Thursday, April 02, 2015

The deplorable Daren Acemoglu

The gradual Leftist takeover of American education has now become extreme.  Many American universities and colleges are very reminiscent of Mao's China during the "Cultural Revolution".  The tiniest departure from Leftist orthodoxy is heavily condemned and often punished.  If you doubt it scroll through some of the episodes I have collected on  EDUCATION WATCH.

One area that has to a degree resisted the takeover, however, is economics.  Almost any study of economics uncovers the sheer ignorance of the Left.  Economics makes obvious lots of things that Leftists don't want to know about -- such as the efficiency of markets.  And central to what Leftists hate about economics are the lessons it gives about what it takes for countries and populations to get rich.

Which is where Daren Acemoglu comes in.  He dismisses all the usual explanations such as reliance on markets and the rule of law and provides his own explanation.

And it is a testament to how desperate Leftists are that they find his explanation attractive.  He essentially says that what you need is more democracy. Given their Fascist tendencies, that would not normally be a congenial idea to the Left.  But given their hatred of market economics, Acemoglu is apparently the lesser of two evils.  So he has become something of a rockstar among Leftist economists.

Sadly, however, much as we would ALL like Acemoglu to be right, he is not.  There have been many examples of rapid economic growith under authoritarian regimes:  Meiji Japan, postwar South Korea, present-day China, the Crown Colony of Hong Kong, Kuomintang Taiwan, Pinochet's Chile, Singapore under Lee Kuan Yew etc.  In all of those, democratic influence was very limited if it existed at all.

And that is without going into micro-examples such as the great economic success of South African Indians during the Apartheid era. Facing it fairly, one would have to say that RAPID economic growth requires some degree of authoritarianism in government.

So Acemoglu is clearly wrong.  And both I and Steve Sailer have pointed that out in some detail some time ago (here, here, here and here).  So I was a little surprised to see that Steve Sailer returned to the fray rather recently, with an article  late last year.  I think I now however  might know what motivated Steve.  A correspondent has suggested to me that Acemoglu is in line for a Nobel.  That is such a horrible thought that I feel that I too should return to the fray.  I am not however going to say much more personally.  Instead I am putting up below a brief essay by one of the world's brightest and most knowledgeable men:  Bill Gates.  Gates is reviewing Acemoglu's book Why Nations Fail

Why Nations Fail: The Origins of Power, Prosperity, and Poverty

By Bill Gates

Why have some countries prospered and created great living conditions for their citizens, while others have not? This is a topic I care a lot about, so I was eager to pick up a book recently on exactly this topic.

Why Nations Fail is easy to read, with lots of interesting historical stories about different countries. It makes an argument that is appealingly simple: countries with “inclusive” (rather than “extractive”) political and economic institutions are the ones that succeed and survive over the long term.

Ultimately, though, the book is a major disappointment. I found the authors’ analysis vague and simplistic. Beyond their “inclusive vs. extractive” view of political and economic institutions, they largely dismiss all other factors—history and logic notwithstanding. Important terms aren’t really defined, and they never explain how a country can move to have more “inclusive” institutions.

For example, the book goes back in history to talk about economic growth during Roman times. The problem with this is that before 800AD, the economy everywhere was based on sustenance farming. So the fact that various Roman government structures were more or less inclusive did not affect growth.

The authors demonstrate an oddly simplistic world view when they attribute the decline of Venice to a reduction in the inclusiveness of its institutions. The fact is, Venice declined because competition came along. The change in the inclusiveness of its institutions was more a response to that than the source of the problem. Even if Venice had managed to preserve the inclusiveness of their institutions, it would not have made up for their loss of the spice trade. When a book tries to use one theory to explain everything, you get illogical examples like this.

Another surprise was the authors’ view of the decline of the Mayan civilization. They suggest that infighting—which showed a lack of inclusiveness—explains the decline. But that overlooks the primary reason: the weather and water availability reduced the productivity of their agricultural system, which undermined Mayan leaders’ claims to be able to bring good weather.

The authors believe that political “inclusiveness” must come first, before growth is achievable. Yet, most examples of economic growth in the last 50 years–the Asian miracles of Hong Kong, Korea, Taiwan, and Singapore–took place when their political tended more toward exclusiveness.

When faced with so many examples where this is not the case, they suggest that growth is not sustainable where “inclusiveness” does not exist. However, even under the best conditions, growth doesn’t sustain itself. I don’t think even these authors would suggest that the Great Depression, Japan’s current malaise, or the global financial crisis of the last few years came about because of a decline in inclusiveness.

The authors ridicule “modernization theory”–which observes that sometimes a strong leader can make the right choices to help a country grow, and then there is a good chance the country will evolve to have more “inclusive” politics. Korea and Taiwan are examples of where this has occurred.

The book also overlooks the incredible period of growth and innovation in China between 800 and 1400. During this 600-year period, China had the most dynamic economy in the world and drove a huge amount of innovation, such as advanced iron smelting and ship building. As several well-regarded authors have pointed out, this had nothing to do with how “inclusive” China was, and everything to do with geography, timing, and competition among empires.

The authors have a problem with Modern China because the transition from Mao Zedong to Deng Xiaoping didn’t involve a change to make political institutions more inclusive. Yet, China, by most measures, has been a miracle of sustained economic growth. I think almost everyone agrees that China needs to change its politics to be more inclusive. But there are hundreds of millions of Chinese whose lifestyle has been radically improved in recent years, who would probably disagree that their growth was “extractive.” I am far more optimistic than the authors that continued gradual change, without instability, will continue to move China in the right direction.

The incredible economic transition in China over the last three-plus decades occurred because the leadership embraced capitalistic economics, including private property, markets, and investing in infrastructure and education.

This points to the most obvious theory about growth, which is that it is strongly correlated with embracing capitalistic economics—independent of the political system. When a country focuses on getting infrastructure built and education improved, and it uses market pricing to determine how resources should be allocated, then it moves towards growth. This test has a lot more clarity than the one proposed by the authors, and seems to me fits the facts of what has happened over time far better.

The authors end with a huge attack on foreign aid, saying that most of the time, less than 10% gets to the intended recipients. They cite Afghanistan as an example, which is misleading since Afghanistan is a war zone and aid was ramped up very quickly with war-related goals. There is little doubt this is the least effective foreign aid, but it is hardly a fair example.

As an endnote, I should mention that the book refers to me in a positive light, comparing how I made money to how Carlos Slim made his fortune in Mexico. Although I appreciate the nice thoughts, I think the book is quite unfair to Slim. Almost certainly, the competition laws in Mexico need strengthening, but I am sure that Mexico is much better off with Slim’s contribution in running businesses well than it would be without him.


CODA regarding one of the world's most authoritarian regimes:

I don't want to make this a major part of my argument but I think it can reasonably be said that, depending what you compare it with, even Soviet economic progress was not all that bad.  In the post-1945 era, when African countries mostly went backwards economically and India stagnated, the Soviet performance in science and technology was world-class.  The Sputnik was the first unambigiuous evidence of that but Soviet military machines (tanks, submarines, aircraft) were also a severe challenge to American efforts in that field.  Could any African country produce a T-34 tank, let alone design one?

Is it unfair to compare Russia with African countries?  If so why? It would be difficult to suggest a politically correct reason why, I think.  The plain fact is that the people are different and that matters. When the British left Africa, they left behind them nations organized in ways that Acemoglu would applaud.  It didn't help.


Another authoritarian idea from the Left Backfires

In the latest, if not the best, example of why liberals should not be in charge of health care, national security, retirement, foreign policy, or anything else, a Rand Corporation study concluded that Los Angeles' seven year ban on new fast food restaurants did nothing to reduce obesity in the predominately African-American community of South L.A.

Last week, NBC nightly news, hosted by Savannah Guthrie, teased an upcoming segment about the Rand study in which she said: "One city takes an aggressive stand against obesity by banning new fast food restaurants, but what happened next might come as a shock."

Come as a shock to whom? It should have been obvious that a 2008 Los Angeles City ordinance banning, not limiting, but the outright banning of new fast food restaurants in Baldwin Hills, Leimert Park, and portions of South and Southeast Los Angeles would accomplish nothing. What's really shocking is the number of jobs and the amount of tax revenue lost by the city as a result of this nanny, feel-good ordinance.

African Americans suffer the highest rate of unemployment of any group. Instead of promoting economic activity where they live, the City Council chose to depress the economy on the guise of promoting weight loss to improve health, just as the "Great Recession" was taking hold.

Let's assume the ordinance had never been enacted, and just one of each of the following ten fast food chains established new restaurants in the four areas of the city targeted by the ordinance: McDonald's, Burger King, Wendy's, Carl's Jr., KFC, Panda Express, In-N-Out Burgers, Taco Bell, Pollo Loco, and Jack-in-the-Box. That would create 40 additional businesses.

According to an August, 2014 Forbes Magazine article by Carol Tice titled, "7 Fast-Food Restaurant Chains That Rake In $2M+ Per Store," some of the companies I selected were mentioned. For simplicity, if each of the 40 new stores took in an average of $2 million dollars per year, that would equal $80,000,000 in sales per year. At L.A.'s nine percent sales tax rate, these restaurants would generate $7,200,000 in yearly tax revenue. In the seven years this ordinance has been in existence the city has lost $50,400,000 so far!

In addition, think of the impact these restaurants would have made on local unemployment.  At an average of 40 employees per restaurant, that would be 1,600 people off the unemployment rolls who would now have money to spend, generating additional tax revenue and economic activity.

The increased property values of each of these restaurants would generate higher property tax revenues for Los Angeles County.

Now, consider all the jobs created to build each of these 40 restaurants: carpenters, brick masons, concrete pourers, landscapers, electricians, surveyors, tile setters, etc. Also consider the manufacturing and production of the materials needed for these 40 restaurants: glass, tile, insulation, drywall, roofing, lightbulbs, wiring, cable, speakers, microphones, ovens, stoves, grills, fans, heaters, toilets, sinks, railing, stainless steel counters, advertising, plastic utensils, napkins, plastic trays, trash receptacles, tables, chairs, soap, brooms, and mops. To prepare meals they need, hamburger meat, chicken, beef, rice, tortillas, lettuce, onions, tomatoes, soft drinks, coffee, ice cream, condiments, all of which need to be farmed, processed and then sold, generating more jobs and tax revenue.

As an added bonus, new overweight employees working in fast pace restaurants would help with their weight loss, instead of standing in unemployment lines all day.

When liberals don't like something, they want it banned. Banning new fast food restaurants in one part of the city makes no sense if they can be found elsewhere.

But, that's what liberals do, and everyone suffers for it



This Doc Fix Is an Outrage

Over the 2015–2025 period, CBO estimates, enacting H.R. 2 would increase both direct spending (by about $145 billion) and revenues (by about $4 billion), resulting in a $141 billion increase in federal budget deficits (see table on page 2). Although the legislation would affect direct spending and revenues, it would waive the pay-as-you-go procedures that otherwise apply.

That is, less than three percent of this spending binge is paid for. Over 97 percent is deficit financed. This is how Republicans are showing how they can govern, especially on health reform?

What is the big deal, anyway? Currently, Congress has a certain amount of money every year to pay doctors. This amount of money increases according to a formula called the Sustainable Growth Rate (SGR), which was established in 1997. The SGR is comprised of four factors that (by the standards of federal health policy) are fairly easy to understand. Most importantly, the SGR depends on the change in real Gross Domestic Product (GDP) per capita.

The Medicare Part B program, which pays for physicians, is an explicit “pay as you go” system. Seniors pay one-quarter of the costs through premiums, and taxpayers (and their children and grandchildren) pay the rest through the U.S. Treasury. Therefore, it is appropriate that taxpayers’ ability to pay (as measured by real GDP per capita) be an input into the amount.

The problem is, the amount is not enough. If growth in Medicare’s payments to doctors were limited by the SGR, the payments would drop by about one-fifth, and they would stop seeing Medicare patients. So, at least once a year, Congress increases the payments for a few months. The latest patch was passed in March 2014 and runs through March 31, 2015. It costs $15.8 billion.

This has happened 17 times since 1997. Congress has never allowed Medicare’s physician fees to drop.



For more blog postings from me, see  TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH,  POLITICAL CORRECTNESS WATCH, AUSTRALIAN POLITICS, and Paralipomena (Occasionally updated) and Coral reef compendium. (Updated as news items come in).  GUN WATCH is now mainly put together by Dean Weingarten. I also put up occasional updates on my Personal blog and each day I gather together my most substantial current writings on A WESTERN HEART.

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