New Economist: More on the 'resource curse': "

Can economies escape the resource curse? This was the subject of a recent post, which attracted quite a few commments. Now another paper has tackled the issue. Rick van der Ploeg, professor of economics at the European University Institute, explores the issue in a new CEPR discussion paper Challenges and Opportunities for Resource Rich Economies (alternative PDF version available here).

The political economy of resource rich countries is surveyed. The empirical evidence suggests that countries with a large share of primary exports in GNP have bad growth records and high inequality, especially if the quality of institutions and the rule of law are bad. The economic argument that a resource bonanza induces appreciation of the real exchange rate and a decline of non-resource export sectors may have some relevance. More important, a resource boom reinforces rent grabbing, especially if institutions are bad, and keeps in place bad policies.

Optimal resource management may make use of the Hotelling rule and the Hartwick rule. However, a recent World Bank study suggests that resource rich economies squander their natural resource wealth and more often have negative genuine saving rates. Still, countries such as Botswana, Canada, Australia and Norway suggest it is possible to escape the resource curse. Some practical suggestions for a better management of natural resources are offered.

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Growing Income Inequality and the Education Gap

Edward Lazear and Katherine Baicker of the President's Council of Economic Advisers say the growing disparity in wage income between skilled and unskilled labor is not the result of globalization, immigration, or administration policy. The reason for growing income inequality, they say, is increasing returns to education for skilled labor, and this is an opportunity not a problem. "Having an economy that places a greater value on skills and education is a good thing."

They promote a solution to the problem of growing income inequality that attempts to take advantage of this opportunity by reducing the education and skill gap. Three particular steps are recommended as solutions, the No Child Left Behind education reform, the American Competitiveness Initiative, and more importantly they say as responsibility is shifted away from government, is the hope that families will do a better job to "provide the environment and encouragement that is so helpful in producing an educated population":

America at Work, by Edward P. Lazear And Katherine Baicker, Commentary, Wall Street Journal: There is no question that the U.S. is experiencing strong economic gains... The economy created about two million jobs last year, and Friday's jobs report for April showed that we are on track to add more than two million new jobs this year.

This job growth is undeniable, but some ... claim that the benefits of this economic boom are being enjoyed only by the relatively well-off, and that we have left the rest of our workforce behind. Is this true? Over the last 25 years, the wages of the skilled have continued to grow faster than the wages of the less skilled. For example, the wages of the college-educated have grown by 22% since 1980, while the wages of high-school drop-outs has fallen by 3%.

This does not mean, however, that the rich are benefiting at the expense of the poor. Instead, it means that the return to investing in education and training continues to grow. ... Having an economy that places a greater value on skills and education is a good thing. Our economy can grow more quickly when the returns to investment are high, and human capital investment is the most important form of investment.

This presents us with opportunities and challenges. We have the opportunity to increase our standard of living as our workers reap the benefits of the skills that they have acquired. We face the challenge of ensuring that all Americans have access to the education and training that the modern economy values so highly.

The data show that it is this greater return to investing in education that is driving the long-run widening of the income distribution. The cause is not increases in immigration or international trade, as some have alleged. First, wages for less-skilled workers have not declined with growing trade, even in sectors of the economy with the greatest import competition. Second, some of the groups that have experienced the highest wage growth have also seen increased immigration swelling their ranks. Silicon Valley is full of highly paid immigrants and native-born Americans ... earning very high salaries in the high-tech sectors ... Third, those who have examined the data systematically find that trade and immigration can account for at most a small proportion of the increased wage spread that has occurred over the past 25 years.

To make sure that the gains from technology are enjoyed by all, we must be vigilant in providing training and educational opportunity for all. Programs such as the No Child Left Behind ... and American Competitiveness Initiative are vital steps in that direction. Perhaps even more important are steps that families can take to provide the environment and encouragement that is so helpful in producing an educated population. The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings.

Through education, hard work and entrepreneurship, there is great opportunity for Americans to improve their economic circumstances over their lifetimes. ... Those who invest in education increase dramatically the likelihood that they will enjoy these improvements in their standard of living. ...

Given the importance being given to education in explaining wage disparity, I would like to see a higher level of commitment from the administration to improving education at all levels than has been exhibited to date.

With regard to the claim that taxes are more progressive, see this recent report from the Center for Budget and Policy Priorities for a counterargument:

Recent Tax And Income Trends Among High-Income Taxpayers: Administration officials have consistently sought to portray the distribution of benefits from the 2001 and 2003 tax cuts as balanced or even progressive. Recently, for example, the Treasury Department released a ... fact sheet... The fact sheet makes two main points: that “the individual income tax is highly progressive ... higher income taxpayers pay most of the individual income tax...,” and that the burden these taxpayers bear has increased as a result of the tax cuts enacted under the Bush Administration.[1] These Administration claims are designed to counter arguments that the tax cuts enacted since 2001 are tilted to those at the top of the income scale. The claims, however, are misleading...

Update: Brad DeLong comments on the progressivity claim and on Greg Mankiw's response to the editorial in "Cue the Noisemakers."

Update: I should have linked this commentary by Paul Krugman on whether the returns to education explain the growing income gap, "Graduates and Oligarchs." Quoting, "But Mr. Bernanke did stumble at one point. Responding to a question ... about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education.""

Economist's View: The Increasing Risk of Poverty:

"This is another reason why many people report dissatisfaction with the current economic situation even though the numbers indicate a strong economy. It surprised me to learn that one third of the population in their 40's spent at least a year below the poverty line in the 1990s:

America's 'Near Poor' Are Increasingly at Economic Risk, Experts Say, by Erik Eckholm, NY Times: ...Americans on the lower rungs of the economic ladder have always been exposed to sudden ruin. But in recent years, with the soaring costs of housing and medical care and a decline in low-end wages and benefits, tens of millions are living on even shakier ground than before, according to studies of what some scholars call the 'near poor.'

'There's strong evidence that over the past five years, record numbers of lower-income Americans find themselves in a more precarious economic position than at any time in recent memory,' said Mark R. Rank, a sociologist at Washington University in St. Louis...

In a rare study of vulnerability to poverty, Mr. Rank and his colleagues found that the risk of a plummet of at least a year below the official poverty line rose sharply in the 1990's, compared with the two previous decades. By all signs, he said, such insecurity has continued to worsen.

For all age groups except those 70 and older, the odds of a temporary spell of poverty doubled in the 1990's... For example, during the 1980's, around 13 percent of Americans in their 40's spent at least one year below the poverty line; in the 1990's, 36 percent of people in their 40's did, according to the analysis.

Comparable figures for this decade will not be available for several years, but other indicators — a climbing poverty rate and rising levels of family debt — suggest a deepening insecurity, poverty experts and economists say.

More people work in jobs without health coverage, including tempor"

Economist's View: Galbraith and the Galbraithians...

Richard Parker, John Kenneth Galbraith's biographer, says the media has not adequately described his views. He says he was not a liberal, a Keynesian, or an advocate for big government. But he was an advocate for his own beliefs whether or not they agreed with the party line:

Galbraith's oversized shadow, by Richard Parker, Commentary, LA Times: 'As this is written, American liberals have made scarcely a new proposal for reform in 20 years. It is not evident that they have had any important new ideas…. Rather, they have had a file. Little is ever added. Platform making consists, in effect, in emptying out the drawers."

Can you guess the author of these words? Rush Limbaugh? Tom DeLay? Newt Gingrich? George Will? ... The author is John Kenneth Galbraith. "The state is the kind of organization which, though it does large things badly, does small things badly too." Galbraith again. "Free trade is preferable to the alternative." Again.

When Galbraith died ..., it was front-page news worldwide ... The flood of obituaries and remembrances got the facts mostly right, but few came close to portraying well the man I knew. I'm his biographer, and I found myself wincing all too often when he was too-neatly described as "a liberal," "a Keynesian" or "an advocate for 'big government.' " A man, in short, of a time gone by.

Galbraith wasn't, in fact, any of those things — not, at least, in the way those words are used today. On the contrary, he'd carried on as many arguments in his time with liberals, Keynesians and big-government proponents as he had with their opponents.

He was — for all his elegant wit and stylish friends — a farm boy first. ... Independence of mind and spirit was what he admired foremost. Unlike many liberals, he never viewed markets as an evil meant to be broken by government — but as the opportunity for invention, creativity and the fulfillment of essential human needs. Moreover, ... he actually admired big corporations for their ability to do things small firms found harder: basic research, economies of scale, innovation. Indeed, ... he admired fellow Scot Adam Smith as much as he did John Maynard Keynes — admiring them so much that he spent much of his life trying to rescue them from acolytes who'd misunderstood their genius.

Galbraith had few illusions about government. Appointed by President Franklin D. Roosevelt at the tender age of 32 as the nation's World War II "price czar," he'd seen close up not only the baleful influence of special interests — their lobbyists and legislators ever ready to do their bidding — but the frequently chaotic and venally incompetent mismanagement that defines bureaucracies in times of greatest challenge.

At war's end, as director of the U.S. Strategic Bombing Survey, he moreover got to see at close range not only the false claims made for military power (strategic bombing, it turned out, hadn't crippled German war production) but the gathering strength of what President Eisenhower would later call the military-industrial complex, and its ambitions in and for the postwar U.S. ...

Power was the subject that fascinated him, and it was the underlying topic of everything he wrote ... He argued with mainstream Keynesians for years — not only with the academics because he thought their preoccupations with abstraction and mathematics crippled their ability to see the world as it is, but with Keynesian policymakers as well, for their arrogant confidence that government could, with the right models and computers, easily deliver a world of permanent full-employment output. The world was too complex, the need constantly to adapt to changing circumstance too great ...to imagine anything so blackboard perfect.

Galbraith was never afraid of using power, either as an insider or outsider. When advisors ... tried to persuade the president to go to war in Southeast Asia, Galbraith as early as the summer of 1961 virtually alone began warning Kennedy of the folly of this "foreign misadventure." ...

When, in early 1965, ... after months of private arguments with President Lyndon B. Johnson over expansion of the war but long before most of the country agreed — he declared his departure memorably. His letter to LBJ, outlining a strategy for withdrawal, began..: "Mr. President, despite much official crap to the contrary, we are going to lose in Vietnam." ...

President Clinton admired Galbraith enough that shortly before he left office, he wrote with the idea that the two of them would write a book on the future of American government. Galbraith weighed the idea for a while but finally declined. He liked Clinton, he said, but Clinton hadn't learned a basic truth about politics. "As I told Harry Truman," Galbraith said, "what this country doesn't need is two Republican parties. One is more than enough."

Economist's View: Sachs: Lessons from the North on Economic Security and Economic Performance

effrey Sachs refutes the claim that economic security must be traded for economic performance by looking at countries that have successfully combined economic security with high economic performance in this Project Syndicate commentary. He also looks at some of the factors such as the use of relatively non-distorting value added taxes combined with redistributive policies that he argues have allowed this to occur:

Lessons From the North, by Jeffrey D. Sachs, Project Syndicate: Fewer debates over economics would be needed if the world spent more time examining what actually works and what does not. Almost everywhere, debate has raged about how to combine market forces and social security. The left calls for an expansion of social protection; the right says that doing so would undermine economic growth and widen fiscal deficits.

But the debate can be moved forward by examining the successful economies of Denmark, Finland, Iceland, the Netherlands, Norway, and Sweden. While no regional experience is directly transferable, the Nordic countries have successfully combined social welfare with high income levels, solid economic growth, and macroeconomic stability. They have also achieved high standards of governance.

To be sure, there are also differences among the Nordic states... Nevertheless, whereas the taxes at the national level in the United States are equal to around 20% of GNP, in the Nordic countries the ratio is more than 30%. High taxation supports comprehensive national health care, education, pensions, and other social services, resulting in low levels of poverty and a relatively narrow income gap between the richest and poorest households. ...

American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption, and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency. But each of these propositions is refuted by the Nordic experience.

Consider the claims of inefficiency and waste. As a result of government-funded national health insurance, the Nordic countries have a higher life expectancy and a lower infant mortality rate than the US ... where the government does not guarantee national health insurance and millions of families are too poor to pay for it on their own. Ironically, the ... US system is so inefficient that Americans pay a larger share of GNP for health (14%) than do the Nordic countries (11%), but get less. ...

Nor has high taxation in the Nordic countries impeded economic performance. Rather than relying mainly on income taxation, as in the US, the Nordic countries rely on value-added taxation, which provides a relatively high amount of revenue with relatively low rates of evasion and few distortions to the economy.

The Nordic experience also belies conservatives’ claim that a large social welfare state weakens incentives to work and save. National saving in the Nordic countries averages more than 20% of national income, compared to around 10% in the US.

Moreover, economic growth in the Nordic countries has been similar to that in the US in recent years. Income levels are higher on average in the US, but mainly because the Nordic countries work fewer hours per week. In any case, all of the Nordic countries have very high incomes, and Norway’s per capita income actually exceeds the US.

Several factors appear to explain the Nordic countries’ economic success. Taxation is broad-based and relatively non-distorting, while open international trade, market forces, and private ownership of industry are relied on to maintain incentives. The Nordic countries are not “socialist” economies, based on state ownership and planning, but “social welfare” economies, based on private ownership and markets, with public provision of social protection. Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries.

Half a century ago, the free-market economist Friedrich von Hayek argued that a large public sector would threaten democracy itself, putting European countries on a “road to serfdom.” Yet the Nordic states have thrived, not suffered, from a large social welfare state, with much less public-sector corruption and far higher levels of voter participation than in the US. ...

But how replicable are the Nordic successes? These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors. Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness.

European income inequality

by Jerome a Paris
Thu May 4th, 2006 at 09:20:31 AM EDT

More pretty graphs, courtesy of Eurostat (pdf):

These represent the top decile, the bottom decile and the median for industrial and services incomes (so NOT overall incomes) by regions (above) and by countries (below).

The most interesting thing I see is that bottom deciles are remarkably similar across Europe and regions, except for the new members, which are still behind), and the difference in median levels comes from the presence of higher-paid layers in the richest regions, reflecting, presumably, their specialisation in higher value added jobs (like finance and the like).

Poor Britons healthier than rich Americans

by Jerome a Paris
Thu May 4th, 2006 at 07:15:34 AM EDT

Some good news to contrast with Agnes a Paris's relative pessimism on the NHS:

Study Shows Americans Sicker Than English

White, middle-aged Americans — even those who are rich — are far less healthy than their peers in England, according to stunning new research that erases misconceptions and has experts scratching their heads.

Americans had higher rates of diabetes, heart disease, strokes, lung disease and cancer — findings that held true no matter what income or education level.

Those dismal results are despite the fact that U.S. health care spending is double what England spends on each of its citizens.

The upper crust in both countries was healthier than middle-class and low-income people in the same country. But richer Americans' health status resembled the health of the low-income English.

Is there a clash of civilizations? By Robert Kagan and Amartya Sen

From: Robert Kagan
To: Amartya Sen
Subject: Why Is There So Little Evidence To Contradict the "Clash" Theory?
Wednesday, May 3, 2006, at 6:48 AM ET

Dear Dr. Sen,

Let me begin our little correspondence by congratulating you on your wonderful book. It is (with apologies for the following string of back-cover-blurblike phrases) elegantly written, powerful, convincing, humane, and necessary. No doubt our hosts at Slate will be unhappy to hear this, but I agree with you about almost everything. I agree entirely when you insist that to interpret the present era as a "clash of civilizations" is both mistaken and dangerous and that it is important to view people not by a single identity—as Muslim, "Western," or Asian—but as a bundle of identities. Your keenest insight may be that we need to avoid falling into precisely the trap that Osama Bin Laden has deliberately laid for us: to divide the world into Muslim and non-Muslim. Above all, I share your conviction that liberal democracy is not a cultural phenomenon but a basic human aspiration. I may perhaps go even further than you in arguing that liberal democracy—which does not separate peoples by cultures but unites them in common devotion to the principle of equal rights—is the only durable answer to the present crisis...

Economist's View: Paul Krugman: Our Sick Society

Paul Krugman stays with the topic of his last column, our health care system. In this column, he wonders why being American appears to be bad for your health:

Our Sick Society, by Paul Krugman, Commentary, NY Times: Is being an American bad for your health? That's the apparent implication of a study just published in The Journal of the American Medical Association.

It's not news that something is very wrong with the state of America's health. ... But it isn't clear exactly what causes this stunningly poor performance. How much of America's poor health is the result of our failure, unique among wealthy nations, to guarantee health insurance to all? How much is the result of racial and class divisions? How much is the result of other aspects of the American way of life?

The new study ... doesn't resolve all of these questions. Yet it offers strong evidence that there's something about American society that makes us sicker than we should be.

The authors of the study compared the prevalence of such diseases as diabetes and hypertension in Americans 55 to 64 years old with ... a comparable group in England. Comparing us with the English isn't a choice designed to highlight American problems: Britain spends only about 40 percent as much per person on health care..., ... Moreover, England isn't noted either for healthy eating or for a healthy lifestyle.

Nonetheless, the study concludes that "Americans are much sicker than the English."... What's ... striking is that being American seems to damage your health regardless of your race and social class. That's not to say that class is irrelevant. ... In fact, there's a strong correlation within each country between wealth and health. But Americans are so much sicker that the richest third of Americans is in worse health than the poorest third of the English.

So what's going on? Lack of health insurance is surely a factor in the poor health ...[and] everyone in England receives health care from the government. But almost all upper-income Americans have insurance.

What about bad habits...? The ... statistical analysis suggests that bad habits are only a fraction of the story. In the end, the study's authors seem baffled by the poor health of even relatively well-off Americans. But let me suggest a couple of possible explanations.

One is that having health insurance doesn't ensure good health care. For example, a ... report on diabetes pointed out that insurance companies are generally unwilling to pay for care that might head off the disease... It's possible that Britain's National Health Service, in spite of its limited budget, actually provides better all-around medical care ... because it takes a broader, longer-term view than private insurance companies.

The other possibility is that Americans work too hard and experience too much stress. Full-time American workers work ... about 46 weeks per year; full-time British, French and German workers work only 41 weeks a year. I've pointed out in the past that our workaholic economy is actually more destructive of the "family values" ... than the European economies in which regulations and union power have led to shorter working hours.

Maybe overwork, together with the stress of living in an economy with a minimal social safety net, damages our health as well as our families. These are just suggestions. What we know for sure is that although the American way of life may be, as Ari Fleischer famously proclaimed back in 2001, "a blessed one," there's something about that way of life that is seriously bad for our health.

Freakonomics Blog » The best economics humor ever

Almost all economics PhD students hate being PhD students. They get demoralized and abused constantly. The one day a year that they rise up in triumph is the “skit party.” Almost all the programs have skit parties where the students make fun of the faculty.

This video (from the Columbia skit party as far as I can tell) is the funniest thing I have ever seen produced by economists. The person singing in the video is pretending to be Glenn Hubbard who was one of the leading candidates to be the Chair of the Federal Reserve, but the job was instead given to Ben Bernanke.