to many. Moreover, he may be trying to change the constitution to enable him to serve a third term (the ANC can do this because they have a two-thirds majority). His approach to diplomacy with Zimbabwe has been woeful, and his approach to South Africa’s AIDS crisis has been, well, bizaare (garlic, anyone?). On the other hand, we have Jacob Zuma. Zuma was acquitted of raping an HIV-positive woman a few years ago, though it emerged during the trial that he did have sex with her. Don’t worry — he took a shower afterwards to prevent himself from catching the virus. Zuma has campaigned without actually enumerating his economic policies, though his support from trade unions is worrying, as South Africa cannot risk veering off to the left (the economy needs to grow by 6+% per year to help reduce its exceptionally high unemployment). Moreover, he has already (as vice president) allegedly conducted several shady, back-office arms deals and possibly taken bribes for influence.

Should South Africans amend the constitution to enable a technically competent, though scarily authoritarian to stay in power, or should they elect an uneducated populist with a questionable moral code? Hard choices indeed. I’d much rather be a voter in Iowa.