Our Word is Our Weapon

Just time to sum up a few things I’ve been too lazy to turn into proper posts before the clock runs out on 2006.

• More on FairTrade. Just to follow up my last post on that Economist article about FairTrade, I like the point made by Brad Plumer:
  

  Something in the “free” market was already preventing producers from switching to other crops. Maybe farmers were too poor to diversify. Who knows? At any rate, fair-trade coffee only comprised 1.8 percent of the U.S. market in 2004—a tiny fraction—so it’s hard to imagine that this is the chief thing stimulating overproduction.

  And while we’re at it, am I completely crazy to believe that increased demand for FairTrade coffee would tend to decrease demand for non-FairTrade coffee, since they are more likely to be substitutes than complementary goods?

• Income mobility. Replying to my criticism of his claims on income mobility in the US, Arnold Kling gave his source as the analysis by W. Michael Cox and Richard Alm of data from the Panel Study of Income Dynamics. However, it doesn’t take long to find some interesting comments on their work such as this and this. In summary, Cox and Alm depart from the usual methodology in these studies by including in the sample people who were teenagers in the first period and who therefore had tiny initial incomes which increased massively over time. As a result, they found that the average income of someone in the lowest quintile of the 1975 income destribution increased 22-fold over the 16 years to 1991. Now, only a complete mentalist would believe that this is actually representative of income dynamics in the US in that period, and indeed researchers who used the far more commonly accepted age-standardised approach (i.e. almost everyone else who has looked into the subject) find vastly lower mobility over time. For some strange reason however, free-marketeer bloggers and contributors to TechCentralStation seem to prefer citing this one rather bizarre bit of research rather than the much more extensive and robust body of research which provides less ideologically convenient findings.
• Inter-generational and inter-national redistribution Brad DeLong makes a good point:
  

  The U.S., Japan, and Western Europe today have average incomes of roughly $40,000 per capita. The poorer half of the world’s population today have incomes of less than $6,000 per capita. The same logic that says that we today need our $70 more than the people of 2100 need an extra $500 also tells us that we ought to tax the world’s rich in the OECD more and more to fund world development as long as each extra $500 in first-world taxes generates even as little as $70 in extra poor-periphery incomes. If we in the world’s rich now are stingy toward the (likely to be much richer) future and want to leave them our environmental mess to deal with, we should be lavish toward our poorer brothers and sisters today. If we today are stingy toward our poorer brothers and sisters now, we should be lavish toward our descendants.

• Africa’s manufacturing exports Jonathan Dingle links to a call from Paul Collier for the rich world to give trade preferences for African manufactures:
  

  in the 1980s when Asia first penetrated these global markets, coastal Africa was mired in poor governance and conflict. Africa’s belated improvements have come too late: the region has missed the globalisation boat. Asian cities now have massive agglomeration economies. African exports need to be pump-primed over the entry threshold constituted by these competing agglomerations and this needs a temporary advantage over Asia in markets of the Organisation for Economic Co-operation and Development… Africa needs pan-OECD temporary preferential access for its labor-intensive manufactures, combining the best of EBA and AGOA. Such trade policy has the potential to create millions of jobs in Africa.

  African manufacturing exporters probably could do with a helping hand, but I’m a bit sceptical about how helpful trade preferences of the sort Collier seems to be asking for would be. Maybe we should be looking instead at some sort of import subsidy system, as proposed in this paper by Limao and Olarreaga and discussed in an old post of mine here.

• Malaria An article by Jeff Sachs on how to tackle malaria prompted an interesting discussion, with his key point (don’t charge for bed-nets, contrary to the William Easterly view) disputed and then embraced in quick succession by Felix Salmon of Economonitor, who also uncovered some interesting evidence that charging for bed nets is counter-productive. And anyway, isn’t it somewhat contradictory to believe that people generally know their own interests best but that Africans won’t look after life-saving equipment like bed-nets simply because somebody didn’t charge them for it?
• Not-so-stingy Americans, again The Economist’s ‘Free Exchange’ blog is if anything even more irritatingly smug than the magazine itself, and is in danger of turning into a repetitive litany of “Doesn’t Old Europe suck?” posts. This time round they’re claiming that US patents for anti-obesity drugs and government spending on cancer research somehow makes up for a failure to adequately fund the battles against diseases which kill vastly greater numbers of poor people around the world. For a post which is ostensibly about efforts to deliver “net benefit to poor nations” it’s interesting that they neglect to mention the best available research on commitment to development at government level, which unfortunately places the US well behind the Scandinavian countries.
• Malnutrition as poverty trap The New York Times reports on the devastating impact malnutrition has on those it doesn’t kill:
  

  almost half of Ethiopia’s children are malnourished, and most do not die. Some suffer a different fate. Robbed of vital nutrients as children, they grow up stunted and sickly, weaklings in a land that still runs on manual labor. Some become intellectually stunted adults, shorn of as many as 15 I.Q. points, unable to learn or even to concentrate, inclined to drop out of school early.

  That’s about as clear an example of a poverty trap as you’re going to get. Child malnutrition is shockingly high in India, too.

• The Big Questions About Development This PowerPoint presentation by Alex Tabarrok (linked to be Anthony of TheFilter), is an excellent summary of, firstly, Jared Diamond’s findings on the direct influence of geography on development, and secondly of the research by Engermann and Solokoff (like this) into the indirect influence of geography through its impact on ‘institutions’. The latter research is also more evidence of the centrality of inequality to questions of political economy, and social / economic development.
• Inequality, neoliberalism and development. Speaking of inequality, this post by Tim Worstall is interesting, not because he gets his facts about global poverty wrong again, but because it raises an interesting question. If ‘neoliberal’ globalisation means increasing inequality in developing countries (and there is some evidence that it does) and higher inequality means less poverty reduction (and there is very good evidence of that) then perhaps neoliberal globalization isn’t the silver bullet for poverty-reduction that Tim thinks it is?
• The global development agenda in 2007 Simon Maxwell of the ODI looks into his crystal ball and makes some interesting predictions for the next year, among them that disenchantment would grow at the inaction of the G8 countries since 2005 and that “Attention will begin to focus on glaring and growing inequality between rich and poor, in a conversation dominated by ideas of social justice rather than the eradication of absolute poverty”.

And best wishes for the new year to you all.

A bit late getting round to this, but I think it’s worth pointing out. In its article generally slagging off Fairtrade, farmers markets and so on, The Economist wrote:

But perhaps the most cogent objection to Fairtrade is that it is an inefficient way to get money to poor producers. Retailers add their own enormous mark-ups to Fairtrade products and mislead consumers into thinking that all of the premium they are paying is passed on. Mr [Tim] Harford calculates that only 10% of the premium paid for Fairtrade coffee in a coffee bar trickles down to the producer.

Sounds like producers don’t do particularly well out of Fairtrade, right? Well, let’s see what Tim Harford actually said.

Cafedirect promises to offer good prices to coffee farmers in poor countries. Fair trade coffee associations make a promise to the producer, not the consumer. If you buy fair trade coffee, you are guaranteed that the producer will receive a good price. But there is no guarantee that you will receive a good price. For several years, customers who wished to support third-world farmers - and such customers are apparently not uncommon in London - were charged an extra 10p. They may have believed that the 10p went to the struggling coffee farmer. Almost none of it did.

Cafedirect paid farmers a premium of between 40p and 55p per pound of coffee, and that premium was reflected in the price they charged to Costa. That relatively small premium can nearly double the income of a farmer in Guatemala, where the average income is less that $2,000 a year. But since the typical cappuccino is made with just a quarter-ounce of coffee beans, the premium paid to the farmer should translate into a cost increase of less than a penny a cup.

That relatively small premium can nearly double the income of a farmer in Guatemala. How is this ‘an inefficient way to get money to poor producers’?

Update to the last post. Tim has a lengthy go at me and correctly highlights a big mistake I made, which was to think that ‘tax unit’ in the Piketty and Saez data is the same thing as ‘individual’. So I got that wrong, and it turns out I know less about income dynamics in America than I thought. But I still don’t think this supports the argument made by David Henderson (based on Alan Reynolds’ figures), as I explain in detail in this comment to Tim’s post. Basically, even their data shows a big rise in inequality and at best a stagnation in incomes for the least well-off (see chart below based on their data).

Secondly, Arnold Kling kindly gave a reference to the figures on income mobility he used in the post I slagged off. I’d love to do a post on this the next few days are going to be manic for me (hey, it’s party season in London), but the gist of it is that the research he cites (Myths of Rich and Poor by Cox and Alm) is in fact an extremely poor analysis of social mobility as most people understand it (i.e. the question of whether your relative economic background determines your relative economic destiny) and is more like an analysis of whether people in America earn more in the middle of their careers than they did as teenagers. The answer is, yes, they do, but the same thing happens in other countries and it does not mean social mobility is high in America. As has been repeatedly shown (again, see the analyses summarised in tables 11 and 12 here), social mobility is low in America compared to other countries (especially the Scandinavians), and if anything it appears to be falling further.

Update: See this post and my comment here for a partial correction.

Hilarious. Over at DreckTechCentralStation, David Henderson extols the virtues of a new book from Alan Reynolds, describing it as “an empirical Howitzer … the most important book on the U.S. economy in 2006 and possibly one of the five most important in the decade”. This exciting tome apparently demolishes the myths perpetuated by those lousy liberals - you know, the myths about stagnating middle class incomes, increasing inequality and low social mobility in America. Myth number one comes courtesy of Paul Krugman, who wrote in an article on rising inequality in America back in 2004 wrote:

According to estimates by the economists Thomas Piketty and Emmanuel Saez—confirmed by data from the Congressional Budget Office—between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent.

But Henderson begs to differ:

Reynolds shows that Krugman’s statement is wrong for two reasons. First, CBO estimates go back only to 1979. Second, the CBO data show that between 1979 and 2000, average after-tax income in each quintile (fifth) of the household income distribution rose.

I was surprised that Krugman could be so wrong, so I decided to check the facts for myself. Here’s what I did:

1. First, I Googled piketty saez 2000 income
2. Then I clicked on the first result, the paper “Income Inequality in the United States, 1913-1998″ (remember that title)
3. Next I downloaded the tables Piketty and Saez made available - TabFigs200web.xls here
4. Then I went to table A4 (”Top fractiles income levels (excluding capital gains) in the United States, 1913-2000″), column 7 (”P0-90″, ie the bottom 90 percentiles of the income distribution) and calculated the change between 1973 and 2000
5. Which I found to be a fall of 7%, just like Krugman said

There. It took me five minutes faffing about on the net after dinner and now I know more about income dynamics in America than either David Henderson* or Alan Reynolds**.

All this is fun, but I think it reveals a deeper truth about how the American Right intelligentsia, such as it is, operates. The fact that Reynolds attempted to ‘demolish’ a claim from a paper called “Income Inequality in the United States, 1913-1998″ on the basis that the data didn’t go back as far as 1973 tells you something about the rigour of his research, or perhaps his respect for his readers. Similarly, the more observant of you will have noticed that the other plank of his argument is to attempt to contradict Krugman’s point about individual incomes with some data about household incomes. Now, anyone who gives the issue a moment’s thought should realise that household incomes would tend to have been pushed up since the 1970s by the rising proportion of women entering the labour market and thus the rise of the two-earner household, from one-third of married-couple households in 1970 to three-fifths in 2000. So comparing household income in 2000 to household income in 1979 is comparing apples to oranges, and comparing either to individual income is apples to, I don’t know, papaya or something. Either Reynolds and Henderson are complete idiots, which is certainly possible, or they know this and don’t care because they don’t expect their readers to pick them up on it. And when you’re writing for TechCentralStation, that’s probably a reasonably good bet.

Henderson’s shoddy claptrap is, unsurprisingly, applauded by another TCS contributor, Arnold Kling at EconLog (who has previously sternly decreed that he “expect[s] academics to write with a respect for readers and, above all, for the truth”). Kling leaps upon Henderson’s waffle as definitive proof (even more definitive than the revival of the luxury condo market in St. Louis!) that the US economy is lifting all boats and Horatio Alger is alive and well. And he goes further:

In fact, this way of looking at the numbers understates the improvement. Most of the people in the bottom two quintiles in 1979 were in the higher quintiles in 2000. They had been replaced in the bottom quintile by new immigrants and young families.

As far as I can see, Kling has simply pulled these figures out of the air, and once again it looks like he’s wrong. Some proper researchers find that in the 1970s

about half of all families in the poorest quintile at the beginning of the decade were still in the poorest quintile 10 years later; only about one-quarter of these families made it past the bottom two quintiles

and it got even worse in the 1990s, something you won’t hear on TCSDaily or EconLog any time soon. Nor are you likely to see a comparison of social mobility in the US with other countries, because the reality is that mobility is lower in the ‘free-market’ US and UK than in Scandinavia and most other European countries (see Tables 11 and 12 here).

So if people like Kling, Reynolds and Henderson cared as much about mobility as they claim to, they’d be going to the Scandinavians for lessons. As it is, there’s only one reason left for thinking that America is a land of opportunity these guys think it is: if they can earn big bucks talking such complete bollocks, there’s probably still hope for anyone.

*Research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School in Monterey, Calif.

**Senior Fellow at the Cato Institute, former Director of Economic Research at the Hudson Institute and former Research Director with the National Commission on Tax Reform

[Apologies to Spacemen 3 for the terrible pun on their great album title, by the way]

A really great resource for anyone interested in development is the record (complete with audio and presentations) of meetings held at the Overseas Development Institute which bring experts and policymakers together to thrash out the issues of the day. Particularly eye-catching recent meetings for me are the launch in September of William Easterly’s book ‘The White Man’s Burden’ (featuring an especially good contribution from Simon Maxwell), and discussions on urbanisation and the Millennium Villages Project.