Posts Tagged economics

Glenn Hubbard and Tim Kane’s “Balance” — Why Countries Fail

Glenn Hubbard and Tim Kane’s BALANCE: The Economics of Great Powers from Ancient Rome to Modern America is an entertaining overview of a number of civilizations, ancient and modern alike, and why these civilizations’ economies eventually faltered. Covering such disparate countries as Rome, Ming China, Spain, Ottoman Turkey, Great Britain, and the United States (with two sections, one on the state of California alone), Hubbard and Kane make the case that all of these countries’ economies failed for simple and systemic reasons — albeit not necessarily the same simple and systemic reason in every case.

However, there are some things that tend to crop up whenever nations start to decline, including the ossification of political elites, the substantial obstacles to any form of new technology or new way of doing anything, and in some cases — like Ming China — where a change in rulership means economic policy may make U-turns for no good reason whatsoever. This is mostly because an Emperor, like contemporary Prime Ministers or Presidents, wants to put his own, individual stamp on something — and oft-times, that means a change in policy for the sake of change alone rather than doing whatever is in the best interest of the country.

One interesting thing Hubbard and Kane discuss is the theory of “rent-seeking,” a term coined by economist Anne O. Krueger in an article for the American Economic Review back in 1974. Rent-seeking, according to Hubbard and Kane, is when “a group of people have the power to make money by manipulating the rules of government to their own advantage.” (Ms. Krueger came up with this term to discuss the corrupt nature of many Third World officials, who often took bribes to circumvent burdensome government regulations — this after first setting up the obnoxious regulations to begin with.)

But Hubbard and Kane go further in their discussion of what rent-seeking is, including economic protectionism on the part of lobbyists and labor unions — something that’s somewhat controversial, to put it mildly — and monopolistic restrictions or policies, which are far less so.

The most interesting points Hubbard and Kane make are those of political ossification — that is, when a system has hardened into a non-functional mess and is perpetuated by the bureaucrats, for the bureaucrats. When you add in the potential for self-enrichment by those self-same bureaucrats, such as what happened with the recent United States Farm Bill (where many seated legislators came out ahead, financially, because of the policies they enacted), you can see why nations might tend to decline.

There are some historical inaccuracies, however, with some of the overviews of other countries. Spain’s economic problems, for example, weren’t as simplistic as Hubbard and Kane want everyone to believe — they’re right that chasing the Jews out hurt the economy, they’re right that most of the rulers didn’t understand then-contemporary economics, but they minimize one of the biggest problems that caused Spain’s decline — the defeat of the Spanish Armada by Great Britain in 1558. Having a whole fleet of ships suddenly disappear certainly impacted the Spanish economy to a great extent . . . why this wasn’t discussed hardly at all is quite vexing, especially as one of the main reasons Ming China failed, according to Hubbard and Kane, was the dismantling of Zheng He’s fleet after Zheng He died (ships were actually burned in the harbor, partly due to isolationism on the part of the then-Emperor, partly because the ships were starting to rot anyway).

That being said, much of BALANCE is an entertaining overview of politics, economics, and history. It’s interesting, albeit not deep, and many of the high points are discussed.

Bottom line? If you like history, politics, or economics, and are looking for a quick, fast read that hits many high points, BALANCE is entertaining and will probably hold your interest.

But I’d have preferred a little more authenticity along with the entertainment value, thanks.

Grade: B-minus.

–reviewed by Barb

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Michael Casey’s “The Unfair Trade” — Worldwide Financial Collapse Weakens the Middle Class in Every Country

Michael Casey’s illuminating THE UNFAIR TRADE: How Our Broken Financial System Destroys the Middle Class is a financial book to be reckoned with.  Casey has covered worldwide economics for Dow Jones and The Wall Street Journal, and specializes in discussing global economic trends.  That’s why Casey was uniquely situated to write about the 2007-8 global financial meltdown . . . and it’s also why his book THE UNFAIR TRADE is so very good, so very readable, and so very important.

But I’m getting ahead of myself.

Casey’s main argument is that no matter what the country’s name, the middle class of that country has been left behind.  This has occurred because of the rapidly-changing nature of the global marketplace on the one hand and the badly outdated financial regulations of just about every major country on the other.  This has caused the “big banksters” (as radio personality Clark Howard calls them) to isolate themselves from the middle and lower classes, and it’s why, after the 2007-8 economic meltdown, these same big banksters were helped while the middle class people who’d invested at the behest of the banks got the shaft.

Casey went all over the world and found that no matter what the country, every single middle class person he talked to was disgusted with the economy (worldwide and in-country, made no nevermind).  The belief worldwide is that the economic deck is stacked against the middle class; from China, which has an overly large amount in savings due to its own government’s policies, to the United States, where small and big manufacturers must meet the “China price” (AKA the rock-bottom price, which most of the time is provided by Chinese manufacturers), it seems impossible for the middle class to get ahead.  And more than possible for the middle class to get left behind through no fault of its own.

What’s most important about Casey’s chronicles aside from his excellent reportage is the analysis he puts behind same.  Simply put: Casey has found that what every single person has told him is the truth — the middle class, as a whole, is not doing better in this generation.

In fact, we are doing worse.

And there are reasons for that — pressing reasons — that Casey can’t help but mention.  Some of it has to do with how interdependent all economies are with every other economy (even dysfunctional systems like North Korea’s must take this into account).  Some of it has to do with outdated laws that don’t adequately take into account the rise of computerization and mechanization.  And some of it has to do with the bizarre symbiosis between China and America, which must be read to be fully understood.

And even where the little guys win for a change — like Iceland — there are still huge losses.  Casey went to Iceland and chronicled what happened there; the Icelandic government actually refused to bail out the three large banks doing business on their island.  So what happened instead?  Iceland’s three big banks went into receivership.  This was actually helpful to the middle class over time, because the bank’s owners had to deal with the fallout, not just the bank’s stockholders or the little people who’d put their faith, trust and savings into the bank.

But in the short run the middle class was still harmed.  (Which just goes to show that even in Iceland, the little guy still gets the shaft.)

Even though Iceland’s taxpayers were spared the agony of TARP I and II, they were really angry over the bank meltdowns, and rightfully so.  The consequence of the implosion of the three banks was staggering.  Unemployment went sky-high.  People didn’t know how they’d get access to their money (fortunately the government stepped in, so most people did not lose everything).  And at least one person was so angry over what had happened to him at one of the three Icelandic banks that he went and took the bank’s coffee machine; Casey reported that no one stopped the man because they understood that he was only acting out what everyone felt.

And that was the best-case scenario.  The worst-case scenarios (in Spain, in Greece, and in Ireland) are still playing out to disastrous effect.

Look.  You need to read THE UNFAIR TRADE to understand what’s going on; Casey’s writing is clear, distinct, often ironic, sometimes witty, and above all is extremely important.  Because interdependence in global economics isn’t likely to go away; we must make sure that the laws in place do more than shield the people who caused the trouble in the first place, as if those bad laws stay on the books, it will be impossible for the middle class to ever regain its former stature.  (Much less make any renewed gains.)

Bottom line: THE UNFAIR TRADE is one of the best books I’ve ever read on the worldwide economy.  Period.

So do yourself a favor; read Casey’s book, think about what he says, and then insist that the safeguards Casey discusses be put into place.  Because it’s most unlikely that the 2007-8 economic meltdown is the last meltdown we’ll ever see, so we’d best heed our wisest thinkers (such as Casey) while we still can.

Grade: A-plus.

–reviewed by Barb

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Graeme Maxton’s “The End of Progress:” Depressing, Yet Necessary Look at World Economics

Graeme Maxton’s THE END OF PROGRESS: How Modern Economics Has Failed Us is a trenchant and often extremely depressing look at world economics.  Maxton starts with the unbridled “free” market of much of the Western industrialized world, and points out that philosopher and economist Adam Smith (author of THE WEALTH OF NATIONS) would not like much of what he sees.  Too many monopolies, says Maxton; too much money and power in the hands of too few, and too little taxation in countries like the United States of the wealthy and upper middle class (who can afford to pay) means that the world economy, in effect, is upside down: the things that should be expensive aren’t (such as televisions, calculators, and computers), and the things that aren’t expensive should be (oil, which is a finite resource; food, especially red meat which isn’t cost-effective to grow and/or sustain without a substantial price increase; water, which once again is a finite resource).

Maxton lays out many, many facts and even more opinions about why he believes the world has reached an end to any sort of substantial, sustainable technological progress to lift most of humanity up out of poverty.  Maxton believes instead that in many countries, such as the U.S., we are going backward (he is particularly censorious when it comes to the U.S.’s broken health care system, and how it leaves millions without good access — or perhaps any access at all — to health care), and that the way the world economy has gone in the past thirty years, we’re only going to accelerate this trend.

Now, the main reason this has anything to do with economics is due to how Maxton ties in his premise (that being, of course, “The End of Progress”) to the 2007 stock market/worldwide banking crisis.  Maxton points out that after the 1929 stock market crash, the world actually hit bottom some time in 1932; the world, as a whole, took nearly 25 years to recover from the damage of that stock market crash.  Yet the 2007 crash, with the worldwide banking crisis added to it, was actually worse than the 1929 crash — and Maxton believes that the 2007 crash, rather than being an end in itself as the worst-possible recent economic event, is actually a harbinger of even harder times to come.

Maxton’s prescription for economic improvement mostly depends on two things: raising taxes substantially on those who can afford to pay, and worldwide belt-tightening as there just aren’t the resources available to improve the economy overnight (or in his view, perhaps at all).  He believes that attitudes need to change, especially among the wealthy; he points out that in Smith’s time, the wealthy believed they should pay more in taxes because they could afford to do so, yet now the wealthy pay as little as they can get away with because it appears they’ve bought most of the politicians/power brokers.  This leaves everyone else with a far lesser share of the economic “pie” than we should have, and yet the wealthy do not believe they’re doing anything wrong as they believe free-market, unbridled capitalism is what Smith was talking about in 1776.

Yet the meaning of words change over time, so when Maxton points out that this isn’t what Smith believed at all — Smith believed that capitalism within moral limits was the right move, and that businesses should look at long-term gain rather than the short-term profits that may look enticing, but will ultimately hurt everyone including the business at hand — he is on to something.  And he’s also right when he points out that many of the world’s resources are finite and must be conserved as much as possible, which is something Smith would also approve of; Smith would definitely not approve of how oil company executives behave (how they get tax write-offs and economic benefits when they’re the wealthiest companies the world has ever known, for example), nor about how many economists fail to talk about the morality and ethics of how wealth changes hands while instead talking only about money as if there are no morals and ethical consequences attached.

Overall, Maxton’s premise here is that of a worst-case scenario.  But it’s a necessary point of view to take, considering much of what is heard from economists these days is only about the money rather than the ethical considerations behind the actions of those who have the money and/or power. 

This is a “. . . if this goes on” polemic that should be acknowledged, widely read, and debated, especially considering Maxton’s main premise that our attitudes need to change when it comes to dealing with worldwide, finite resources.  After attitudes change, maybe then politics and policies will finally also change to reflect a greater awareness that the world we live on is a precious resource — not to mention the only one we have — and needs to be husbanded carefully.

My recommendation is that everyone needs to read THE END OF PROGRESS, most especially writers and politicians, in order to understand the magnitude of the choices we’re making.  Yes, it’s an often depressing book that sometimes conflates opinion with fact.  But the case Maxton’s making is sound, especially when you consider it as a worst-case scenario that it’s obvious Maxton really hopes we as a species will avoid.

Grade: B-plus.

— reviewed by Barb

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“Why Nations Fail:” Excellent in Every Way

WHY NATIONS FAIL by Daron Acemoglu and James Robinson combines history, economics, and political science to come to grips with one, central question: why do nations fail?  And if there is a root cause, what, if anything, can be done to keep more nations from failing?

In the process of examining that central question, Acemoglu and Robinson discuss known history and come up with some rather startling conclusions.  

To start with, nations generally have two different types of economic structures, “extractive” and “inclusive.”  The extractive type of economy (contemporary China, the Mayans, the Soviet Union, Great Britain prior to the 18th Century) is one where there is a cadre of elites that “extracts” all the wealth from the country, but doesn’t set up a good infrastructure so everyone can benefit from it.  Note that in extractive economies, a middle class may still arise, but the country’s ruling elites typically will not care about them; they are solely in it for themselves.

The inclusive economies (contemporary Botswana, the United Kingdom historically and today, and the United States among them) want everyone to succeed; further, an inclusive economy fosters innovation and what’s called “creative destruction” — that is, new ways of doing things cheaper or better are encouraged, even if it will temporarily cause distress in a formerly solid manufacturing sector.  A middle class is not only typical in inclusive economies, but is actively encouraged by progressive policies of taxation and legislation.

And the reason for the difference in extractive and inclusive economies, while it seems basic, comes down to one thing: politics.  This is illustrated very early on, when Acemoglu and Robinson discuss the differences between Nogales, Arizona and Nogales, Sonora, Mexico.  They’re just over the border from each other and really would be one city if circumstances were different, but because Mexico has historically had extractive economies and the United States historically has had an inclusive one, the difference between Nogales (U.S.) and Nogales (Mexico) is stark.

You see, in Mexico, no one really cares if businesses prosper; there isn’t a good way to collect taxation (which is one of the main “motivators” for a society to want to encourage a business-friendly environment); mostly, businessmen have to take chances they wouldn’t in the United States and, more importantly, pay bribes frequently in order to keep their businesses open.  Doing these things is not conducive to running a healthy business, to put it mildly.

And, of course, in the United States, business owners do not have to worry about most of that; the state of Arizona and the country of the U.S. wants businesses to have the chance to succeed, which is why business owners don’t have to pay bribes on a regular basis.  Business owners, for the most part, do not have to risk life and limb in order to run their businesses, as they often must in Mexico.  And because the United States has a system of taxation in place, a business owner knows exactly how much he’s going to have to pay the government, which is another plus compared to Mexico.

Another excellent example was the difference between South Korea and North Korea; the South Koreans have an inclusive economy, one other countries want to participate in.  They highly educate their people; they have a system of taxation that works for them; they are a lawful place where it’s free to associate, free to innovate, and of course it’s a place that allows — maybe even encourages — the “creative destruction” necessary in order to encourage new businesses and new ways of thinking, which is one reason why South Korea is at the forefront of the world’s (inclusive) economies.

But the North Koreans — ah, what a mess they are!  The people there are downtrodden; the country is run by elites for elites, and it is clearly an extractive economy.  Most people are at subsistence level.  Few people get decent, or even adequate, education unless they’re a member of the elite group that’s running the country.  And the country’s infrastructure is so bad that if Korea ever again becomes one country (as West and East Germany did), the South Koreans know they will have to massively upgrade the North in just about every possible respect in order to help the poor souls who live there.

There are many examples in WHY NATIONS FAIL that are drawn from history, economics, and political science that will more greatly illustrate this central premise: it’s not so much where you live that counts, but what sort of political system you live under as to whether or not your life is going to be bearable — or awful.  And while the United States is currently an inclusive economy, there is one example of a formerly inclusive economy — South Africa prior to 1935 or so, when the black farmers were encouraged rather than vilified and obstructed — going backward and becoming extractive (South African under their “apartheid” regime), so I’d definitely not want the U.S. to “rest on its laurels” after reading this book.  There is a constant need for vigilance on the part of any country’s populace in an inclusive economy in order to keep elections fair and free, or the potential exists for elites to arise in the United States in the same way they arose in North Korea, the Mayan Empire, or during the decline and fall of the Roman Empire.

WHY NATIONS FAIL is an excellent book that explains economics, politics, and history in a highly readable way without sacrificing intellectual vigor.  It is outstanding in every possible way, and I couldn’t recommend it more highly.  When it’s released on March 20, 2012, go grab a copy right away — you’ll be glad you did.

Grade: A-plus.

— reviewed by Barb

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