First, Do No Harm

A fantastic article summarizing the trouble behind the recent push to support ethanol by Congress, the White House, Presidential hopefuls, and anyone else with the desire to make a quick buck and do some good for the world. It’s a cause that’s easy to get behind, but not necessarily right-minded. BusinessWeek summarizes some of the potential mis-steps a legislation-happy Congress might take.

But as an optimist, I take heart from one policy proposal….

What some experts see as the best policy may be the least likely to pass: a tax on oil that kicks in only if the price goes below, say, $40 per barrel. “That would keep OPEC from dropping the price of oil to drive out ethanol,” explains venture capitalist and ethanol investor Vinod Khosla. Democrats, however, fear they can’t get the new taxes by Republicans.

I love this idea. It leverages game theory to up the stakes with OPEC, and it appeases those members of the Republican Party who knee-jerk any time anyone mentions increased taxes. Frankly, I have no idea why we couldn’t pass this policy.

Just so that the UN doesn’t feel too alone…

Apparently the World Bank has been trumpeting its own research, even when it’s not statistically robust. This is especially probelmatic given their penchant for big-think pieces on drivers of economic growth and poverty alleviation, which are often sensitive to study design and small changes in variable. See the Economist article here.

Tough couple weeks for UNDP…

My former employer, the United Nations Development Programme, is taking much abuse this week from the conservative establishment. Much of it is rightly deserved. The Economist published a piece excoriating UNDP for lauding the new “self-sufficiency” policy of the military government Thailand, developed by the King. This theory is broadly:

for sustainability, moderation and broad-based development; and against excessive risk-taking, inequality and other evils

I think most folks can get behind these platitudes, especially in SE Asia, where Malaysia, Singapore, and South Korea have demonstrated that controls on globalization don’t necessarily have to turn back development. The Economist goes on, however, to remonstrate UNDP for both failing to acknowledge the success of Thaksin’s policies (which actually did a great deal to alleviate the lot of the poorest) and supporting “new-age waffle” which can be used to justify all sorts of backwards policies, from nationalization of industries to stric government regulations.

Perhaps it makes sense for the new government to obscure its predecessor’s achievements while stealing its best clothes. The question is why the UNDP thinks it should provide cover for this whitewash by puffing the sufficiency economy as a miracle-cure for the developing world’s woes. The answer is that the UNDP is a sucker for this sort of new-age waffle, especially if it has royal patronage. It has also lauded the not entirely dissimilar “Gross National Happiness” theory of Bhutan’s King Jigme Singye Wangchuk.

In publishing such an unbalanced report on a theory that is untried on a national level, the UNDP has abandoned all sense of objectivity. It is also lending legitimacy to a regime that took power by force. Hakan Bjorkman, the UNDP’s deputy chief in Thailand, says it wanted to provoke a debate. But no such debate is possible in Thailand, because sufficiency theory is the king’s philosophy and anything remotely critical of it could be seen as lèse-majesté, punishable with jail.

A second piece, titled “United Nations Dictators Program,” in the Wall Street Journal from Melanie Kirkpatrick describes the lack of delivery and possible corruption in UNDP’s North Korean program. She argues that UNDP’s program to delivering roughly $6 mm per annum across 30 projects in North Korea suffers from poor oversight and likely serves mainly as a source of hard currency for the regime. Though falling short of accusing UNDP ofcorruption, Kirkpatrick argues that UNDP is “willfully blind” to the North Korean government’s willingness to break UN rules to get access to hard currency.

Unlike Oil for Food, there’s no evidence to date that corrupt UNDP officials are in on the game–though given the U.N.’s record of late, it would be unwise to rule that out before a full investigation. There is, however, plenty of evidence of willful blindness on the part of the UNDP, which let myriad rules be broken and allowed itself to become a large source of hard currency for the regime. Nor did it bring these irregularities to the attention of its governing body, the 36-member executive board.

Examples include staffing and procurement relationships:

In addition to appointing the UNDP’s staff, the North Korean government requires that UNDP pay their salaries to the government, which presumably takes its cut…..In yet another violation of the rules, UNDP gives local staff a cash “meal stipend” of $120 a month, which is another hard currency contribution.

The UNDP also accedes to Pyongyang’s demands that it pay cash to local government vendors. That’s another violation of U.N. rules, as is placing North Korean staffers in jobs that give them control of financial records, personnel actions, and equipment and supplies. To cite just one example of abuse, the 1999 internal audit found that the UNDP checkbook was not kept in a secure location and no check register was maintained reflecting checks written.

Kirkpatrick goes on to highlight the negative impact of one of the dirtiest little secrets of UNDP project implementation–so-called “nationally executed,” or “NEX” projects– in which money is transferred directly to government officials, who then allocate the money back to UNDP and implementing non-profit organizations.

There is little if any oversight of the UNDP’s projects in North Korea, which, according to a U.N. document, numbered 30 last year. UNDP regulations require one official, on-site visit a year but since Pyongyang prohibits foreigners from visiting some of the project sites, that’s another rule that’s out the window. Audits of individual projects are spotty at best and in the case of “nationally executed” or “NEX” projects–that is, those run by the North Korean government with funds provided by the UNDP–they are often done by the government itself, giving new meaning to the adage about the fox running the henhouse.

This is unfortunately a weakness in many UNDP offices around the world, and speaks to two broader challenges that UNDP faces and will continue to face.

First, UNDP is tasked as the main branch of the United Nations for interacting with local governments in developing countries. As such, one of its main responsibilities is to develop strong relationships with local government officials, many of whom serve in UN posts during their careers. These relationships pay off not only when development projects need to be implemented, but also when peace negotiations need to be held by the UN Secretary General’s office or famine needs to be avoided by the World Food Program or a natural disaster needs to be addressed by the Office of Coordination of Humanitarian Affairs. So UNDP wears two hats, as both an implementing agency funding and leading development projects on the ground and as a coordinating agency on behalf of the rest of the UN. As a result, UNDP will continue to pander to local governments more than, say, the folks at USAID or independent non-profits, who report only to the philanthropists or national governments who fund them.

The second challenge faced by UNDP and the UN system more broadly–and it’s one that we as Americans find especially hard to swallow–is the challenge of communicating to the world the belief that engagement and process matter. The UN was founded on this belief that engagement and discussion could help people resolve conflict. (So, by the way, was the U.S. government.) However, belief in process, in addition to forcing UN diplomats to attend an ungodly number of conferences and cocktail parties, often leads to disturbing results such as endorsing weakened economic policies or funding a dictator. They also create a cover for more nefarious activities, such as foreign officials attending conferences solely to charge appearance fees or per diems.

Lastly, these articles highlight perhaps the saddest fact about the state of UNDP certainly, if not the broader UN, and that is the lack of oversight of activities at any level, from the remote, on-the-ground microfinance project all the way up to HQ-level appropriations meeting. This lack of oversight leaves a vacuum in which it is no surprise that sinister activities take place.

Happily, the UN’s new Sec Gen has immediately a forcefully replied to Kirkpatrick’s article, requesting

an urgent, system wide and external inquiry into all activities done around the globe by the U.N. funds and programs.

For regular UN watchers, this is actually big news, as rarely does anything happen with the immediacy of this announcement, nor does the UN often open its doors to independent oversight. See the follow up piece in WSJ here.

(Thanks, Dad and Sanjay, for relevant articles)

This just in — We still don’t know what to tell you

The WSJ has coverage of an important debate going on the economics profession. In a keynote speech at the American Economics Association conference in Chicago this weekend, Simon Johnson, a professor at MIT’s Sloan School of Management,

“Do we really know how to help the poor people — the increasing number of poor people? Do we really know how to help them out of poverty?”

The answer, as is evident from the debate among Johnson, Anne Krueger, and Martin Feldstein, and others, is that clearly we do not. The points of view can be boiled down to the following:

Anne Krueger: we do know what’s right, but every time we prescribe the right policies, we miss the organizational and institutional nuance required to implement it effectively (e.g., Russia in 1990).

“[S]o-called Third World governments and their First World advisers applied sound economic principles incorrectly or without sufficient attention to the reality. Policies to encourage exports and shield embryonic industries from imports until they got rolling sounded good, for instance, but bred corruption, infantilized industries and created politically powerful vested interests that blocked needed change.”

Sebastian Edwards: we used to think we knew what was right, but we didn’t. We’ve learned from the lessons of the past (e.g., the Washngton Consensus), and now, like Socrates, we are smart enough not to prescribe an all-encompassing solution, but rather to offer some general guidelines.

“Another view is that poor countries got bad advice and paid the price, but that today’s experts know much more than their predecessors. “We don’t have recipes, or a checklist,” Mr. Edwards says. But, he says, we do know the ingredients: educating workers, accumulating capital and investing it widely, improving productivity.”

Simon Johnson: we were focusing on the wrong economic policy advice. What we really need to do is focus on the institutions that support economic development.

“Mr. Johnson, among others, argues that what really matters is having solid political, legal and economic institutions — courts, central banks, honest bureaucrats, private-property rights — that allow entrepreneurs to flourish. “

Or you could take my personal favorite, the approach espoused by William Easterly and not featured in this article: people respond to incentives, and therefore, development advice should incorporate incentives. True.

What I find ironic or perhaps sad about this entire debate (and I have the luxury of doing so, since I’m not a practicing economist nor do I claim to know the answer to any of these questions), is that all of the above are compelling explanations for past mistakes, but none of these offer tangible conclusions about what to do in the future. Nor, for those who desperately want economics to be a science, do they offer any predictions that can be tested. I worry that we’re doomed to 25 years of focusing on “institution-building” while inflation runs rampant and debts spiral out of control, which I can ensure you will not lead to economic development for the least developed countries in the world.

Thanks, Sanjay, for referring the article.

The Beginning of an Analysis of the Minimum Wage

The New York Times has an interesting, albeit anecdotal, analysis of the potential impact of a minimum wage increase. The article compares towns in Washington, with the highest minimum wage in the U.S., and those across the border in Idaho, with the federally mandated $5.15 per hour wage. Interviews with restaurant owners (surely a statistically robust sample!) suggest that the higher minimum wage in Washington has not impacted sales.

Why?

Here on this border, business owners have found small ways to raise their prices, and customers say they have barely noticed.

“We used to have a coupon, $3 off on any family-size pizza, and we changed that to $2 off,” said Mr. Singleton, of Papa Murphy’s. “I haven’t heard a single complaint.”

Right. The economist in me has to ask– why didn’t Papa Murphy’s change the coupon earlier (i.e., before the minimum wage law went into effect?). This would have generated an extra $1 in profit per pizza sold! Well, the article suggests an explanation to this, too:

“Washington’s robust economy, which added nearly 90,000 jobs last year, is proof that even with the country’s highest minimum wage, “this is a great place to do business,” Mr. Brunell said.

During a recession five years ago, the same group had argued that Washington’s high minimum wage law would send businesses fleeing to Idaho. The group sent out a news release with a criticism of the law from John Fazzari, who owns a family-run pizza business in Clarkston, Wash., just minutes from the Idaho town of Lewiston.

But now Mr. Fazzari says business has never been better, and he has no desire to move to Idaho.

In short, when the economy is growing, it’s easier to raise prices and pay higher wages. When it’s stagnating, it’s less easy to do either. This is just another way of saying that “We don’t mind having a minimum wage, as long as it doesn’t bite too much.”

Having said that, this article suggests a robust research agenda for some aspiring young economist (see previous post). We have a random instrumental variable (whether the state has a minimum wage law higher than the federal minimum wage) which can be used to test a variety of effects on town’s on either side of the border. Do people move from one town to another? Are more or fewer people living below the poverty line? And in particular, what happens to small business openings and closures?

Why “Econophile” exists — Economics is not dismal

NY Times has a great profile of 12 young, untenured economists doing the most exciting work. These folks, who study everything from AIDS in Africa to point-shaving, are why I consider myself an econophile. They are using an economic view of the world to solve difficult, non-economic problems. Interestingly, the same article suggests why it’s so difficult to be an econophile–or an aspiring young economist doing innovative work: pressure to publish-or-perish and emphasis on journal prestige and independent work over collaboration and real-world problem-solving. In order to make it to the top, unfortunately, it feels like work needs to become less, rather than more, applied.

On the “I feel old front”– Emily Oster and Justin Wolfers went to school with me.

Thanks for the reference, Kevin.

New Minimum Wage — Does it Actually Matter?

The Democrats want to raise the minimum wage to what, $7.50? My question is: is this move a political gambit, or will it actually impact workers?

I’d like someone to do some research to help understand how big a deal it is for us to raise the minimum wage. My gut tells me that in a tight labor market and in a country where states can often override the federal government, the federal minimum wage may not be nearly as much of a headline issues as we make it out to be. See, for example, the map below, which I believe is from the Department of Labor (found on Wikipedia):

This map clearly demonstrates that the current federal minimum wage is non-binding (i.e., lower than the state minimum wage) in more than 50% of U.S. states. It’s even higher than the proposed new minimum wage ($7.93 in Washington and $7.80 in Oregon). On a side note, I was recently in Portland and my friend observed to me that there 6 Fortune 500 companies in the city 25 years ago, and now there are none. Coincidence?

But my central point is two-fold. First, it seems as if the federal minimum wage is actually more of a political gambit than a fundamental policy change. Second, ironically, the federal minimum wage will be binding in states that are typically Republican strongholds. So, rather than pandering to their base, the Democrats are pandering to the Republican base. But I would hypothesize that rather than steal votes from Republicans, this move will simply reinforce the “traditional” view of Democrats among Republicans and independents. Texans aren’t going to switch to voting Democrat because they’re exerting more federal control, and Kansan farmers aren’t going to change their vote on the minimum wage issue.

So why do it? Let me propose that the minimum wage is to Democrats as same-sexmarriage is to George Bush– an issue that mobilizes the base and a peace offering, post-election, to all the traditional supporters who rocked the vote. [By the way, please excuse my bad analogy. These issues are more different than they are similar -- the minimum wage is an economic issue with some genuine economic arguments in favor of it, while a ban on same-sex marriage is a social issue with few economic arguments in favor of it. However, both raising the minimum wage and banning same-sex marriage are supported by a majority of Americans.]

The “New” Democrats? I Doubt It

Well, at least I get to spread my disgust around a bit. Good opinion piece in today’s WSJ summarizing the Democrats’ agenda for the first month in office. To summarize:

• Federal minimum wage increase
• Price controls for prescription medications (modelled after the Dept of Veteran Affairs program)
• Earmark reform
• Mandatory ethics classes for all employees of the House

For those of you who voted in November, which of these were you hoping the Democrats would place as the #1 priority? Any of them? As I read through the list, I’m excited about earmark reform, though not many Democrats really ran on a platform of earmark reform. But a federal wage increase and price controls? Per my earlier post, Americans did not give the Dems a mandate for their usual platform but rather a mandate for change. Am I wrong?

And anyone who has ever been to a mandatory sensitivity training class will understand my skepticism about mandatory ethics class. Let’s try a little role-playing:

• Lobbyist: Hi Mr Humbaugh, may I buy you lunch?
• Me: Why sure, we need to talk business after all.
• Lobbyist: OK, I’ve made us reservations at Roy’s…. in Kauai.
• Me: Wow, that sounds like fun. Can my wife come?
• Lobbyist: Sure, but I don’t know how well she’s going to get along with the on-board strippers.
• Me: Makes sense to me. I’ll suggest that she take the kids to see Happy Feet instead.

Now, where did I go wrong in this scenario? Clearly, I should have fought harder to bring my wife with me on the trip. After all, she’s a significant decision-maker, and if a lobbyist really wants to influence policy, he should fork over the “companion” bucks, too.

Welcome Congress! Allow myself to introduce myself

Bush wrote a typical Presidential essay today in the Wall Street Journal. Because it was written and not spoken, it actually reads reasonably intelligently. There are two points of note in the essay, and not surprisingly, neither one of them has to do with Iraq.

First, he finally takes a moment to outline his beliefs:

“My principles are no secret. I have campaigned on them in my races for governor and in two presidential contests, and I have worked hard during my presidency to translate these principles into sound policy.

I believe that when America is willing to use her influence abroad, the American people are safer and the world is more secure. I believe that wealth does not come from government. It comes from the hard work of America’s workers, entrepreneurs and small businesses. I believe government closest to the people is more responsive and accountable. I believe government plays an important role in helping those who can’t help themselves. Yet we must always remember that when people are hurting, they need a caring person, not a government bureaucracy.”

For those of you who read my message to the Democrats (or who are, like me, fiscally conservative and socially liberal), these words should resonate. It’s just a shame that we haven’t lived by them over the past six years. Why not?

That’s where it gets interesting. Bush uses his essay to call for an end to earmarking, a cause which is a little like calling for a reduction in Congressional paychecks– everyone is for it, but it will never get passed.

“One important message I took away from the election is that people want to end the secretive process by which Washington insiders are able to slip into legislation billions of dollars of pork-barrel projects that have never been reviewed or voted on by Congress. I’m glad Senator Robert Byrd and Congressman Dave Obey — the Democrats who will lead the appropriations process in the new Congress — heard that message, too, and have indicated they will refrain from including additional earmarks in the continuing resolution for this fiscal year.”

Over the past six years, was anybody in government other than McCain calling for an end to earmarking? Was anybody howling about the growth in non-discretionary, non-military spending, let alone military spending? Not really. Because Republicans could feed at the pork barrel as long as they wanted, and as long as they toed the line on Iraq and tax cuts, they got their bridges to nowhere and highways through the backcountry.

Now, this isn’t the only reason the past sixy years have not lived up to Bush’s stated values above. But it’s important because it reminds us why we have a system of checks and balances. A slew of evidence has come in recently about the positive budgetary implications of a divided Congress and President. See, for example, a recent Milken Institute report excoriating the Republican Party for over-spending — note especially the chart on pg. 45, which suggests just how prevalent earmarking and other budget-stuffing practices have been under the Bush administration.

In a 2004 piece entitled “The Contradictory Conservative,” The Economist offers another damning piece of evidence– Bush has increased discretionary spending more than any President ever since LBJ. What have we gotten for it? Shoddy Medicare legislation and a toothless Department of Homeland Security.

The seminal article with the key data behind the Milken Institute report and the Economist chart was originally offered by Veronique de Rugy at the Cato Institute. Although more academic, the data speak for themselves here.

Worst of all, Bush uses his call to limit earmarking to suggest that he needs the line-item veto:

“But we can and should do more. It’s time Congress give the president a line-item veto.”

Right. There was a time when I trusted the President to cut through the factionalist and pandering of a populist Congress. No longer. For other ideas, check out some of the proposals from Milken. By the way, I consistently like they’re stuff. If they weren’t named after the former junk bond king, they could be one of the foremost think tanks in the U.S.