Our Word is Our Weapon

David Brooks gives thanks: we are apparently “in the 11th month of the most prosperous year in human history”, so quit your moaning about poverty and inequality.

He’s getting a bit ahead of himself, as the World Bank data he cites shows that world growth in 2004 wasn’t even the highest in 20 years. Indeed, if I’m reading my World Development Indicator database right then world growth was higher for most of the 1960s. But Brooks is still right to say that these growth figures are still very good, and total growth for developing countries of 6.1% is excellent.

A couple more quibbles, though: firstly, even looking at developing countries alone, it doesn’t seem to be the biggest ever year of growth, with a few years in the 1960s and 1970s apparently higher (according to the WDI database, which is not available in full online). The World Bank report makes clear that it is the highest year of growth for developing countries “in the last three decades”, but Brooks simply ignores this as it wouldn’t make for such a catchy opening line.

Second, it is wrong to call this 6.1% figure an ‘average growth rate’ for developing countries, as the World Bank does: rather, it is the growth rate of the developing ‘world’ as a whole, so its biased upwards by big fast-growing countries like Russia, India and China. Of course, that’s a better reflection of what’s really happening to all the people in the world, but it does hide the fact that a lot of developing countries are still struggling, if not as much, generally, as they were in the 1980s and 1990s. The report says that “virtually every region enjoyed solid growth”, which is one way of saying that Sub-Saharan Africa, where per capita growth is 1.1% in 2004, continues to fall behind alarmingly. Per capita growth in Latin America and the Carribbean in 2000-6 is forecast to be even lower than Africa’s, at 0.8% a year. The fact that these two struggling regions (containing 20% of the world population) are the ones that most faithfully followed the policy prescriptions of the IMF and World Bank should really give some cause for concern, but Brooks and the IMF/World Bank obviously choose not to make this connection.

Brooks rightly notes that the high growth in developing countries should lead to substantial reductions in extreme (less than $1 a day) poverty, and he should have left it at that. But he goes on to claim that world inequality is falling too:

“Economists have been arguing furiously about whether inequality is increasing or decreasing. But it now seems likely that while inequality has grown within particular nations, it is shrinking among individuals worldwide. The Catalan economist Xavier Sala-i-Martin looked at eight measures of global inequality and found they told the same story: after remaining constant during the 70’s, inequality among individuals has since declined.”

Actually, Sala-i-Martin’s work is really not about inequality between individuals, as Branko Milanovi convincingly demonstrates in a comprehensive critique here. Milanovic points out that Sala-i-Martin’s work involves so many shaky assumptions that the real trend in world individual inequality is likely to be slightly upwards, rather than down as Brooks would like to believe.

Inevitably, Brooks goes on to claim that it is “globalization” that explains all this good news: “The poor nations that opened themselves up to trade, investment and those evil multinational corporations saw the sharpest poverty declines. Write this on your forehead: Free trade reduces world suffering”. He follows up with the standard line about silly old Sub-Saharan Africa not joining in the benefits of globalization because of its “bad governments and AIDS”.

There’s several things wrong with this picture. As I’ve already pointed out, world growth was often higher in the 1960s and 1970s, so one could just as well write something on David Brooks’ forehead about the benefits of trade protection, import substitution and interventionist industrial policy. Secondly, African countries have opened themselves to trade and investment just as much (if not more than) those thriving Asian economies, and are generally improving fast in terms of democratisation and ‘good governance’ but have seen little or nothing of the expected benefits.

Lastly, I would like to offer a slightly contrarian explanation of the relationship between trade and development today. Brooks says that “if you really want to reduce world poverty, you should be cheering on those guys in pinstripe suits at the free-trade negotiations”, but I suggest that we should do exactly the opposite, because we are seeing very high growth at a time when trade liberalisation has certainly slowed and might have ground to a halt.

Not being an expert on measuring trade policy, I have gone for my data to the Fraser Institute’s Economic Freedom of the World Index. Their data (downloadable in Excel format) includes a multi-part ‘Freedom to Trade Internationally’ index, with figures for 120 countries, including 102 back to 1985. This composite index is calculated from a variety of data, including average tariffs, regulatory trade barriers and international capital market controls. Looking at the 102 countries for whom full data is available back to 1985, I get the following results:

Now, that looks to me as though trade liberalisation, viewed in the round, has slowed and/or reversed very slightly in the early years of this decade. Assuming a bit of a lag for actual trade patterns to adjust to policy changes, we seem to arrive in 2004 with very high world growth and the best year for the developing world since the 1970s. I’ll invite you to draw your own conclusions - I’m not saying the slowdown in liberalisation (if there really has been one) has caused the higher growth, just that we can’t explain that growth in terms of more free trade. Comments welcomed, as always.

As predicted here a few weeks ago, the Irish government has announced that is not likely to raise its overseas aid budget to 0.7% of GNP as previously promised. That said, the budget has been raised by 15% to 535m Euro in 2005, which is hardly disastrous.

Presumably maddened by being constantly reminded of his Government’s broken promise, Minister Conor Lenihan decided to take the opportunity to have a go at development NGOs for spending too much on advocacy and not enough in Third World countries. Not very smart - opposition TDs, who have been kept up to speed on the issue by precisely those NGOs, weighed in with condemnations and calls for his resignation. I don’t think that’ll happen, but he’s hardly making friends and influencing people at the moment.

The Adam Smith Insitute have published a pamphlet pushing the case for a “flat tax” in Britain. That’s a flat income tax, by the way: taxes on savings and investment would actually be abolished. Since the rich derive a higher proportion of their incomes from savings and investment than those lower down the scale, this is effectively a straight shifting of the tax burden from the rich onto the poor - taxing work rather than wealth, if you like.

Andrei Grecu, the author of the ASI report, pretends that the proposed massive cut for top-rate taxpayers (from 40% to 20%) would pay for itself since the well-off would all suddenly decide to work much harder, but there’s no evidence that they would. In fact, due to the backwards-bending labour supply curve, reducing taxes on the very wealthy will actually persuade some of them to work less, not more. Grecu simply assumes that the present tax system is on the wrong side of the ‘Laffer curve’ (so that a reduction in tax rates will encourage more people to work thus bringing in more revenue), without putting forward any evidence to support the case.

Although Grecu says that “the history of tax cuts in both the USA and the UK [shows that] lower tax rates engender a substantial economic boom”, don’t get the impression that this conclusion is the result of an in-depth analysis. It’s not - he just notes that top income tax rates went down at the same time that total tax take went up, and assumes that one simply caused the other (and the Coolidge tax cut was apparently the sole cause of the 1920s boom in the US economy, but had nothing to do with the crash and subsequent depression).

In fact, in the US during the 1980s Reagan raised payroll taxes and closed numerous loopholes after realising that his tax cuts were not causing the expected revenue surge. What’s more, income tax receipts rose faster under Clinton, who raised tax rates. So by Grecu’s logic, there’s just as strong a case for raising the top rate.

The ASI’s pamphlet is a pretty weak document overall, but the most glaring omission is an analysis of just how progressive the present system is. That’s because it’s not progressive at all - those on higher incomes pay a lower proportion of their incomes in taxes than those lower down the scale. See this article by Office for National Statistics economist Caroline Lakin, which contains figures I’ve adapted into the graph below (click for a larger version). The column on the left shows the tax burden for the lowest income quintile, the column on the right the burden of the highest quintile. The rich pay a considerably higher proportion of their income in income tax, but this progressivity is more than cancelled out by the highly regressive council tax and indirect taxes.

Quite obviously, a tax that eliminated the progressivity of the income tax system (like the proposed “flat tax”) would result in an extremely regressive tax system. For that reason alone, it’s not going to happen. Proposing it makes the ASI look pretty foolish, but that’s nothing new: I’d be more worried that their less barmy friends on the right will profit from the idea because (as MaxSpeak says of a similar proposal in the US) it makes any other tax-cutting plan look sane by comparison.

Update! You know who else might have opposed the Adam Smith Institute’s flat tax proposal? Adam Smith! In his “Wealth of Nations” (Book Five, Chapter II, Article I, if memory serves), he wrote

It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

Linky

Eamonn Butler of the Adam Smith Institute cracks a rib in Zagreb and blames the British government’s safety regulations. Damn their obsession with protecting people who can’t look where they’re going! For someone who is so keen on the doctrine of personal responsibility, Butler (like the rest of the ASI) sure likes to blame the government for everything.

After a nice break, I think I’ll come back with a post on the startlingly original topic of the US election.

With the benefit of hindsight - even if it is from several thousand miles away - it seems to me that the (narrow) victory of Bush over Kerry was also one of faith-based politics over reality-based politics. Or, to put it most kindly, hope over experience.

The Republicans knew that on the major issues - security and the economy - they would not win an argument based on policies and evidence. So not only did they seek to shift the terms of the argument to their preferred ground of emotional politics (the main emotion being fear, mixed in with hope and hatred), they also sought to undermine the very use of evidence-based, policy-based argument. Kerry was ridiculed for having a ‘nuanced’ foreign policy. When he criticised Iraq’s post-war planning he was denigrating the troops. Of course Saddam Hussein was in cahoots with Al Qaeda. The economy’s doing fine - don’t be such economic girlie-men! And so on.

Unfortunately, the Democrats played right into their hands. Even I got bored of hearing John Kerry tell us he had ‘a plan’ for this or that. What Reagan, and to a certain extent Clinton, were able to do was make a compelling story about their plans, weave them into an appealing vision of the kind of country America could be. In 2004 the Democrats were so sure of themselves on the real policy issues that they never got around to telling a good story.

For a lot of people, Americans no less than most, the most compelling narrative is a morality tale. In the past few decades, Republicans have convinced a substantial minority of Americans that Republican values and Republican morals, are American values and American morals. They have fostered a sense of moral disgust at the very ideas of secular American liberalism. And they’ve basically been allowed get away with it. Now, Democrats really need to start making the moral case for their ideas. It can be done. New Labour have occasionally done it in the UK, and in America Barack Obama’s speech to the 2004 Democratic National Convention was an inspiring exposition of liberal morality based not on bullying sanctimony but on a recognition of human dignity and interdependence.

Well, that’s my two pence, anyway. An American makes the same case very well here.