Topic: International Economics and Development

The Tyranny of Confusion: A Response to Prof. Djavad Salehi-Isfahani on Iran

By
Steve H. Hanke

In October 2012, I first reported that Iran had experienced hyperinflation. My diagnosis of Iran’s inflation woes has since drawn the ire of Prof. Djavad Salehi-Isfahani, who has written a series of blogs and articles disputing my analysis. Prof. Salehi-Isfahani, an economist at Virginia Tech, has employed a confused (and confusing) mix of half-baked methodologies and selected data to yield unfounded, preposterous claims. Specifically, he claims that Iran never experienced a brief bout of hyperinflation and that Iran’s inflation rate is much lower than the estimates reported by virtually everyone except Iran’s Central Bank. To borrow Jeremy Bentham’s phrase, Prof. Salehi-Isfahani’s claims constitute a series of “vulgar errors.”

What has puzzled me for the past few months is why Prof. Salehi-Isfahani has been so hell-bent on denying Iran’s inflation problems. But finally, in his most recent article in Al Monitor, he showed his hand, revealing his underlying thesis – the same claim propagated by the Iranian regime – that the sanctions imposed by the West have not inflicted economic damage on Iran to the extent that has been reported.

In his most recent blog, Prof. Salehi-Isfahani finally abandons his own confused attempts to calculate Iran’s inflation rate. For his readers, this is a relief, as the variety of methods with which he attempted to calculate inflation in Iran amount to nonsense – and not even good nonsense.

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Topics: 
Finance, Banking & Monetary Policy, Foreign Policy and National Security, International Economics and Development

And Congressmen with Consumers as Constituents Outnumber Both

By
Sallie James

It seems that talks about a possible transatlantic trade deal between the United States and the EU are ongoing. Speaking at Davos, soon-to-be-ex U.S. Trade Representative Ron Kirk told reporters that the United States was keen to lower trade barriers on goods and services flowing between the two economies, but wants to make sure that the political ducks are in a row first. One hurdle? Famers. Apparently he wants to make sure that U.S. farmers are comfortable with the deal before proceeding, as they have the power to block any deal once it comes before Congress. From the New York Times on Sunday:

But Mr. Kirk noted that members of Congress with farmers as constituents far outnumbered those whose districts included big companies like Boeing or Apple that would benefit from a trade deal. “Agriculture tends to be a challenging issue,” he said.

Ugh. Again with the implication that the benefits of trade come from exports, and flow to big corporations. As far as the congressional maths is concerned, Mr Kirk fails to recognize that members of Congress with consumers as constituents– that is, all of them– far outnumber those whose districts include either “big companies like Boeing or Apple” or farmers (who may also see higher export sales, in any case). Consumers have long been the silent, long-suffering minority when it comes to political support for free trade, but it would be nice if we had a trade representiative willing to make their case. Perhaps Mr. Kirk’s successor will be more bold.

Topics: 
International Economics and Development, Trade and Immigration

“If Poor People Get Richer, They Won’t Have Anything to Eat”

By
K. William Watson

The nonsensical sentiment expressed in this post’s title seems to be the guiding belief among people in the United States and United Kingdom currently concerned that eating imported quinoa is harmful to the Bolivian farmers who grow it.

For the uninitiated, quinoa is a grain-like plant that grows only in the Andes Mountains and is possibly the most nutritious food on the planet. In recent years, health food enthusiasts in the United States and Europe have developed an affinity for the exotic import. The result has been a sharp rise in the food’s global price and a concurrent increase in production in Bolivia and Peru.

If you’re like me, you probably think this is a terrific outcome for the Bolivians, who can now sell their crop for three times what they could just five years ago. Major media outlets disagree. The New York Times ran a piece titled “Quinoa’s Global Success Creates Quandary at Home” that warns, “The surge has helped raise farmers’ incomes here in one of the hemisphere’s poorest countries. But there has been a notable trade-off: Fewer Bolivians can now afford it, hastening their embrace of cheaper, processed foods and raising fears of malnutrition in a country that has long struggled with it.”

The UK Guardian ran an article last week airing similar concerns and also published a commentary titled, “Can Vegans Stomach the Unpalatable Truth about Quinoa?” The commentary’s author laments that “the quinoa trade is yet another troubling example of a damaging north-south exchange, with well-intentioned health and ethics-led consumers here unwittingly driving poverty there.”

This is all par for the course in the interminable fair-trade, ethical-consumption conundrum in which the desire among affluent American consumers for things is pitted against their concern that production, commerce, and consumption breed injustice. While part of me finds this hand-wringing amusing, I can’t help but worry about the bigotry implied in the notion that poor foreigners will starve if they are allowed to sell food for money. 

I came across a blog post recently by Stefan Jeremiah and Michael Wilcox, two photographers currently in Bolivia making a documentary. They do a really great job of putting the quinoa controversy in its place. After National Public Radio ran a story in November worrying about overpriced food for poor Bolivians and considering the possibility of growing quinoa in the United States, Jeremiah and Wilcox wrote this in response:

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Topics: 
International Economics and Development, Trade and Immigration

Olga’s Soulmate

By
Daniel J. Mitchell

The welfare state creates some amazing individuals:

But I’ve never found a match for Olga, a Greek woman who thinks it is government’s job to take care of her from cradle to grave.

At least not until now. I’m excited to announce that Olga has a soulmate named Natalija. She’s from Lithuania, but she now lives in England, and she doubtlessly will inspire Olga on how to live off the state.

UK Welfare Horror StoryHere’s some of what The Sun reports on Natalija:

Natalija Belova, 33, told The Sun how she spurns full-time work — yet can afford foreign holidays and buys designer clothes. The Lithuanian said: “British benefits give me and my daughter a good life.” She has milked soft-touch Britain for £50,000 in benefits and yesterday said: “I simply take what is given to me.”

And what is given to her? Quite a lot.

The graduate, who became a single mum after she arrived here, rakes in more than £1,000 a month in handouts — £14,508 a year — to fund her love of designer clothes, jaunts to the Spanish sun and nightclubbing. She bragged: “I have a lovely, fully-furnished flat and money to live properly on. …Her handouts total £279 a week — with housing benefit contributing £183, child tax credit adding £56, child benefit £20 and her council tax being paid to the tune of £20.

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Topics: 
Government and Politics, International Economics and Development

Is Anybody Surprised that Krugman Was Wrong about U.K. Fiscal Policy?

By
Daniel J. Mitchell

Just like in the United States, politicians in the United Kingdom use the deceptive practice of “baseline budgeting” as part of fiscal policy.

This means the politicians can increase spending, but simultaneously claim they are cutting spending because the budget could have expanded at an even faster pace.

Sort of like saying your diet is successful because you’re only gaining two pounds a week rather than five pounds.

Anyhow, some people get deluded by this chicanery. Paul Krugman, for instance, complained in 2011 that “the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback.”

This was nonsense. There have not been any genuine budget cuts in the United Kingdom. Heck, just compare what’s happening today in the United Kingdom and what happened in Canada in the 1990s to see the difference between gimmickry and real fiscal restraint.

Now we have some new numbers that confirm that the UK economy is suffering because of a heavy burden of government spending.

Here’s some of what Allister Heath, the Editor of City A.M., wrote for the UK-based Telegraph.

The public finances are deteriorating again, making a mockery of the Coalition’s core purpose. Osborne’s fatal problem is that he is proving unable to deliver any meaningful reduction in the size of the state. The extent of his failure will come as a shock to many. Remarkably, public spending actually went up last year as a share of our national income… public spending hit 49pc of UK GDP last year, a shocking increase on the 48.6pc of GDP spent by the state in 2011. Even with a stagnant economy, this implies that Osborne has lost control of public spending.

Gee, doesn’t sound like much budget cutting to me.

Heck, the burden of government spending is worse than it is in Germany (45 percent of GDP). Or even Spain (44 percent) or Portugal (47.4 percent).

Perhaps the most shocking number is the one showing that the UK has radically veered in the wrong direction this century.

Public spending as a share of GDP hit a trough of just 36.6pc in 2000.

Allister hits the nail on the head.

…after all the rows about “slashing spending to the bone”, and following almost three years of coalition government, the state is still spending around half of national income. …it beggars belief that a government that remains so large, so bloated cannot provide much better quality services, and that we have a public debate in this country that exaggerates beyond all recognition the extent of the state’s downsizing.

But there has been some “austerity,” but only for taxpayers.

…real austerity is only biting on the tax side: total UK government revenues increased from 40.3pc of GDP in 2011 to 42.4pc in 2012, the OECD estimates. It’s getting increasingly hard for the Chancellor to extract revenues, with taxes on income and wealth falling to £194.3bn over 2012 as a whole, 2.7pc lower than in 2011, when they stood at £199.7bn, according to separate figures from the Centre for Economics and Business Research.

That last sentence, by the way, shows the Laffer Curve in action.  The supposedly Conservative government of Cameron and Osborne has raised the tax burden, yet revenues aren’t materializing.

Allister also echoes the argument of Veronique de Rugy about choosing the right kind of austerity and reining in the public sector.

Not all kinds of austerity were created equal: cutting current expenditure, such as benefits, is good for growth; but hiking taxes is bad for it… There is also lots of evidence that elevated levels of public spending and large government debts are bad for GDP; no wonder, therefore, that growth is failing to materialise.

So what’s the bottom line? Well, as Allister stated, the real problem is that government is too big and spending too much.

And until Cameron and Osborne are willing to tackle that problem, don’t expect much positive from the United Kingdom.

Topics: 
International Economics and Development

Attenborough’s Nonsense

By
Marian L. Tupy

According to Sir David Attenborough, the famous British broadcaster and naturalist, “humans are threatening their own existence and that of other species by using up the world’s resources.” In a recent interview, Attenborough said that “the only way to save the planet from famine and species extinction is to limit human population growth.”

We are a plague on the Earth,” he continued. “It’s coming home to roost over the next 50 years or so. It’s not just climate change; it’s sheer space, places to grow food for this enormous horde. Either we limit our population growth or the natural world will do it for us, and the natural world is doing it for us right now… We keep putting on programmes about famine in Ethiopia; that’s what’s happening. Too many people there.

In 2006, Sir David Attenborough was voted Britain’s greatest living icon. Popularity, however, is no substitute for wisdom. As I have explained in a previous blog post, “[The] rate of global population growth has slowed. And it’s expected to keep slowing. Indeed, according to experts’ best estimates, the total population of Earth will stop growing within the lifespan of people alive today. And then it will fall… the long-dreaded resource shortage may turn out not to be a problem at all.”

Some of the reasons why Attenborough is as mistaken about the “over-population problem” today as Paul Ehrlich was when he published his infamous The Population Bomb in 1968, include:

  1. Increase in urbanization. In 1950, 29 percent of the world’s population lived in cities. By 2050, 67 percent of people will live in cities. City dwellers have less of an impact on the environment than do rural dwellers, because “When you have a critical mass of people like in London or New York, public transport becomes a feasible option for many, while people in more rural areas rely more on cars. And a flat that is surrounded by others is more efficient to heat than a free-standing house.”
  2. Technological change will make it possible is making it possible to feed, clothe and house more people while using fewer resources. In their book Abundance: The Future is Better than You Think, Peter Diamandis and Steven Kotler point to some fascinating technological innovations that will revolutionize supply of water, food, energy, and so on. Put differently, Attenborough’s Malthusian thinking about the relationship between population growth and resources is as outdated as a horse-drawn cart.

What is to be said about Attenborough’s take on the famine in Ethiopia? In a word: embarrassing.

To start with, population density in Monaco is 17,676 people per square kilometer. It is 79 people per square kilometer in Ethiopia. Monaco is one of the richest countries in the world and Ethiopia one of the poorest. If anything, there is an inverse relationship between population density and poverty. Some of the world’s most populated places (Hong Kong, Singapore, The Netherlands, etc.) are very rich, while some of the least heavily populated countries (Central African Republic, Chad, the two Congos, etc.) are very poor.

The real reasons for Ethiopian famines are altogether different. First, Ethiopia was a Marxist dictatorship and like many Marxist dictatorships (USSR, PRC and Cambodia), it experienced both economic collapse and civil war. Second, Ethiopia has almost no economic freedom. All land, to give one example, is owned by the state – and the state can take it away. As a consequence, farmers have little incentive to make long term plans and undertake necessary investment, and agricultural production suffers.

Attenborough is, in many ways, a great man and I love watching his programs. But, he thinks he knows more than he does. A little intellectual humility would not be amiss.

 

Topics: 
International Economics and Development

China: Money Matters

By
Steve H. Hanke

Contrary to what the doomsters have been telling us, China’s economy is not on the verge of collapse. As the Wall Street Journal’s man in Beijing (and my former student), Aaron Back, reported: “China’s economic growth accelerated in the fourth quarter of 2012.” Indeed, China’s fourth quarter GDP growth rate came in at a strong 7.9%.

What the doomsters and many other Pekingolgists fail to grasp is that money matters. Indeed, it dominates fiscal policy, and nominal GDP growth is closely linked to growth in the money supply – broadly measured.

China’s most recent acceleration in GDP growth did not catch me flatfooted, because China’s money supply has been surging (see the accompanying chart).

In fact, China’s M2 money supply measure is 9.7% above the trend level. Money matters.

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

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