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December 5, 2007

Economist's View - 7 new articles

Boccaccio: The Decameron, "Introduction"

This account of the plague is from Boccaccio's The Decameron (1353) :

Boccaccio: The Decameron, "Introduction": Thirteen hundred and forty-eight years had passed since the fruitful Incarnation of the Son of God, when there came into the noble city of Florence, the most beautiful of all Italian cities, a deadly pestilence, which, either because of the operations of the heavenly bodies, or because of the just wrath of God mandating punishment for our iniquitous ways, several years earlier had originated in the Orient, where it destroyed countless lives, scarcely resting in one place before it moved to the next, and turning westward its strength grew monstrously. No human wisdom or foresight had any value: enormous amounts of refuse and manure were removed from the city by appointed officials, the sick were barred from entering the city, and many instructions were given to preserve health; just as useless were the humble supplications to God given not one time but many times in appointed processions, and all the other ways devout people called on God; despite all this, at the beginning of the spring of that year, that horrible plague began with its dolorous effects in a most awe-inspiring manner, as I will tell you. [...continue reading...]

Measuring Ancient Inequality

One more from Vox EU, this time on inequality today as compared to ancient times:

Measuring ancient inequality, byPeter H. Lindert, Branko Milanovic, and Jeffrey G. Williamson, Vox EU: How does inequality in today's least developed, agricultural countries compare with that of ancient societies dating back to the Roman Empire? Did some parts of the world always have greater income inequality than others? Was inequality augmented by colonization? Did the industrial revolution lower inequality or raise it?

Recent research infers inequality for 14 ancient societies using what are known as social tables.[1] It also applies two new concepts in making those assessments – the inequality possibility frontier and the inequality extraction ratio. Rather than just offering measures of actual inequality, we compare the latter with the maximum feasible inequality (or surplus) that could have been extracted by the elite. We suggest five working hypotheses about inequality patterns over the very long run. First, income inequality rose initially as hunter-gatherer settlements slowly evolved into agricultural societies with rising surpluses above subsistence. Second, there is little difference in conventionally measured inequality between modern and ancient pre-industrial societies. Third, the elites in ancient societies failed to exploit their opportunities fully, since income inequality did not rise anywhere near as much as it could have. Fourth, inequality in ancient societies was driven largely by the class-average gap between the rural poor at the bottom and the landed or bureaucratic elite at the top. The distribution of income among the elite themselves, and their share in total income, contributed far less to overall inequality, and never consistently. Fifth, ancient inequality probably was lower in East Asia than it was elsewhere, suggesting long period-persistence in region-specific distributions.

While there is little difference in conventionally measured inequality between modern and ancient pre-industrial societies, there are immense differences between what was possible and what was achieved. New measures are needed to explore this issue, and the inequality possibility frontier is one. Suppose that each society has to distribute income in such a way as to guarantee subsistence minimum for its poorer classes. The remainder is the surplus that accrues to the elite. When average incomes are very low, the surplus is small, and inequality is modest. As average incomes increase with economic progress, the surplus increases, and the maximum possible inequality rises. Whether the elite fully exploit that maximum, or whether there is some trickle-down to the poorest classes, is another matter entirely. [...]

Conclusions Some key aspects of inequality have been uncovered by this initial look at ancient societies. On the average, income inequality in today's countries is not very different than it was in distant times. However, the extraction ratio – how much of potential inequality was converted into actual inequality – was significantly bigger then than now. This ratio measures how powerful and extortionary are the elite, its institutions, and its policies. While a relation between conflict and actual inequality has proven hard to document on modern evidence, the introduction of the extraction ratio might shed brighter light on that conjecture. It might also show more clearly how colonisers exploit the colonised: indeed, some preliminary ancient inequality evidence suggests higher extraction ratios in colonised than in autonomous societies. Unlike the findings regarding the evolution of the 20th century inequality in advanced economies, our ancient inequality sample does not reveal any significant correlation between the income share of the top 1 percent and overall inequality. Instead, it was the gap between the working poor at the bottom and those near the top that mattered. [...complete argument here, including three supporting graphs...]

Martin Wolf: We Need Fear without Loathing

Martin Wolf says that if the U.S. does not take the lead on climate change immediately and forcefully, "the cause, in all probability, will be lost":

Why the climate change wolf is so hard to kill off, by Martin Wolf, Commentary, Financial Times: The point of the story of the boy who cried wolf is that, finally, a wolf did appear. ... But it is far away and coming slowly. "If the worst comes to the worst," mutter the rich to themselves, "we can always let our children cope."...[H]umanity will change its behaviour only when convinced that the lifestyle the better off enjoy now – and the rest of the world aspires to – remains in reach.

This cynical view of human behaviour is fully consistent with what has happened so far. For it is as if the Kyoto treaty had never been. ... The one point in favour of George W. Bush's US or John Howard's Australia is that they were not hypocritical. For the signal feature of most of the commitments made so far has been the failure to meet them (see chart). The vaunted European emissions trading system has been more a way of transferring quota rent to a few big emitters than an effective means of emissions control. ...

Can the world do better in future? Yes, but it will find it hard. If we are to understand why, we must confront the fact that the world is far from a single country. This creates three huge problems: collective (in)action; perceived injustice; and indifference.

First, not only does each country want to be a free rider on the efforts of others but none feels wholly responsible for the outcome.

Second, the contributions made by different countries to the problem have been (and remain) enormously different. Collectively, the rich countries account for seven out of every 10 tonnes of CO2 emitted since the start of the industrial era. ...

Third, as the report spells out in compelling detail, the heaviest cost will be borne by the world's poor. Among the most frightening consequences are those for rainfall and glaciers: water shortages could become severe across large swaths of the globe. Poor people are far less able to cope with climatic disasters than rich ones. But this, if we were honest, is why the rich are unlikely to make the huge reductions in emissions the report demands. The powerful will continue to act without much consideration for the poor. This, after all, is a world that spends 10 times as much on defence (much of it useless) as on aid to poor countries.

How might this change? The answer is that we must appeal at least as much to people's self-interest as to their morality. Yes, we have a moral obligation to consider both the poor and future generations. Yes, the fact that the changes in the composition of the atmosphere are, to all intents and purposes, irreversible makes early and effective action essential. But acceptance of these points will not be sufficient to obtain meaningful action...

Two things are needed. The first is convincing evidence that the true risks are larger than many now suppose. Conceivable feedback effects might, for example, generate temperature increases of 20°C. That would be the end of the world as we know it. I cannot imagine a rational person who would not seek to eliminate even the possibility of such outcomes. But if we are to do that, we must also act very soon.

The second requirement is to demonstrate that it is possible for us to thrive with low-carbon emissions. People in the northern hemisphere are not going to choose to be cold now, in order to prevent the world from becoming far too hot in future. China and India are not going to forgo development, either. These are realities that cannot be ignored.

The UNDP report argues that the low-carbon future it wants could be achieved at a cost of 1.6 per cent of global output between now and 2030. Such round numbers look attractively modest. But the question people will still ask themselves is what this might mean for their own standards of living. Advocates of change will have to persuade people that living in a low-carbon economy does not mean giving up everything they enjoy. ...

In short, if they are to tolerate radical change in energy use, people must first be frightened and then they must be offered a good way out. The truth, moreover, is that this will happen only if the US also takes the lead. No country will deliver radical cuts if the US does not do so, too. ... The US can no longer wait for a lead from others. Either it takes the lead now or the cause, in all probability, will be lost. Our children and grandchildren will then find out whether it was a real wolf or not.

"Job-Creating Offshoring?"

Since we are already talking about immigrants, may as well continue the Lou Dobbs type topics. Here is evidence from Japan that offshoring may help to create domestic jobs:

Job-creating offshoring?, by Mitsuyo Ando and Fukunari Kimura, Vox EU: European business is internationalising its supply chain; European manufacturing employment is falling. The correlation – combined with a lively anecdotes of West European jobs being transferred to low-wage Central European nations – has given rise to a growing choir of anxious voices. Public opinion and politicians both worried that globalization would ship jobs abroad and domestic workers will suffer.

The term 'hollowing out' is not new. Kūdōka (hollowing-out due to offshoring) has been a concern in Japan since the mid-1980s. Since it has been going on so long in Japan, it is natural place to look to the Japanese data for the employment impact of this new form of manufacturing organisation.

Theoretically, the effect of offshore outsourcing on domestic operations may be positive or negative. The outcome depends on whether the cost savings from offshoring make the firm more competitive, inducing it to expand at home, and whether the activities abroad are complementary to domestic operations. Thus, the effect of foreign direct investment (FDI) on the home labour market is an empirical issue. This column examines the globalizing activities of Japanese firms, with a particular emphasis on East Asia.

From the mid-1980, East Asian firms began to 'unbundle' their manufacturing processes by slicing up the value-added chain, a trend that accelerated in the 1990s. This fragmentation of production processes across the region resulted in a massive increase in the vertical trade of parts and components. Japanese firms have been major players in these international production and distribution networks, especially in the manufacturing sectors. As these firms have expanded their manufacturing operations in labour-abundant neighbours such as China, some in Japan have shared the fears expressed in Europe and North America about the impact of firms investing abroad to take advantage of the large wage gap between developed and developing countries. In a new CEPR Policy Insight, we use extensive data on the behaviour of Japanese firms with and without operations abroad to assess whether offshoring is a boon or bane to domestic manufacturing.[1]

Main findings Japanese firms are major players in East Asian production and distributions networks, and the acceleration of Japanese investment in East Asia, especially in manufacturing, over the last decade has spurred fears that Japanese domestic production may be hollowed-out by offshoring. However, the data demonstrate complementarity between firm-level trade and FDI, suggesting an increasing unbundling of manufacturing processes across production and distribution networks in East Asia. Therefore, firms establishing affiliates abroad need not shrink their domestic activities, as these operations are often complementary to the rest of the value added chain.

Using comprehensive firm-level data, we examine the relationship between firms' offshoring of activities and their domestic operations. The statistics and our formal analysis both suggest that globalising manufacturing firms are less likely to reduce their domestic employment than other firms. In fact, controlling for other firm characteristics, they experience greater job creation at a rate as high as 8%. Unfortunately, the dataset does not permit analyses of the skill structure of labor that is directly employed. We so however clearly observe that Japanese firms intensifying operations in East Asia tend to retain domestic operation including employment, more successfully than other firms – particularly in the case of SMEs globalizing their activities. Indeed, we find that SMEs expand domestic operations while offshoring.

These findings provide evidence that fears of offshoring may be unwarranted. Increased globalisation of manufacturing processes does not necessarily imply a hollowing-out of domestic production, and in Japan's recent experience, firms that go abroad expand employment at home relative to non-globalisers. In East Asia, at least, there is evidence that domestic workers ought to welcome offshoring by their employers. [See original for references and footnotes].

Bush's Press Conference

For some reason, today's press conference brought this picture to mind:

Pressconference2

What would your dialogue/thought bubbles say? [Update: The WSJ's Washington Wire says reporters were tougher than usual today. Has the tone changed? Will hard questions finally be asked? I'm skeptical. Update: This is less kind to the press.]

Multiply by Ten

A reminder about opportunity costs:

Now and Forever, by Bob Herbert, Commentary, NY Times: Most of the time we pretend it's not there: The staggering financial cost of the war in Iraq, which continues to soar, unchecked...

A report prepared for ,,, the Joint Economic Committee of the House and Senate warns that without a significant change of course in Iraq, the long-term cost of the wars in Iraq and Afghanistan could head into the vicinity of $3.5 trillion. The vast majority of those expenses would be for Iraq.

Priorities don't get much more twisted. A country that can't find the money to provide health coverage for its children, or to rebuild the city of New Orleans, or to create a first-class public school system, is flushing whole generations worth of cash into the bottomless pit of a failed and endless war. ...

President Bush's formal funding requests for Iraq have already exceeded $600 billion. In addition to that, the report offers estimates of the war's "hidden costs" from its beginning to 2017: the long-term costs of treating the wounded and disabled; interest and other costs associated with borrowing to finance the war; the money needed to repair or replace military equipment; the increased costs of military recruitment and retention; and such difficult to gauge but very real costs as the loss of productivity from those who have been killed or wounded.

What matters more than the precision of these estimates (Republicans are not happy with them) is the undeniable fact that the costs associated with the Iraq war are huge and carry with them enormous societal consequences.

Far from seeking a halt to the war, the Bush administration has been considering a significant U.S. military presence in Iraq that would last for many years, if not decades. There has been very little public discussion and no thorough analysis of the overall implications of such a policy.

What is indisputable, however, is that everything associated with the Iraq war has cost vastly more than the administration's absurdly sunny forecasts. The direct appropriations are already roughly 10 times the amount of the administration's original estimates of the entire cost of the war.

Senator Schumer and other Democrats on the Joint Economic Committee have been trying (not very successfully, so far) to get other policy makers and the public at large to focus on the sheer insanity of pumping hundreds of billions — if not trillions — of public dollars into a failed venture with no end even remotely in view.

There are myriad better ways to use the many millions of dollars that the U.S. spends on Iraq every day. Two important long-term investments that come to mind — and that would put large numbers of Americans to work — are the development of a serious strategy for achieving energy independence over the next several years and the creation of a large-scale program for rebuilding the aging American infrastructure.

To get to those, or any number of other important initiatives, the country's leaders will have to somehow get past their bizarre reluctance to end this debilitating war. ...

Youngsters who were just starting high school when the U.S. invaded Iraq are in college now. Their children, yet unborn, will be called on to fork over tax money to continue paying for the war.

Seriously. How long do we want this madness to last?

links for 2007-12-04

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