Scroll down to find a specific post on this archive. For searching the entire archive, use this search tool.

George Soros is richer than I am, and Joseph Stiglitz is more academically distinguished than I am, but that does not mean that they are beneath criticism. With much rhetorical flourish, Stiglitz expresses contempt for free markets and praise for Soros.

I strongly agree with the spirit of two of his proposals—the more advanced industrial countries should absorb more risk...

U.S. lenders want to be repaid in dollars rather than in local currency. Developing country enterprises earn revenue in local currency, not in dollars. Thus, they have to absorb the risk.

In my opinion, there is no way around this. If the foreign country tries to use dollars as domestic currency, you have the Argentina problem. If you force lenders to accept payment in local currency, then they need to charge a higher interest rate to compensate for the currency risk. If you want to enact a subsidy for loans to developing countries, fine. But neither the financial genius Soros nor the economic genius Stiglitz can come up with any way to eliminate the risk premium by magic.

Soros rightly notes the marked slowdown of flows of funds to the emerging markets after the 1998 crisis. "Taking resident lending, portfolio investment, and private credit flows together, there has actually been a net outflow from emerging markets since 1997, going from positive $81.7 billion in 1996 to a negative $106 billion in 2000, offset by slightly larger inflows of foreign direct investment and by official financing." This is an odd situation, and for anyone who believes that the key problem of development is lack of finance, it is deeply troubling.

Stiglitz says that developing countries are in a box. They need capital inflows. Capital inflows necessarily imply trade deficits. Trade deficits create loss of investor confidence, leading to reduced capital inflows.

The problem with this story is that it is pure macroeconomics, without any micro. From a microeconomic perspective, foreign investment works if and only if the investments are sound. If the investments are sound, then the earnings from the investments will sustain investor confidence.

If what developing countries lack is finance, then those few investors who do put money in developing countries would earn outstanding rates of return. The fact that they do not do so probably reflects internal market failures in the developing countries. Often, these are regulatory restrictions and excessive government involvement.

Capital inflows don't enrich countries. Profitable investments enrich countries.

Discussion Question. Both Stiglitz and I have used rhetoric to state our positions. Where can one find evidence to help evaluate which of us is correct.

According to Zimran Ahmed, the problem with spectrum is not that private ownership is too strong but that it is too weak.

All the considerable waste in spectrum exists because the spectrum users don't own it in perpetuity or it has encumbrances on its use, which means it can't be freely sold. Strong property rights would solve both problems.

Elsewhere, he writes

To date, spectrum licensing has been the single most damaging government intrusion into the technology world...

...there is nothing more logical than a spectrum auction. Those most able to profitably use the spectrum will bid the highest for it, and if they get it wrong they can then sell those rights to other people. The market will decide which uses it most values, and those holding spectrum inefficiently will bear the opportunity cost and so sell the spectrum to those who can use it better. Spectrum is a rival good, so strong property rights and a free market will allocate it best.

Discussion Question. Why is a spectrum auction, which allocates spectrum to private owners, so much more efficient that spectrum licensing, which allocates spectrum to specific uses?

Back when the California energy crisis was news, Paul Krugman said that there was price-fixing going on, and that this showed that the Texas oil industry is evil. This story has good news and bad news for Krugman. The good news is that there is evidence of price fixing. The bad news is that the party responsible was not from Texas.

...it turns out that the state-created Independent System Operator, or ISO, was the one rigging the price of power, not the evil private generators who everyone suspected.

As of now, the state government is more involved than ever in the California energy market. What does this suggest about the possibility of another energy crisis there this summer?

The liberal refrain is that "We cannot afford tax cuts." Then how can we afford this?

This week the Senate is expected to approve the final farm bill, a 10-year, $173.5 billion bucket of slop...By the time all the handouts and payoffs were complete, the well-fed conferees had agreed to increase agricultural spending by no less than 70%.

...The bulk of this bill's new flood of subsidies will go to a select group of wealthy wheat, rice, corn, cotton and soybean growers

Discussion Question. How much more is spending likely to increase in a year in which the Senate is closely contested, compared with a year in which the Senate is not up for grabs?

Alan Krueger describes an economic development program that works.

The idea is simple: pay poor families to send their children to school and visit health care providers. Careful evaluations suggest the strategy is working.

...the educational benefits of Progresa alone exceed the costs by 40 to 110 percent. The effects on health and nutrition raise the benefits even further.

Discussion Question. How many developing countries have countries that would resist such a program because it encourages education of girls? How many would resist because the money goes directly to families, rather than to the government?

Economists do not dare to try to forecast thirty years ahead. That job is left to folks like Ray Kurzweil and Gregory Stock, as reported by Reason's Ron Bailey.

Kurzweil thinks the future will be both biotech and nanotech. The first two decades of the 21st century will be the golden age of biotechnology, featuring tissue engineering, the immortalization of cells and organs using telomeres, rational drug design, simulations replacing animal testing, and the repair of genetic defects. The third and fourth decades will be the golden age of bionanotechnology..."We will make progress equivalent to that of the whole 20th century in the next 15 years," Kurzweil predicts. "Progress in the 21st century will be equivalent to 20,000 years of progress at today’s rate of progress."

...He suggested that people’s notions of machines have to be revised – we will grow to see them not as merely cold, inflexible, and brittle gadgets, but as helpful and necessary devices, as soft and subtle as human tissues. Kurzweil is convinced that a person’s computationally powerful nonbiological components will eventually overwhelm his biological remnants. Perhaps a person’s biology would then become simply superfluous.

Discussion Question. Kurzweil is predicting that growth will be 200 times as fast in the 21st century as it is currently. So, if GDP per capita grows at 2 percent per year today, it will average 400 percent per year for the century as a whole. Is that a reasonable estimate?

Brad DeLong posted an article on his blog that asserted that labor productivity is higher in several European countries than in the U.S. I was surprised, as this runs counter to the fact that overall GDP per capita is higher here. I emailed him, and he sent me this link to a Bureau of Labor Statistics publication, which provides the data along with some perspective.

...productivity in France is above that of the United States. But, this productivity advantage is eroded by the effects of fewer working hours and lower labor force participation rates, particularly among the working age population.

...efforts by France to increase labor force participation might reduce that country's productivity while increasing per capita income. Moreover, relatively high wage costs in European countries may have induced rapid substitution of capital for labor in these countries relative to the United States...

Or, as DeLong put it in his email,

if you want to boost average labor productivity above $10 an hour, make it uneconomic to employ anyone who would produce less than $10 of stuff an hour.

Discussion Question. What are some of the labor policies in Europe that make it uneconomic to employ workers who would have jobs if they were in the United States?

In my insightful but overlooked TechCentralStation column, I did not make precise the calculations underlying my claim that hard disk drives make CD's obsolete as music storage devices. With help from a site called Disenchanted.com, which seems to keep the identity of its authors uncertain, I can be more specific.

The first piece of information that Disenchanted provides is the current capacity of a typical hard drive--40 gigabytes. Next, Disenchanted estimates that one minute of music compressed as MP3 requires one megabyte. Putting these figures together, a typical hard drive has a capacity of 40,000 minutes of music. If a typical CD gives you 80 minutes of music for $15, then a hard drive with pre-loaded music would be worth $7500. In other words, CD's have become a really expensive way to distribute pre-loaded music, compared to hard drives. What the music industry is struggling against is not copyright theft--it's the obsolescence of the CD.

I try to summarize all of Introductory Macroeconomics in a single essay.

Her advice is unapologetically platitudinous:

...act sensible and don't expect to get rich on the stock market. Allocate your assets between different securities and different industries. Don't put all your eggs in one basket.

Not unlike my advice in Invest Wisely.

Discussion Question. Why do people insist on trying to beat the market, when economists tell them that it's a sucker bet?