Market Power

Bryan Caplan on the Macro AP Exam

From Bryan Caplan:

Today my 8th-grade homeschoolers take the Advanced Placement test in Macroeconomics.  Back in 1989, when I took this exam, it covered little more than 1960s Keynesianism.  The current test is marginally better.  Now we've got long-run Aggregate Supply curves and long-run Phillips curves to remind students that pumping up demand has clear long-run dangers and little long-run benefit.  But this AP is still far worse than it should be. 

The biggest lacuna: There's essentially nothing on the fundamental question of macroeconomics: Why are some countries rich and others poor?  Short-run macro stabilization policy questions outnumber long-run growth questions by at least 20:1.  Part of the reason is probably the legacy of Keynesianism: "In the long run, we're all dead."  But the main reason is that the test writers fear to be empirical - even when the empirics are clear.  Saying, "Economic freedom is a major cause of development" just sounds too ideological, even when the statistics are pretty clear and the natural experiments are crystal clear.

For the first time in a very long time, I will be teaching Principles of Macro at my university.  Hopefully it will pass the Caplan Test.

"Chug for Growth"

But in fact, mounting evidence suggests that beer in particular, and the beer industry that surrounds it, may be as good for growth as excess sobriety. In some of the world's toughest investment climates, beer companies today are building factories, creating jobs, and providing vital public services, all in the pursuit of new customers for a pint. It's the brewery as economic stimulus

That's from Charles Kenny writing at ForeignPolicy.com.  It's just another reason to liberalize America's alcohol laws.

Assorted Links on Government, Markets, and Poverty

1.  It sounds like the stimulus was more like an offset: increased federal spending was an offset for decreased state spending.according to this NBER paper by Aizenman and Pasricha.  King Banaian argues that the stimulus created/saved a half a million jobs but that the long-run effects are "murkier." 

2.  Entitlement programs don't increase the number of rich people relative to the population.  Markets tend to do that and it's reasonable to think that, at some point, we run out of "other people" to pay the way with entitlement programs.  Mark Steyn argues that Greece is at this tipping point.  Many American states are at similar points.  If the US legislates an entitlement health program - Obamacare, for example - then it, as a nation, is moving closer to the point Greece is at today.  "What could go wrong?"  Greece may provide an answer.  Via Craig Newmark.

3.  On the one hand we have Haiti, an impoverished country hit by a magnitude 7 earthquake.  The result was hundreds of thousands dead and terrible damage.  On the other hand we have Chile, hit by a magnitude 8.8 earthquake, much, much worse than the quake that hit Haiti in terms of sheer seismic power (the Richter scale is based upon the base-10 logarithmic scale).  Like the Haitian quake, this one was centered near a major city and it caused considerable damage.  Unlike the Haitian quake, it also generated a tsunami that inundated coastal regions of Chile.  It was a double whammy for Chile.  But the death toll was much smaller than in Haiti (just over 700 dead from what I last saw).

Why the difference in death tolls?  One argument can be made that Chile's building codes were stricter than Haiti's.  That is true.  But you also have to point to Chile having enough wealth and income to be able to afford having stronger building codes.  You have to be able to take care of the basics - basic food and shelter - first before you take care of the fancy stuff - fancy food and shelter.  Where does wealth and income come from?  Generally speaking, from strong market institutions (HT Art Carden).  Why does Chile have stronger market institutions than Haiti?  Bret Stephens points to Milton Friedman. 

Ironically, Friedman's Nobel Prize ceremony was punctuated with protests for his having been associated with the Chilean dictatorship. 

4.  "African Poverty is Falling" and it is "remarkably general."  This is a very good thing.  Via MR.

North Korea's Fight Against Markets and Private Wealth

Remember that famous picture of North and South Korea at night?  

The darkness that is North Korea has, if it's possible, gotten darker.  From the Times Online:

In the capital, Pyongyang, yesterday only the few shops and restaurants permitted to trade in foreign currencies — patronised by the privileged elite and the city’s small foreign population — were open for business. All other enterprises and services based on cash, including markets, long-distance bus services, barbers’ shops, saunas and bath houses, were suspended until the revaluation of the won is completed next week.

There were reports of public outrage and confusion after the announcement of the measure, which requires North Koreans to swap existing won notes for new ones at an exchange rate of one to 100 — effectively knocking two zeroes off their value. Because of a cap of 100,000 won per family (£475 at the official exchange rate), anyone with significant holdings of cash will have their savings wiped out.

Meanwhile, ABC news reports:

One South Korean report says graffiti and leaflets criticising dictator Kim Jong-Il have surfaced.

In a bid to dissuade mass defections sparked by the revaluation, North Korean troops have been ordered to shoot to kill anyone trying to cross the border into China.

The Economist cautions at the use of the word "revalue" suggesting, instead, the term "confiscate."

WESTERN reports decribe North Korea's currency moves as a "revaluation". The word is pure Newspeak. When a government revalues its currency, citizens do not rush out to convert their cash into foreign notes, as North Koreans have done this week. Nor do they stand on the streets screaming at officials in anger and despair.

Rather, the moves represent confiscation on a massive scale. By this coming Sunday, the state says, all existing currency must be replaced by a brand new won, with old 10,000 won bills swapped for new 10 won bills. So far so fine. The state wants to fight inflation, and plenty of other countries have resorted to the expedient of a new currency.

But the state also wants to crack down further on North Korea's myriad private markets. The currency moves are all of a piece, for the maximum amount of old currency that may be converted into new is 100,000 won. For rich traders doing business with China, this matters little. Their wealth will already be in Chinese yuan or dollars. Ditto for the elite. For North Korea's poorest, the new currency is also neither here nor there, for they have no cash at all. But for the broad middle struggling to cope, this is a disaster. Responding to popular fury, North Korea appears to have raised the limit this week to 150,000 won.

Claudia Rosett and Daniel Drezner both comment (HT to Glenn Reynolds).  For those of us living in societies that are more or less free economically, it's a stark reminder of home inhumane men can be to one-another.

You Cannot Stimulate an Economy By Discouraging Economic Activity

I tell my classes that to have a vibrant economy, people generally need to have the freedom to choose who to buy from and who to sell to.  Taxes, subsidies, price controls, and other things of that nature ultimately discourage economic activity because at some point they each take away the freedom for people to contract with whom they please.  This idea is behind Daniel Henninger's current column at WSJ.com.  An excerpt:

Barack Obama campaigned for a year against "the top 1%" and "the wealthiest." It sounded like more than economics to me. But a nation can't have entrepreneurs and eat them, too. Asia is overflowing with rich entrepreneurs. Google "China's auto industry." They have more new auto manufacturers than you can count. If the U.S. has any hope of competing long term with this rising force, it will have to let some Americans get as rich as nouveau riche Asians. This presidency won't do that.

At the jobs summit, Mr. Obama said "I want to hear from CEOs what's holding back our business investment." Really?

How about the world's highest corporate tax rate? How about the 5.4% health-care surtax on top of the expiring Bush tax cuts, which will push the top marginal individual rate, paid at the outset by many entrepreneurs, well over 40%?

Set aside income taxes as the unransomed hostages of progressive dogma. Justify this: The Senate health-reform bill imposes a $4 billion annual excise tax on medical devices and diagnostic equipment. In a slow-innovation economy, which is what we have now, medical and diagnostic miracles sit at the intersection of American science, technology, education and IQ. That stuff defines American entrepreneurship and ingenuity. If the Obama Democrats will tax these people, they'll tax anything that produces income, no matter how innovative or job-creating.

Texas's Experiment in Deregulation of the Electricity Market - Chalk One Up For the Market

From a new book by Lynne Kiesling and Andrew Kleit entitled Electricity Restructuring:  The Texas
Story.

In the early 1990s, the U.S. electricity industry was plagued by cost overruns and stagnant productivity. Many states turned to deregulation to promote innovation and cut costs, a strategy that had worked for the telecommunications, trucking, natural gas, and airline industries. Yet, after the California energy market's infamous meltdown in 2000-2001 triggered the recall election of Governor Gray Davis, deregulation lost popular and political support. Plans to introduce competition and retail choice in electricity markets were stalled or abandoned nationwide--in every state but Texas.

This volume explores how Texas's groundbreaking program of electricity restructuring has become a model for truly competitive energy markets in the United States. The authors contend that restructuring in Texas has been successful because the industry is free from federal oversight within the state; because new investments in electricity supply have been encouraged to insure that increased demand for power is met; because restructuring has spurred the growth of more efficient electricity technologies and business models; because the markets integrate wholesale and retail competition; and because the operation of the transmission grid has been changed to maximize its efficiency.

The success of electricity restructuring in Texas proves that deregulation is both feasible and potentially effective. State policymakers' commitment to competition, decentralized coordination, and ongoing market analysis have made Texas's electricity industry the most competitive in the country. Electricity Restructuring: The Texas Story offers a unique set of guidelines for deregulation done right.

One of the big problems with the California deregulation story is that California deregulated the wholesale market for electricity but kept a price cap on the retail side, which resulted in the wholesale price being higher than the retail price.  As we know, price ceilings discourage the sale of goods while they simultaneously encourage the consumption of goods, creating shortages.  That's no way to deregulate a market.

HT DOL

R.I.P Anniversary Berlin Wall

R.I.P. = Rest in Pieces.  The WSJ editorial staff on "why the Berlin Wall fell."

The Fall of the Berlin Wall: Winds of Change

Growing up in the potential firing line between the US and the USSR, the members of the metal band the Scorpions had special reason to celebrate the fall of the Berlin Wall.  Here is a video of their classic ballad Winds of Change which is about this historical event.

Here is the original video.

It's important to remember that this song, recored in 1990, is about this moment in history written from that moment in history.  It is a song about hope and the dismantling of the the dark shroud that destroyed the hope of millions of people in Eastern Europe:  the Iron Curtain.

The Best Paragraphs I've Read Today

Don Boudreaux on what ails public education in the US:

Suppose that newspapers were run by government and funded by taxpayers, and that each American was assigned to read only the newspaper published in his or her local area.  Clearly, the resulting quality of journalism would be atrocious.

Would anyone seriously suggest that this problem would be solved if only there were better schools of journalism, or higher pay for journalists, or more people who are “called” to journalism, or newspaper readers who take more active roles in digesting and interpreting the news?  Surely not.  All sensible people would understand that these fixes would all fail as long as newspapers faced no competition – indeed, as long as journalism is produced by the state.

I recall hearing that the US has one of the highest rates of church attendance in the world and a lot of that has to do with the fact that people are free to choose what religion they want to follow.

People Tend to Move to Where They Expect the Highest Standard of Living...

that is to places with the most economic freedom and more limited government.

More important, the key group leaving New York and other so-called "youth-magnets" comprises the middle class, particularly families, critical to any long-term urban revival. This year's Census shows that the number of single households in New York has reached record levels; in Manhattan, more than half of all households are singles. And the Urban Future report's analysis found that even well-heeled Manhattanites with children tend to leave once they reach the age of 5 or above.

The key factor here may well be economic opportunity. Virtually all the supposedly top-ranked cities cited in this media narrative have suffered below-average job growth throughout the decade. Some, like Portland and New York, have added almost no new jobs; others like San Francisco, Boston and Chicago have actually lost positions over the past decade.

In contrast, even after the current doldrums, San Antonio, Orlando, Houston, Dallas and Phoenix all boast at least 5% more jobs now than a decade ago. Among the large-narrative magnet regions only one--government-bloated greater Washington--has enjoyed strong employment growth.

A useful graphical test of this hypothesis would be to have something like this graphic of economic freedom and something like this graphic of employment changes side-by-side or imposed over one another.

HT Craig Newmark