Thought du Jour

Republicans are in transition between being one kind of party and another. Yesterday’s Republicans were an upper-middle-class party (small-town lawyers, shop-owners, managers) and tomorrow’s are a lower-middle-class one (landscape gardeners, construction workers, truckers).

In recent years, Democrats, traditionally the party of the vast industrial working class, … became the party of billionaires, academics, minorities and single women, driving white working-class voters into the Republican party.

Mr [Mitt] Romney represents the Republican party as it was back in the 1950s, probably the last decade when most Ivy League professionals joined it. …. Mr [Rick] Santorum is playing the role in these primaries that Mr [Mike] Huckabee did last time. Elected to Congress from a majority Democratic district, he has differed from most Republicans in his defence of minimum wage laws, union rights and his loud opposition to gay marriage. You could call this a confusing mix of Right- and Left-wing positions. Better to call it a consistent platform of working-class attitudes. ….

Torn between their old, Rotary Club wing and their new, Burger King wing, what is going to happen to Republicans? Although things can change, the likely answer right now is that they will lose.

Christopher Caldwell. “The new battle for the old soul of the Republican party“, Financial Times, 25 February 2012.

US journalist Christopher Caldwell (born 1962) is a senior editor at The Weekly Standard, a neoconservative opinion magazine.

Recently, I was asked by the organisers of the IIASA conference to mark the 20th anniversary of the beginning of economic reforms in Eastern Europe and former Soviet Union to comment on the lessons of transition. …. [H]ere is my top-seven list.

First …. Economic transformation takes time.

Second, … have faith – capitalism really does work.

Third, … a reformer should fear not populism but capture of politics by the new elites.

Fourth, … do not over-plan the move to markets, but, more importantly, do not delay in the hope of having a tidier reform later.

Fifth, … you cannot teach an old dog new tricks, even with incentives.

Sixth, … do not panic about crises; they blow over fast.

Seventh, … middle-income countries eventually slouch toward democracy, but not nearly in as direct or consistent a way as they move toward capitalism.

Andrei Shleifer, “Seven things I learned about transition from communism“, VoxEU, 5 February 2012.

IIASA is the International Institute for Applied Systems Analysis, based in Laxenburg, Austria.

Russian-American economist Andrei Shleifer (born 1961) teaches in Harvard’s department of economics.

University of St. Gallen (Switzerland) economist Samia Costa measures the effect of government repression on mortality from natural disasters and finds it to be an inverted U. Countries at each end of the repression distribution suffer fewer casualties. Countries whose citizens are mildly repressed experience greater mortality from natural disasters.

Natural disasters have been a major cause of human suffering. Countries with higher income, lower inequality, lower corruption, and more democratic regimes have been found to experience less casualties from disasters. Government repression, however, could also play a role in disaster preparedness. ….

I empirically test whether countries whose governments are deemed to be repressive (and which hence may not expect to receive assistance) experience less disasters and lower mortality rates from natural disasters. I find that overall, countries with worse human rights records are no less likely to experience a natural disaster, but that they suffer higher casualties than countries with better human rights records. However, the relationship between repression and fatalities is an inverted U-shaped, so that countries at either end of the human rights distribution have lower casualties. ….

[To control for effects of other variables on death tolls, the estimated models] include the number of disasters, the log of GDP per capita, the percent of the population living in urban areas, population density, the log of population, the log of development aid, a democracy indicator, corruption, the log of land area, and the absolute value of latitude, as well as a time trend.

Samia Costa, “Government Repression and the Death Toll from Natural Disasters“, CESifo Working Paper No. 3703 (January 2012).

Partitioning the full sample into two groups – low- and high-income countries – Ms Costa reports that the relationship between repression and fatalities is linear rather than inverted U-shaped. For low-income countries, the relationship is positive, whereas for high-income countries the relationship is negative.

This finding is surprising to me. The author does not provide the partitioned regression results, nor an explanation for them, but I think that I might have one. Is it not possible that the relationship between fatalities and “log of GDP per capita” variable is U-shaped rather than linear? Testing the full-sample equations by inserting the square of “log of GDP per capita” would be an interesting exercise. Would the relationship between fatalities and repression continue to be nonlinear? Perhaps. Perhaps not. I would love to find out. Perhaps the author has already examined and discarded this possibility.

US journalist Christopher Caldwell looks at President Barack Obama’s call for a minimum 30% tax on those earning more than $1m a year.

Mitt Romney, a Republican candidate for US president, released his tax returns this week. They showed that he had paid just $3m on his 2010 income of $21.6m, which is just the tip of his quarter-billion-dollar iceberg of wealth. Mr Romney, in other words, is paying taxes at a lower rate than most of the middle-class Americans he seeks to rule. And this inequity is made possible in part by a special rule on “carried interest” that taxes the earnings of managers of private equity, such as Mr Romney, at the super-low capital gains rate of 15 per cent. ….

When Mr Obama and his fellow Democrats held the presidency, the House and a filibuster-proof majority in the Senate, they could have eliminated the carried interest accounting rule in a single afternoon. It remains in the tax code because Mr Obama’s party – which, let us not forget, holds the allegiance of 19 of the richest 20 postcodes in the US – wanted it there.

Christopher Caldwell “Class warfare need not be taxing“, Financial Times, 28 January 2012.

Mr Caldwell (born 1962) is a senior editor at The Weekly Standard, a neoconservative opinion magazine.

Alan Greenspan’s contribution to the FT series “Capitalism in Crisis” is a spirited defence of free-market capitalism. This comes as no surprise, since he is a follower of Russian-American novelist and philosopher Ayn Rand (1905–1982). Ms Rand was a fervent advocate of laissez-faire capitalism.

Greenspan, correctly in my opinion, attributes the economic success of countries in the past century to competitive markets. He fails, however, to defend capitalism from the charge that, unfettered, it produces a very unequal distribution of income. He touches on inequality only briefly, in two paragraphs:

During the past century …, competitive-market-driven economic growth created resources far in excess of those required to maintain subsistence. That surplus, even in the most aggressively competitive economies such as America’s, has been mainly employed to improve the quality of life: advances in health, greater longevity and pension systems that go with it, a universal system of education and vastly improved conditions of work. We have used much of the substantial increases in wealth generated by our market-driven economies to purchase what most would view as greater civility. ….

The often-assailed greed and avarice associated with capitalism are in fact characteristics of human nature, not of market capitalism, and affect all economic regimes. The legitimate concern of increasing inequality of incomes reflects globalisation and innovation, not capitalism. But an additional contributor to inequality in America is our immigration law, which “protects” many high earners from skilled migrant competitors. The American H1B programme is in effect a subsidy for the wealthy, a policy that is anathema to the supporters of capitalism.

Alan Greenspan, “Meddle with the market at your peril“, Financial Times, 26 January 2012.

I will restrict myself to just a few comments. Economic growth improves quality of life for those with rising incomes, but government action is necessary if everyone is to enjoy the gains. Markets alone do not ensure universal access to health care, old age pensions or education. Greenspan must know this. He should write it, instead of describing free markets/central planning in black and white terms. Real economies – including the US economy – are mixtures of markets and government planning (interference).

Greenspan writes that income inequality reflects globalisation and innovation. There is some truth to this. But wouldn’t incomes be almost as unequal in a closed, free-market system without international trade, capital flows or innovation? Wouldn’t there still be greed, crony capitalism and abuse of wealth? I think so, unless the initial endowment of wealth was very equal, but economists (fortunately) cannot run an experiment to test my hypothesis.

In any event, it is clear that capitalism’s ‘creative destruction’ produces winners and losers. Government can distribute some of the increased income from winners, so that everyone gains at least something from economic growth. Greenspan does not mention this. He advocates market solutions, for example allowing skilled migrants to compete with high earners. Competition from immigrants would not, I suspect, have any effect on bonuses of fund managers, or on incomes of the super-rich in general. Nor would it improve earnings of those in the bottom half of the income distribution.

Photos: Ayn Rand, Alan Greenspan

President Ronald Reagan in 1987 appointed Alan Greenspan (born 1926) to succeed Paul Volcker as chairman of the US Federal Reserve. Greenspan served in this position until January 2006, when President G.W. Bush replaced him with Ben Bernanke.