Category: Economics

Simon and I were walking to class today and we started to talk about cars. He started to to talk about how there seems to be very wealthy people here and poor people, and no middle class. I sort of agree with him, it really depends on how you’re making the distinctions. There certainly is a Yemeni middle class, but in comparison to America’s middle class, they are really poor. The people that are considered “poor” in the US would compare very well to the middle class here. Similarly, the ones that seem rich here don’t hold a candle to the rich back home… The upshot is that we Americans have more money, that’s no surprise. The real surprise, and one that is reinforced every day that I am here, is that our “poor” aren’t doing too badly. Discounting the drug addicts and schizophrenics on the streets, our “poor” live much better than many, if not most, of the people in the world. Almost all of South America, Africa, and Asia have much more serious poverty issues than the US. It struck me today that I no longer really worry too much about our poor back home because they just don’t seem that poor to me anymore. Income inequality is not a problem, absolute income is…

… that there is some concern over the price controls being implemented by the government. It came from some minister or other and was published in the Observer. He didn’t have the same worries that I do though. I am worried about shortages in the near term, maybe not even making it through ramadan. The minister pointed out, quite correctly, that subsidies and price controls have long term consequences, and not good ones at that. His concern is a long term one. If the government insists on selling wheat at a loss, there won’t be much interest from companies to import or sell it. It could be the worst of all worlds, the government could run out of wheat and there may not be anyone else importing it… The good news is that in a recent poll, over half the people that responded didn’t think that the government could maintain the price throughout ramadan. It’s good to know that most people realize that no matter what the government does, the market will rule… With any luck the price controls are only short term things, short enough to avoid shortages and short enough that companies will not leave the market. We’ll see if the Yemeni government can avoid really screwing this up…

My teacher and I were talking about different countries and their economies. He asked if I thought if Yemen could ever be like the US. I think that Yemen’s upside is going to look more like Canada or Australia, but they have a very, very long way to go. He lamented the fact that there aren’t any arab countries with a good economy. I mentioned the UAE, Dubai and Abu Dhabi are some of the most prosperous regions on earth. “Yes, but it’s a plastic economy. They don’t have anything there but businesses, they don’t make anything there.”

As usual, he didn’t notice the fact that they don’t “make” anything, and yet they are fantastically wealthy. They make wealth, pure and simple. Really, when you think about it, wouldn’t you want other people making stuff for you instead of making it yourself? There is nothing wrong in doing what you do best and allowing others to do what they do best, it’s called trade and it will make you wealthy. Just look to the UAE for guidance. Don’t be afraid of trade and don’t be afraid of services, they’re good things.

Arg. I was afraid this was going to happen, and now it has. The Yemeni government has imposed a price cap on the price of wheat. These things never work, and yet they have a huge amount of support from the general public, at least at first. When the shortages hit, people start to at least think about how things work economically. With any luck, they’ll snap out of it before too long. I always wonder why governments choose to ignore all of the precedents that other governments have provided for them. Just in recent times places like Zimbabwe and Venezuela are poster children for how price controls don’t work. Even the US figured this out. Remember the “Oil Crunch” in the 70’s? Remember the long lines and shortages? There was never a world wide shortage of oil, but due to the price controls set down by the government, there wasn’t enough gas to go around. We haven’t had any experiments with price caps since then (excluding those damn “anti-gouging laws. They are so vague as to be useless, even as a cap), price floors are a different matter… My prediction is that there will be flour shortages by the middle of Ramadan…

There have been a number of protests and sit ins across the country this past week in order to highlight some ongoing problems. All the usual suspects were there, poverty, hunger, water shortages, child labor, refugee issues, etc. The common theme across all of them is the the government should do something. It even goes further than that, they all have as an understood axiom that all things flow through the government, the only reason they do not have what they need is because the government does not give it to them.

I hope that it’s obvious what the problem is with that world view. The government can indeed give some things to some people, but only by taking them away from someone else. If the Yemenis want their economy to grow, they will have to start looking at themselves. What the sit ins should be about is the corruption, interference and cronyism that is preventing Yemen from clawing itself into a decent position. The government doesn’t want to correct people’s views on where prosperity comes from because then the people would start demanding that the government should get the hell out of the way…

On the other hand, the president did have a rather refreshing take on the water shortages in Ta’izz. People have been demanding that something be “done” to help alleviate the water problem. The president’s response, “Water comes from the sky, not from the government.” It is both astoundingly obvious and bound to go right past most of the people. There have already been op-ed pieces lambasting the president for this stance. Of course no one has any solutions to offer, if there isn’t any water, there isn’t any water. For once, I think I agree with the president on something…

In the latest Yemen observer, there are a couple of real “howlers” when it comes to economic things. There is an ongoing problem with wheat prices going up rather quickly. The world price of wheat has gone up significantly (due in part, no doubt, by the ethanol subsidy in the US making people switch to corn and lowering overall supply) and people claim that the price here has gone up more than it should. The headline of the most recent article is “Greedy businesses keep prices high,” or something to that effect. The caption under the photo in the article says that merchants are selling wheat “for more than it’s worth.” Now it’s one thing to ask for more money than it’s worth (you won’t get it) but it is impossible to sell it for more than it’s worth short of doing it at gunpoint (and then I guess technically it would be called theft). If they sold it, it was worth the money they asked to someone…

The government is getting a lot of pressure to do something. Salah (the current president) and various other officials are clearly upset with the traders that are selling the wheat. The president even made the veiled threat that “We liberalized trade, but we can go back to the old way of doing things if we need to.” He then announced that the government will now start to compete with these several traders in the wheat market. Presumably, this will lower the price. Hold on a sec., Why couldn’t another company compete with the current traders and do the same thing that the government wants to do? They would also make quite a bit of money in the process. The reason of course is because the government has only licensed these 2 or 3 companies in the wheat trading business. Why you need a license to buy and sell wheat is beyond me. Well, the government gets a fee and/or other kickbacks I suppose, that’s always a given here. Anyway, this is the perfect example of people blaming the “free market” for unwanted effects when in fact it is the government that is screwing things up by limiting competition. Now that they are officially getting into the market, I expect even more problems…

Keep in mind that most of the countries in the world operate like this. Barry Weingast talks about this in his upcoming book, “A Conceptual Framework for Interpreting Human History.” I know, it sounds like a real page turner, but he does have some really important insights for growth economics. Most countries have a system where privileges are divvied up among a power base of elites. Of course, efficiency and competitivness never enter into the picture, so you get situations like we have here in Yemen. His idea is that these alliances are made mostly to avoid violence and armed conflict. I can certainly see that here, if favors were not granted to certain powerful people or tribes, they might fight back. I think that his insights go a long ways towards explaining how and why a leader would engage in economic practices that harm the country and why many countries can never get past their third world status, they do not want to go through any more violence…

Brink Lindsey made the comment “The political right has never gotten over the fact that the 60’s happened and the political left haven’t gotten over the fact that the 80’s happened.” He was discussing his book “Age of Abundance” on a podcast from Cato. He talks about how good the US has it and about how the “culture wars” have simmered down a bit and what it means to the US in the future. It sounds like a really interesting book, I’ll add it to my must read list when I get back home…

Karl and I were talking the night before he left to go home. In several of our conversations I noticed that he had a fairly common bias when trying to figure out how to get things accomplished. “If the government doesn’t do it, it won’t happen,” is a really common attitude. Almost without exception, the people that ardently believe in this are afraid of what people will do if left to their own devices. They see no hope of charity, care, or understanding from people. It’s really a cynical viewpoint if you think about it. The alternative to allowing people to do what they want is to force people to do what the government, or in a best case scenario, what the majority of people want to do. They of course do this by forcibly taking money from us and forcing us to follow whatever program they come up with.

As you may guess, I feel that things should be left to people to decide for themselves first before any government involvement kicks in. This is rarely allowed to happen, there is usually some sort of regulations in effect for just about everything out there. Usually, it is the government interference that allows “market failures” to happen. For me, what defines a market failure is that everyone can do whatever they like and nobody is happy with the outcome. I had been a believer in the idea that market failures didn’t really exist without govt. meddling. Living in Yemen has made me rethink some of those ideas.

Two examples of actual market failures that I have seen here are the unbelievable amounts of litter and the horrendous (and dangerous) traffic. I have no idea what’s going on with the litter, seemingly everyone complains about it, but is unwilling to do anything about it. I once had someone lament how dirty Yemen is while he threw a wrapper on the ground! My only guess is that there is some sort of cultural bias towards littering or away from preventing it… The traffic example is a little easier to explain I think. There is relatively little enforcement of traffic laws here, so people drive however they choose, with disastrous results. There are constant traffic jams (usually caused by terrible parking in busy areas), intersections are both risky and harrowing, and the flow of traffic in general is incredibly slow. The noise of horns is deafening, and it leads to you tuning them out for the most part. My idea behind why the “market” for traffic running smoothly doesn’t work so well is one of transaction costs. In any market, actors in it must be free to negotiate between themselves for the outcomes that they both want, for the ones they are willing to “trade” for. If the cost of doing the transaction is too high, it doesn’t happen. Imagine trying to import a plow from England to colonial Virginia. It was far too costly in terms of time to bother with getting it from England, they just went down to the local blacksmith and got one instead. In the same way, traffic moves too quickly for there to be too many “negotiations” to occur. What results is the traffic that we have here. The government (through rules and enforcement) sets up the negotiations beforehand (right of way, traffic lights, etc.) so that no time is needed to figure out who should go where. Traffic tends to be much more efficient (more cars through a given area in a given time) and I believe safer with these negotiations taken care of in advance. So yes, we give up some freedom, but because there isn’t a way for us to make transactions in the market otherwise, the government solution works fairly well.

Here’s where my ideas get a little more difficult to think about. I do believe that people should be allowed to try interact among themselves first before relying on the government to “fix” things. The trouble is, as in the case of traffic here in Yemen, if you allow the market to do its own thing, I’m not sure you can “fix” it later on. I have no idea how the government could step in now and correct the big problems with traffic here. So maybe things like high transactions costs could be predictors in advance whether or not the govt. should be involved. There may be some other factors as well, but the possibility that people may be stupid or evil are not (IMO) good reasons to mandate government control over something. Let people interact with each other freely and usually good things will come about…

That’s the title of the new book by Brian Caplan and it’s making some waves. All of economics is based around the idea that people act rationally, that they act in their own self interest (which often times involves helping other people). Economics shows us what kinds of outcomes you can expect from various policies and it is assumed that people would pick the policy that leads to the best outcomes. The trouble is that the vast majority of people do not choose these policies, they chose the ones that lead to worse outcomes. They expect the politicos they elect to implement the policies they want and so we get a variety of programs that demonstrably hurt people but are very popular. Things like protectionist measures against trade, price controls (anti-gouging laws, minimum wage laws, rent control, etc.), measures to combat automation and outsourcing, and farm subsidies are some of the examples that spring to mind. All of these things hurt the public in general (even if they help certain, small groups) but they enjoy widespread support from the public. Why do people like what can be shown to hurt them?

Caplan postulates 4 biases that people seem to have had for all of history. Some of them may have been beneficial in our ancient past but get in the way today. The 4 biases are:

1) Fear of foreigners
2) Make work
3) Fear of markets
4) Undue pessimism about the economy

The fear of foreigners probably started in our primitive past where new tribes were seen as competitors in the zero sum game of hunting and accumulating women. Back then, it made a lot of sense to be wary of foreigners because the machinery of wealth creation had not come about. Unlike game hunting, wealth creation is not a zero sum game (one person wins only by beating another) so this fear causes us all sorts of problems today. Most of these fears are seen when topics of trade and immigration come up today.

The make work bias shows itself whenever you hear someone judging how the economy is doing by employment figures as opposed to actual production. A common worry today is that America is “losing” because we don’t make as much stuff as before. That’s false of course, America has never been more productive or made more stuff than it does currently. What people really mean is that there are far fewer people employed in the US manufacturing sector. This is a good thing, higher productivity directly relates to wealth creation. Whenever fears of outsourcing or automation come up, it is the make work bias rearing its head. Higher productivity is the source of advancement and continued growth, automation is a great thing.

People in general have an irrational fear of markets. I say irrational because we are surrounded by products and services that are brought to us at varying prices and quality levels by markets, but people refuse to trust them. Farm subsidies are a case in point. They have a fairly widespread base of support not only in rural agricultural areas but in urban ones as well. Most of that is driven by the fear that there wouldn’t be enough food if we left it to the market. There are no shortages of other things that are only market driven, chairs, pencils, computers, concrete, vitamins, etc. As a matter of fact, relatively little food is subsidized and yet we have no shortages of the farm products that are not subsidized (chicken, beef, eggs, fruits and nuts of all kinds, etc.). When economists offer market solutions to things like education, health care, elimination of farm subsidies, etc. they are usually dismissed with the assumption that markets can’t or shouldn’t be involved despite the enormous evidence that they do indeed work. People simply do not believe despite what is in front of them. Part of that is the fallacy that “bad” motives must lead to bad outcomes. Economists make a distinction between self interest and greed, most people do not. Because most people in any given market are driven by a profit motive, the public at large assumes that nothing but bad things can come out of market processes. The facts of the matter are that inevitably, through the magic of competition, the people and firms that succeed are the ones that serve their fellow man the best. Yes, bad things can be done by bad people, but what else is new. Markets, if left to their own devices will provide us with the best services and products at the lowest prices.

There is also an ongoing feeling of pessimism about how the economy is going. This could be understood during times of high inflation and unemployment, but people are pessimistic even now. We have made enormous gains in the last 100 years in every way you can think of. We have better products, longer healthier lives, a cleaner environment, more freedom due to the dramatic drop in the costs of communication and transportation, and even more free time than in 1907. The real kicker is that things are better than they were even 30 years ago, but people don’t acknowledge it despite living with all of the benefits of our ever progressing economy. It goes further than this, whenever something that comes up that could improve our standard of living (outsourcing, freer trade or automation) people point to it as evidence that we are getting worse off! Even if economists didn’t do the research that they do telling us this, it would seem to be obvious that things are indeed (across the country) continually improving. There are some states that are shooting themselves in the foot (Michigan, New York, I’m looking at you) by continuing to use lousy economic policies. If they would simply look at why people are going to other states and start to emulate them, they too could enjoy economic growth and low unemployment…

So why do people cling to these things instead of taking research seriously? A lot of it has to do with clinging to a world view. In just about every other part of life, people either defer to, or at least take seriously the experts in the field. Many, if not most people cling to beliefs that they have no idea if they are true or not. The healthy way of dealing with things you don’t understand is to be agnostic about it, listen to some experts and then do some of your own research. Instead, people tend to blindly believe in awful economic policies. It’s to the point where a person in Mexico may vote against politicians that support freer labor markets, freer trade, and a reduced welfare state and then illegally move to the US to take advantage of the benefits that those things provide. It’s sad to think that most people wouldn’t think twice about that despite the obvious disconnect. Caplan’s book sounds like it does a decent job explaining of why people turn away from things that actually help people and towards the tried and not so true… You can hear (and read) the interview with him here.

Just finished listening to some podcasts from here and I really enjoyed them (as usual). The first one was about outsourcing and trade in general and had some interesting tidbits. One thing I liked was his idea about economies of scale. Instead of talking about the efficiencies of returns to scale due to large purchases of supplies, etc. he posited that the efficiencies come from the continual use of human capital. Economists use the term “human capital” to describe the skills and knowledge that people have and use to produce stuff and services. His idea was that in a production environment capital is used all the time. If I decide to make an amplifier, my human capital involving cameras and Arabic aren’t used. I can only use one skill at a time so anything I decide to make is inherently inefficient. If you get several people (or a lot) together and they specialize, human capital can be used around the clock leading to much greater efficiency. Well, I thought it was interesting…

He also brought up the idea that there are no longer the manufacturing jobs to employ a lot of the immigrants like there used to be. He used the example of the Endicott Johnson shoe factory in Johnson city to discuss his point. I used to wander around the old grounds of the EJ factory in Johnson city a lot back in my college days. Anyway, I don’t think it’s necessarily a problem, but it is interesting to see the difference between today’s immigrants and the ones from years past.

When they started to talk about outsourcing, Russ came up with an interesting way of analyzing things. The usual issue is weather or not the decreased costs are “worth” the loss of jobs stateside. People sometimes have difficulty determining who comes out ahead in these sorts of deals. Imagine some product, like computer software, became totally free. Or imagine that a teleportation device was created. Both of these hypothetical situations would eliminate hundreds of thousands of decent paying jobs. Certainly the people that had those jobs would be worse off, but what about everyone else? It’s pretty clear that everyone in the world would be better off with zero cost software and transportation. The thing that people usually forget is that the money that would no longer be spent on those things would be spent on something else, and that is what drives economic growth long term. The same general idea applies to automation and outsourcing. By making things less expensive (they can never be totally free), the world benefits and money is freed up to be spent on other ideas and services. It’s a great way of putting things into perspective.

On another podcast, they were talking about recycling. It’s interesting to think about the idea between resources and trash. In short, a resource is something that someone will pay you for and trash is something that you have to pay to get rid of. It turns out that aluminum cans are usually a resource and as such are worth recycling, newspaper is a bit of a wash, and glass is a real money loser. What that means is that is actually more expensive (in many cases) to make glass from old bottles than it is to make it from scratch.

Some people might say that it doesn’t matter what it costs, we should reuse and recycle as much as we can, even if it loses money. These people tend to sneer at economists as being short sighted and resource hogs. The shame is that economists are the only ones that take all resources into account, most people that are rabid about recycling think that only the things we get out of the earth are important. Economists take into account time and alternative uses of human capital as resources, things that are frequently ignored by many people. It turns out that if prices are allowed to be set accurately (always easier said than done), it’s easy to find the least resource-intensive product, it is the cheapest one. That’s one more reason to allow prices to rise and fall on their own, it’ll allow us to accurately determine the relative resource use of the products we use.