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What is it that European countries do? Massive income redistribution. That may seem superficial, but it’s the answer that I’m most happy with. It has long been known to network theorists that competitive networks (with a return to scale to node connection) are characterized by power law distributions. This is a natural phenomenon; it happens in the blogosphere, the financial markets, in sports, and it happens in economies as a whole. Left to its own devices, it is inevitable that such networks will evolve an shockingly large disparity between the best-performing actors, and the mean actor.
Lane Kenworthy, who writes a lot about inequality issues, has a recent post on his blog (and a subsequent link to a longer article in a U of Arizona journal) which seems to corroborate the story I told above:
What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality.
I was probably subconsciously channeling my inner Kenworthy when I wrote the previous post, as I read his blog sporadically. If I had it my way, the discussion would break along three lines:
- Wealth Inequality.
- Income Inequality.
- Consumption Inequality
And on three lines, we would be able to analyze poverty. What would be the value in this? We would more easily be able to define public policy on narrower grounds. For example, wealth distribution is always going to be sharply unequal. People with higher incomes relative to consumption will always be able to amass more wealth than lower income groups (wealth meaning savings + assets, wealth is something I think many people conflate with income). However, what is the best policy for addressing this aspect of the problem? Simple income transfers won’t work alone, we need to incentivize intergenerational savings among the poor. In that light, Social Security is not the most optimal program, as it discourages savings.
I tend to not really focus on income inequality, but it does feed into the more important aspect (in my view); consumption inequality. Are poor peoples’ consumption patterns keeping up with what we as a society would consider some measure of a “quality” standard of living? Are they able to afford necessities like electricity, HVAC, food, and medical care? If not, this is where we get to fiddle with income in my most preferred way (and the way which allowed other countries’ poor to keep up with growth): simple transfers. Look for efficiency on the supply side, but on the demand side, just augment income. This could be in the form of a universal deduction for income under a certain level, or cash or voucher transfers. It is relatively cheap and easy to structure these transfers in a way that incentivizes future-time orientation…indeed, that is what the Mexican organization Opportunidad does.
I realize that democracy is much messier than this, but it is something to work toward. The welfare state need not be cumbersome…indeed, the US is unique in the world in the inefficient ways it implements a patchwork system. Canadian Philosopher and pop-economics writer Joseph Heath has said that the US government gets away with it because we don’t redistribute a whole heckuva lot of income…but as that enterprise grows, we’ll inevitably have to address our abhorrent inefficiency issues.
Addendum: Lane Kenworthy has also done some good work on the question of measuring poverty and material wellbeing, so check that out as well. Seems the real barrier to constructing a time series from this data is that it doesn’t go back far enough to create a reliable measure of wellbeing over time.
A couple days ago, Reihan Salam put forth the question of why the United States is so great. Which means how has the US economy performed so well over the last century? Karl answers with what he deemed a “conventional answer”, and FreeExchange grapples with the question, concluding a mix of market size and the influx of talent to America (read: immigration).
I agree that market size has a lot to do with the wealth that the US generates. The most important thing to note is that the US is a free trade area. Capital and labor are free to migrate easily and efficiently across the borders of states in the US. This advantage, the comparative advantage of trade, has allowed the US to innovate in ways that having trade barriers would not allow. The most striking example comes from (I believe) David Friedman, when he noted that there are two ways to make automobiles; you can erect a factory and build them with steel, or you can plant a field and build them with agriculture…or, presumably, you could erect a tower, and build them with finance. The easy with which this division of labor can manifest itself within the United States is definitely a key to the prosperity we enjoy. Although I believe that the advantage of market size has run its course, it has still been very important.
I want to touch on an element that fell out of favor among researchers in the 60’s, but has since seen a tepid renaissance. That is, culture matters.
Conveniently, that is the title of a book that was put out after a Harvard international studies conference headed by Lawrence Harrison and Samuel Huntington. To begin, I’d like to turn to Robert Putnam, from his book, Making Democracy Work, in which Putnam describes his visit to the government offices of the poor Puglia region of Italy:
In the dingy anteroom loll several indolent functionaries, though they are likely to be present on an hour or two each day and be unresponsive even then. The persistent visitor might discover that the offices beyond stand only ghostly rows of empty desks. One mayor, frustrated at his inability to get action from the region’s bureaucrats exploded to us, “They don’t answer the mail, they don’t even answer the telephone!”
Putnam then contrasts that experience with the experience of the government offices in the rich Emilia-Romangna region in the north:
Visiting the glass-walled regional headquarters is like entering a modern, high-tech firm. A brisk, courteous receptionist directs the visitors to the appropriate office, where as likely as not, the relevant official will call up a computerized database on regional problems and policies…A legislative pioneer in many fields, the Emilian government has progressed from words to deeds, its effectiveness measured by dozens of daycare centers and industrial parks, repertory theaters adn vocational training sites scattered throughout the region.
These two regions stand but 400 miles away from eachother, but they may well be worlds apart. The curious question is, why? They are both populated by Italian people who share the history of Italy. Putnam concludes that the source of this disparity is low trust leading to an inability to achieve large-scale cooperation. He argues that the differing histories is the source, tracing all the way back to medieval times. While the south was traditionally monarchist, hierarchical, closed, and dominated by the church; the north was more egalitarian, communal, and open to trade. Later, the north was influenced by the ideas of the enlightenment.
The idea is that while the south was discouraging networks from forming, as they presented challenges to the hierarchy (and especially the church), the north embraced the formation of social networks, which allowed it to form valuable human (and social) capital.
In their book, Harrison and Huntington present data regarding trust and economic performance (measured in PPP per capita GNP). Not surprisingly, there is a strong correlation between the percentage of people who “trust people in general”, and GNP per capita (sorry I don’t have a link, but if I find suitable data, I’ll reconstruct). The question is, why? Argentinean scholar Mariano Grondona has proposed typological rules. These rules fall into three broad categories.
- The first category are norms related to individual behavior. These include norms that support a strong work ethic, individual accountability, and a belief that you are the protagonist of your own life and not at the whim of mystical powers or “powerful leaders”.
- The second category are norms related to cooperative behavior. Foremost is a belief that life is a non-zero-sum game and that there are payoffs to cooperating in a larger group. Societies that believe in a fixed pie of wealth have a difficult time creating social capital, and are often characterized by looting and cheating.
- The third category are norms related to innovation. Cultures that look to rational scientific explanations of the world tend to be more innovative. It is also very important that a culture be tolerant of heresy and experimentation. Orthodoxy stifles innovation. It is also important that a culture welcome competition and celebrate achievement. Overly egalitarian societies reduce the incentives for risk-taking.
Not surprisingly, those cultural traits are also the key to well-functioning organizations, including businesses, charities, and governments. A final norm, and one that is possibly the most important, is how people view time. As Eric Bienhocker states:
Cultures that live for today (or, conversely, are mired in the past) have problems across the board, ranging from low work ethic, to inability to engage in complex coordination and low levels of investment in innovation. Why work hard, and invest in cooperation and innovation if tomorrow doesn’t matter? In contrast, cultures that have an ethic of investing for tomorrow tend to value work, have high intergeneration savings rates, demonstrate a willingness to sacrifice short-term pleasures for long-term gain, and enjoy high levels of cooperation.
Trust also affects the intangible wealth of nations. Bryan Caplan is fond of touting the fact that poor immigrants are extremely productive, as long as they work in America. The amount of physical capital (A, k, L in Cobb-Douglas) in the US certainly tells part of the story, but as the World Bank has pointed out, it can’t come anywhere near telling the whole story. In fact, our institutions contribute 80% to the US’ capital stock. Contrast that with the poorest nation on earth, the Democratic Republic of Congo, whose intangible capital actually depresses the total wealth of the country.
William Easterly has pointed out that in the last half-century, the developed world has provided more than $1 trillion in economic assistance to the developing world. Yet poverty in places like Africa and South America still persists. Africa even regressed (until recently). The lesson? It is important not to ignore the cultural basis of economic growth.
The Origin of Wealth, Eric Bienhocker. I’d like to thank Bienhocker as well, for providing a guide to much of my analysis of culture.
Just wanted to let you know that that is one of my very favorite TED speeches. It is incredibly inspiring.
Millenocket, ME. has the right idea. Matthew Yglesias has apparently been to Millenocket, and finds what they are doing funny. I’ve never been there, but as the article points out, it’s a pretty dead town, with horrible weather…so it seems out of place:
Never mind that Millinocket is an hour’s drive from the nearest mall or movie theater, or that it gets an average 93 inches of snow a year. Kenneth Smith, the schools superintendent, is so certain that Chinese students will eventually arrive by the dozen — paying $27,000 a year in tuition, room and board — that he is scouting vacant properties to convert to dormitories.
There are three ways in which I’d like to analyze this development; from an economic standpoint, a human welfare standpoint, and a social standpoint. I will argue that all three a net benefits to the US and the world, and we should make a long-term policy commitment to this type development around the country (and, indeed, other countries should imitate it).
The economics of importing capital through education are fairly straightforward. The long run growth of an economy, given money neutrality, is a function of an economy’s real capital stock. Ceterus paribus, increasing the efficiency of capital increases the ability of an economy to grow in the long run. If the $27,000 spent on educating a Chinese child is more productive than any other investment, which means the real returns to a US education are higher than any other investment available to them (something that is almost surely the case), then this results in an increase in the marginal efficiency of capital. Whether these Chinese immigrants remain in the US, or return to China, the effect on world growth will for the better. Literally everyone will be better off due to the rising of the world Wicksellian equilibrium interest rate as China and other countries become more productive (and thus, richer).
The US is arguably much more efficient at education than the Chinese, so why not export education?
From a human welfare standpoint, consider this analysis from the World Bank:
This volume asks a key question: Where is the Wealth of Nations? Answering this question yields important insights into the prospects for sustainable development in countries around the world. The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.
Growth is essential if developing countries are to meet the Millennium Development Goals by 2015. Growth, however, will be illusory if it is based on mining soils and depleting fisheries and forests. This report provides the indicators needed to manage the total portfolio of assets upon which development depends. Armed with this information, decision makers can direct the development process toward sustainable outcomes.
This analysis looks at the levels of “intangible wealth” that is embedded within human and institutional capital. The US is found to have $418,009 in intangible wealth per capita (comprising 80% of our real capital stock). That means, simply by stepping within the borders of the United States, human productivity is enhanced by this massive stock of wealth embedded in our people and our societal institutions. By contrast, China has just $4,208 per capita (comprising 55% of the total wealth stock).
Now, despite the obvious material living standards present in the United States, access to intangible capital totaling more than 99 times the amount available in China, comprises a vast gain in human welfare for each and every person who comes to the United States to live and be educated.
Finally, from a societal standpoint, having more immigrant workers increases the real wage rate for most people in the US. Not only that, but it because of the increase in marginal productivity of the Chinese worker (assuming that a non-trivial sum of people will return to China), this will increase the wages of Chinese workers — which, in turn, will increase the demand from China for US-produced goods and services. A greater supply of future labor is very important to the future of the wealth creation (and thus, the welfare state), as is evident by Japan’s aging population.
So, let’s overcome this roadblock…
There is one hitch. Under State Department rules, foreign students can attend public high school in the United States for only a year, a system that Dr. Smith considers unfair, given that they can attend private high schools for four years.
…and make a real Pareto improvement in the lives of people around the world. Most of all, the lives of these prospective Chinese immigrants.
To end, a quote from Terry Given, an English teacher:
“I don’t want to sound flip,” Ms. Given said, “but why not? We won’t know until we get the opportunity to know them and give them the opportunity to know us. There’s something to be said for putting ourselves out there to see if we can be the prize that’s claimed.”