Archives: 05/2013

Accounting for the Industrial Revolution

This is the most important question in economics: Why did the Industrial Revolution happen when and where it did–and not before or elsewhere? Fail to understand that and you may enact policies that will kill the unprecedented human progress it launched: a multiplication in the average worldwide per-capita income of between 16 and 100 times in the span of just 200 years. Compare that to the preceding thousands of years over which worldwide per-capita income was largely unchanged.

In her brilliant 2011 book Bourgeois Dignity, economist and historian Deirdre McCloskey shot down every leading explanation for this “Great Fact,” and then offered a new one: in the Netherlands and then Britain, entrepreneurship was accorded a widespread liberty and respectability it had never before enjoyed in human history. McCloskey will speak at the Cato Institute on this and related topics on June 20th at noon.

This exquisitely elegant explanation packs enormous punch for students of the history of economics. Among other things, it explains why the ancient Greeks–who invented democracy, the core forms of Western literature, joint-stock corporations, commercial insurance, and even steam-powered toys–never enjoyed an industrial revolution of their own. (The ancient Greek elites abhorred the idea of working for a living.)

As yet, though, there is no “implementation detail” for the Liberty and Dignity theory. Bourgeois Dignity is so successful at shooting down earlier explanations for the Great Fact because it describes the mechanisms by which they are proposed to have driven economic growth and then shows that the magnitude of their impact is simply insufficient. So far, it doesn’t seem that anyone has proposed a specific, quantitatively testable mechanism by which the change in popular rhetoric could have precipitated the 16-to-100-times innovation explosion.

To get the ball rolling, below is one proposal for such a mechanism. (Disclaimer 1: this is not my day job. Disclaimer 2: it wouldn’t be that easy to quantify–sorry.)

Liberty and Dignity for entrepreneurs/tinkerers/merchants raised the number of clever, dedicated innovators beyond a threshold that had never before been reached. Below that threshold, would-be innovators would often have hit stumbling blocks that they could not overcome, e.g., needing some as-yet-uninvented process/material/tool/concept to complete/commercialize their own innovation. Without that missing piece, their innovative efforts would have failed. Above that threshold, cross-pollination among innovators would have drastically reduced the number of insurmountable problems–innovators would increasingly have been able to borrow from their predecessors and contemporaries who were working on related problems. This cross-pollination would have required inexpensive information storage and retrieval (i.e., books), but it also would have required a critical mass of innovators simultaneously working on a vast array of problems, a critical mass that the widespread Liberty and Dignity for entrepreneurs created for the first time.

Call it, “James Burke’s Connections meets Deirdre McCloskey’s Dignity.” Just a thought.

Government on the Friends and Family Plan

In his stirring speech to the 1984 Democratic National Convention, then-New York governor Mario Cuomo used an extended metaphor of the whole nation as a family. So maybe it should come as no surprise to discover that his son, current New York governor Andrew Cuomo, uses the New York State government as a jobs program for his friends and their families. The Empire State Development Corporation in particular is chock-full of his donors and friends, and their young sons–not to mention Cuomo’s political advisers.

He’s not alone in spending (other people’s) money to help family and friends. The Washington Post reported in December on the family-friendly atmosphere at the Metropolitan Washington Airports Authority:

Meet the Kulle family: mom Helen, daughter Ann Kulle-Helms, son-in-law Douglas Helms, son Albert, daughter-in-law Michele Kulle and Michele’s brother, Jeffrey Thacker.

They all worked for the Metropolitan Washington Airports Authority. All at the same time.

One MWAA board member, 

who has had at least three relatives, including a daughter-in-law, work at the agency, said family members are employed frequently, particularly among board members.

“If you ask a third of those folks, their relatives work there,” he said. “I never thought that we were doing anything wrong.”

“This is a government town and an agency town,” Crawford said. “If there’s a possibility that you can hire a relative … it was the norm.”

Genetically Modified Foods and the Limits of Trade Agreements

Last week-end, the Washington Post had a good article about how difficult it will be for the upcoming U.S.-European Union trade talks to deal with the issue of genetically modified foods. In the Huffington Post, I have a short piece in which I explain why, in my view, trade talks can’t solve this issue.

Here’s my conclusion: 

However, asking trade negotiations to solve the issue in the next year and a half–the projected time-frame for the talks–may doom the whole process of US-EU trade negotiations. Let’s not risk killing a possible free trade deal on a quixotic quest to improve the EU regulatory process. Instead, put the EU arguments to the test: If protectionism is not the reason for the reluctance to approve genetically modified foods, the EU should have no objection to lowering tariffs and removing quotas for U.S. food products that are not genetically modified. Let’s push the EU on that issue instead, moving us towards free trade in the most simple and direct way we can.

My point here is that in order for international trade negotiations to work, we have to focus on what is actually achievable. Tariffs, quotas, and other explicit forms of discrimination are the core of protectionism, and there are plenty of those left. I’m happy to focus on those issues for now. It’s hard enough convincing the U.S. government not to regulate too much; using trade talks to rein in other governments’ regulation is asking a lot.


Toward Managed Trade in Solar Panels

Rumor has it that the United States, European Union and China are looking to negotiate a deal that would settle a developing trade dispute over solar panels. According to the New York Times, the deal would require China to limit its exports of solar panels to the U.S. and Europe and would impose a minimum price for those panels. In exchange, the U.S. and EU would drop existing antidumping duties (of around 30 and 50 percent, respectively). 

You might call this an “un-trade” agreement. Rather than agreeing to lower their own barriers to trade, the U.S. and EU are convincing China to acquiesce to those barriers by altering their form. The purpose of tariffs is to impose an additional cost on foreign manufacturers that limits competition and keeps prices high. The new model also keeps prices high and limits foreign competition, but unlike tariffs, a mandated minimum price enables the foreign manufacturers to benefit from those high prices. 

The agreement would be beneficial for existing U.S. and Chinese manufacturers, but not for U.S. consumers. For consumers, the effect of this agreement would be the same as if U.S. and Chinese solar panel makers agreed to divide up the market and not to compete on price. Actually making such an agreement between themselves would, incidentally, be highly illegal. So their governments are going to arrange it for them.  

The bizarrest aspect of this new development, and indeed the entire dispute, is that the market for solar panels would hardly exist if not for government subsidies. Increasing the cost of solar panels is completely at odds with any environmental policy to decrease emission of greenhouse gases. Even if you support the creation of “green jobs”, restricting trade in panels is counterproductive because it reduces employment in downstream businesses like solar panel installation. That our government would impose artificial barriers to direct artificial demand toward favored companies highlights the follies of green industrial policy, not just as a mind-boggling waste of taxpayer money, but as an impediment to the success of the broader green energy agenda.


Tyranny of the Minority, ObamaCare Edition


A Fox News poll released Wednesday finds that while 26 percent of voters say their health care situation will be better under the new law, twice as many – 53 percent – say it will be worse.  Another 13 percent say it won’t make a difference…

That helps explains why a 56-percent majority wants to go back to the health care system that was in place in 2009.  Some 34 percent would stick with the new law. 

President’s Drone Speech: Good on Rhetoric, Bad on Policy

President Obama’s Tuesday speech was intended to convey that he is taking a more measured approach to counterterrorism, reducing drone strikes and moving toward closure of Guantanamo Bay.

In many ways, the speech is excellent. The president’s effort to put the terrorism threat in context and his argument that the war cannot be unlimited and unending are praiseworthy, as is his mention of ultimately repealing the Authorization for Use of Military Force.

That said, he still claims almost unlimited war powers based on secret legal reasoning. He still has not told us what countries and groups he claims authority to attack in the name of counterterrorism, or his administration’s legal rationale for doing so.

Members of Congress should not rest on the president’s assurance that they have been “briefed on every military action.” Presidents rarely restrain themselves. Congress should limit the president’s power to kill and detain suspected terrorists, starting by providing the legal end date for the war justifying those powers.

Although the President didn’t mention it in the speech, a big policy change accompanying it is likely to be that the standard now governing drone strikes against U.S. citizens will apply to everyone. Reports hold that this new secret guidance will “sharply curtail” or “dramatically ratchet down” strikes outside war zones, ending signature strikes (killing suspicious people with drones when we are not sure who they are). Hopefully that’s right, but it seems dubious. We do not know how restrictive the current standard is—to what extent it lets the president do what he wants. The rules, at least what leaked in February, were not minimum requirements for strikes on U.S. citizens but assurance that current procedures were legal. Nothing publicly released rules out strikes undertaken by some less restrictive process. And, as a bureaucratic procedure, not law, there is no reason that the President cannot change the standard in secret tomorrow or why the next president should use it.

Which State Will Expand School Choice Next?

With over 150,000 participating students in 12 states, scholarship tax credit (STC) programs constitute the largest and most popular form of private school choice. STC programs have expanded rapidly in recent years with six states adopting them since 2011, including Alabama this year. So which state will be next? After yesterday’s disappointing defeat in South Carolina, the answer may lie on the opposite side of the continent.

Earlier this week, Rep. Liz Pike introduced an STC bill to the Washington state legislature. The bill would provide tax credits to corporations donating to state-approved scholarship organizations that fund children from low-income families and children with disabilities attending the schools of their choice.

Like the STC program that New Hampshire enacted last year, the WA legislation follows the best practices from STC programs around the nation and avoids the flaws of the recent bills in Virginia and Alabama. Washington’s proposed STC program would be capped at $100 million in the first year and includes an “escalator” so that the program will grow over time to meet demand and it eschews unnecessary new regulations. The $5,000 cap on scholarships is high enough to benefit low-income families but low enough that the state still has the potential to save money, as shown in this chart from the Freedom Foundation comparing the maximum scholarship size to Washington state’s total public school spending per pupil: 

How Tax Credits Result in Savings. Image courtesy of the Freedom Foundation.

The bill could go farther still by expanding the use of the scholarships to include educational expenses beyond just private school tuition. For example, under New Hampshire’s STC program, scholarships can cover expenses such as tutoring, textbooks, homeschool curricula, and online learning. Adding a similar provision would move the bill from school choice to educational choice, which would foster greater customization and innovation in the delivery of education.

But even without such provisions, school choice programs have been proven effective at improving student outcomes and adopting one would be a great leap forward for Washington’s education system.