Stumbling and Mumbling

"Contacts, contacts, contacts"

Commenting on Blair's latest job - advising Zurich Insurance on climate change - Bryan Appleyard says:

I know more about climate change than Tony Blair; if I had a dog and had taken it on my last trip to see Jim Lovelock it would know more about climate change than Tony Blair.

He's right, but misses the point. What Blair's selling is not expertise but contacts - not human capital but network capital.
And there's tons of evidence that network capital matters. Knowing other researchers allows scientists to collaborate on generating ideas. Social capital is often crucial in helping scientists turn inventions into companies. Non-executive directors are often useful not so much for their expertise as their contacts with suppliers or customers. And it's a knowledge of other people that helps entrepreneurs make money; any good salesman will tell you that it's at least as important to know your customer as your product.
It's for reasons like this that the internet and mobile phones can boost economic growth, particularly in Africa, and this may be why the privately educated earn more than the state educated, even controlling for qualifications.
Indeed, it could be that network capital is actually more important in raising incomes than human capital. I mean four things:
1. What looks like a return to experience is in fact a return  to knowing more people. If you've done a job for a few years, you'll have met likely employers and your reputation will have grown. Beyond a certain point, it may be these that raise your earnings more than the technical skills you've acquired from an extra year of work. This, surely, accounts for Blair's high earnings now.
2.  Returns to human capital might be over-estimated, if a university education serves to signal ability rather than merely develop it.
3. This lovely paper (pdf) by Marcel Fafchamps estimates that, among agricultural traders, network capital gives a higher return than human capital.
4. Macroeconomic evidence for a strong link between human capital and subsequent growth is surprisingly weak; see, for example, the critiques here (pdf) here (pdf) and here (pdf). 
Which brings us to a nice irony. Blair famously said the key to economic success, for individuals and economies, was "education, education, education." But his subsequent career demonstrates that what might be more important are "contacts, contacts, contacts."

Suicide bombing doesn't work

Forget the morality, suicide bombing just doesn't work. That's the message of this paper by David Jaeger and Daniele Paserman on the Palestine-Israeli conflict:

We find that a successful suicide attack in week t-1 on average leads to approximately six more Palestinian fatalities in week t: we can reject the null hypothesis that this coefficient is equal to zero at the 5% level.

What's more, there's no tit-for-tat here. It's not the case that Israel's attacks on terrorist leaders trigger revenge attacks - quite the opposite:

There is a statistically significant negative effect of successful target killings on Israeli fatalities [in the following week], indicating that killing militants in one of the violent Palestinian factions has an incapacitation or deterrent effect.

However, although Israeli attacks reduce actual Palestinian violence, they increase intended violence - unsuccessful suicide attacks and the like - if the attacks are mild. The authors estimate that intended Palestinian violence rises if there are up to 3.3 targeted Israeli killings the previous month, but falls thereafter.
This suggests that  a tough Israeli response works, but a moderate one doesn't.
The bigger lesson is that suicide bombing is just a bad military strategy.
But the problem is that suicide bombers might, to use Nozick's distinction, be  pursuing symbolic utility rather than causal utility.

Geography, slavery and development

There's a widespread view (pdf) that Africa's lack of economic development is due in part to unfavourable geography. However, a fascinating new paper (pdf) suggests this might be wrong, in at least one respect.
Authors Nathan Nunn and Diego Puga looked at the link between one geographical feature - the average hilliness of a country - and income.
In principle, hilliness should retard growth. It makes it harder to build roads, thus inhibiting trade. It makes irrigation of land difficult, and it limits the growth of cities and hence the gains of agglomeration.
And the data corroborates this, on average. But only for non-African countries.
In Africa, they found, the net effect of the ruggedness of its terrain is positive; countries with one standard deviation hillier landscapes, on average, have 27% higher per capita income.
The reason for this is straightfoward. The ordinary negative effect of ruggedness is offset by a positive effect. Hilly countries escaped the worst predations of the slave trade, because Africans could hide from slave traders in the hills. And other work (pdf) by Nathan Nunn has found that slave exports between 1400 and 1900 are strongly negatively correlated with income even today.
In protecting Africans from slavery, a rugged terrain therefore helped the economy.
But not entirely. Nunn points out that because attempts to escape the slave trade led Africans to populate rugged areas, subsequent growth has been lower because of the negative effects of bad terrain upon economic activity.

Abolish GDP

Imagine real GDP were to grow by 2% a year - roughly its average for the last 100 years - for the next 1000 years. Average incomes in 3007 would then be 398 million times higher than they are now. But can you imagine the average person being 398 million times happier than they are now?
Probably not.
And if the long-run connection between GDP and well-being is weak, GDP must be a bad measure of well-being in the short-run; the Easterlin paradox is real.
In this new paper (pdf), Jeroen van den Bergh summarizes this and other faults with GDP as a measure of well-being - and he argues that we should abolish the measure entirely.
Measures of GDP are worse than useless, he says, as they cause people to panic about recessions or falling behind other countries, without offering any offsetting useful information.
This doesn't mean we should aim for lower economic growth. But it does suggest Bullingdon Boy was right: "it's time we focused not just on GDP, but on GWB - general well-being."
Of course, there are some other indicators of aggregate well-being. But we don't need to replace GDP with these.
Perhaps we don't need any aggregate measure of well-being at all.
Put it this way. Say there's just the two of us. We'd agree to do things that make us both better off, and we'd agree to not do things that'll make us worse off. And if something benefits you but harms me, we can negotiate a side-payment that either compensates you for not doing it, of compensates me for the harm (depending on who has the relevant rights).
In this Coasean world, we just don't need any measure of aggregate well-being of the two of us.
So, rather than fret about aggregate measures, governments should focus on moving us nearer to this Coasean world. This means: clearly assigned property rights, individual power to walk away from repressive bargains; cuts in transactions costs that prevent mutally beneficial trades; and mechanisms to ensure that externalities get internalized.

Growth as an unintended consequence

Chris Bertram's kicked off a nice debate. He said, endorsing Mill:

The goal of our policy ought not to be one of continual struggle for growth.

Tyler Cowen and Glen Whitman reply that economic growth is indeed a good thing.
But might they all be right? Could it be that growth shouldn't be an aim of policy, but rather that it'll emerge naturally, as a result of desirable policies? In other words, growth is an unintended consequence.
Put it this way. If people have freedom of thought and expression, they'll come up with ideas and innovation. If we have secure property rights (a pre-condition of which might be greater equality) people will be willing to invest. If we have good schools, people will get the skills needed to earn good money.
Economic growth, then, can emerge as a result of policies and institutions that are intrinsically good.
Turn the argument around. Old Soviet bloc economies attached a high priority to growth - all those five-year plans. But they failed to achieve it (at least after around the 1960s) because the preconditions for growth weren't in place.
The old Soviet bloc might well have had more growth if it had prioritized liberty over growth.
So here are my questions. I ask Chris: do you want policies that actually restrain growth? Or do you just want whatever growth arises from your preferred policy framework? And I ask Tyler and Glen: what policies do you want that would raise growth and which are not desirable for other reasons?
I suspect there's less difference of opinion here than one might think.

Healthy economy, unhealthy hearts

A stronger economy causes more heart attacks, according to this new NBER paper by Christopher Ruhm:

A one percentage point reduction in unemployment is predicted to raise acute myocardial infarction (AMI) mortality by 1.3 percent, with a larger increase in relative risk for 20-44 year olds than older adults, particularly if the economic upturn is sustained. Nevertheless, the much higher absolute AMI fatality rate of senior citizens implies that they account for most of the additional deaths. This suggests the importance of factors like air pollution and traffic congestion that increase with economic activity, are linked to coronary heart disease and may have particularly strong effects on vulnerable segments of the population, such as the frail elderly. AMI mortality risk quickly rises when the economy strengthens and increases further if the favorable economic conditions persist.

An earlier version of the whole paper is here.

Happiness and economic growth

Will Wilkinson lays into Andrew Oswald’s argument that governments should pursue happiness rather than economic growth. There’s one passage I want to dispute. He asks economists:

Tell me, is your faith in the value of growth diminishing? Do you think the world would be a more happy or a less happy place if world GDP growth slowed, such that the incomes of all the billions of people living in abject poverty (for whom the effect of income on happiness appears to be profound) grew at slower rate?

I think this elides two important distinctions.

1. Between rich and poor nations. No-one doubts that higher incomes will be a great thing in sub-Saharan Africa, where they can make the difference between life and death. Andrew’s argument against pursuing growth applies only to richer nations, where the correlation between incomes and well-being is weaker. This paper (pdf) makes the point well for Scotland, where health and well-being are low despite reasonable incomes.

2. There’s a big difference between opposing targeting economic growth and actively welcoming lower growth. One reason why I want politicians to stop promising to increase growth is not that lower growth would do us good but simply that governments have not been able to deliver this promise. This paper (pdf) concludes:

The many policy packages used across…countries did not have significant long-run effects on relative growth rates. We conclude therefore that long-run growth rates are determined by international factors, and are insensitive to national policies, especially for small countries. This implies severe restrictions on the ability of most governments to increase national long-run growth rates.

Of course, this tells us only that the policies governments have tried have not increased growth. Maybe policies they haven’t tried will raise growth.

And here’s a paradox. Maybe policies aimed at increasing happiness will be more successful at increasing growth than have been policies aimed directly at increasing growth.

The idea here is simple. Any happiness-oriented policy will want to build social capital; it’s networks of friends that make us happy.

And guess what? There’s reason to believe that social capital promotes growth (pdf).

Maybe faster growth is one of those things that we can only get if we aim at something else. If so, those who want faster growth should welcome happiness-oriented policies.

18-year-olds: then versus now

Which is better: to have been an 18-year-old in 1982, as I was, or an 18-year-old today? Polly Toynbee thinks the latter:

This is the golden age - so far. There has never been a better time to be alive in Britain than today, no generation more blessed, never such opportunity for so many. And things are getting better all the time, horizons widening, education spreading, everyone living longer, healthier, safer lives.

For me personally, though, I’m very glad I’m not an 18-year-old today.

If I were 18 today, I wouldn’t have gone to grammar school, I’d have been frustrated by an educational system that teaches to the test rather than encourages inquiry. And I’d be anticipating leaving university with £10,000 of debt.

Perhaps worst of all, grade inflation since the early 80s means I would not have been able to signal my ability to prospective employers. In my day, decent first degrees and a masters were sufficiently scarce to get me decent jobs. Not so today.

I suspect, then, that if I were 18 today, my personal chances of well-paid fulfilling work would be lower than they have been for the actual 18-year-old of 1982.

My taste is that this disadvantage is so big that it outweighs the huge benefits that 18-year-olds today have: the internet, mobile phone and iPods, and of course an extra 25 years of call options on future technological change*.

This is very much a personal thing – I’m the sort of person who would have lost out from the “education spreading” celebrated by Polly: the bright but socially awkward working-class boy. And I, more than most, benefited from the boom in the City in the mid-80s that today's 18-year-old cannot reasonably anticipate.

There is a wider issue here. On average, people are better off today than 20 years ago. But not everyone is average. Even great progress has its losers – and these are not necessarily either obvious or blameworthy for their fate.

* A caveat - one uncertainty here is the course of medical technology. It would be a bit of a bummer if they discovered the secret of immortality just after you died – or would it?

Openness and development

Tim and Jim are having a good set-to about the link between trade liberalization and development. It started when Jim objected to Stephen Pollard’s claim that: “The engine of growth, without which countries remain in poverty, is trade. Tariff protection keeps resources in unproductive low-return activities.”

Jim replies:

If he is right that trade liberalisation is the road to riches, wouldn't we expect the Third World region with the most liberalised trade policy to be the richest? But which one is the most liberalised? According to the World Bank, that would be sub-Saharan Africa.

Tim retorts that tariff barriers understate the barriers to trade in Africa; the problems there, he says, are bad transport and corrupt tax systems.

My take is that both Jim and Tim are right.

Jim’s right to reject the simple view that trade creates growth. The empirical evidence is weaker than you might think. Dani Rodrik’s classic paper (big pdf) concludes:

We are skeptical that there is a strong negative relationship in the data between trade barriers and economic growth…the search for such a relationship is futile.

More recent research by Roberto Rigobon has challenged this. But even this has merely shown that you need immense econometric spadework to find only a weak link.

There are two reasons for this lack of a robust relationship. One is that it is not necessarily the case, as Tim claims, that “it is trade, with the associated playing out of comparative advantage and the division of labour, that makes places rich.”

It’s theoretically possible that free trade would lead a poor country to specialize in industries requiring unskilled labour. If these are industries with poor growth prospects, such an open economy might well grow slowly. (This raises the question: what exactly are the links between allocative efficiency and fast growth?)

The second reason – and I think the more important one - is that it is not a closed economy per se that depresses growth, but rather all the things that are often but not always correlated with being closed. Once you control for these, the link between openness and growth weakens.

It’s here that Tim is spot-on. Bad transport or corrupt tax systems can both depress growth and cause economies to be closed. In such cases, low tariff barriers won't do much good. There are other examples.

A country might be closed because a dictatorial government discourages links with the outside world. North Korea is a poor closed economy. But it’s poor mainly because of a crap government, not merely because it’s closed.

Anything that depresses investment – lack of confidence, low education, insecure property rights, bad capital markets – will cause low imports of capital goods. In the data, it will look as if a closed economy (in the sense of a low import-GDP ratio) leads to slow growth – but again, the causal link is different.

Examples like these mean that if a government can provide secureish property rights, good education and confidence, it could get good growth even with tariff barriers - as China and India have shown. And conversely, a country with low tariff barriers but no other pro-growth factors in place won't grow.

So, maybe it’s not trade in itself that matters for growth, but rather the attitudes that generate trade – sound property rights, an interest in the outside world (including a willingness to attract FDI), and good government. As Roberto Rigobon put it: “It is openness in a broad sense – as part of the overall economic, policy, and institutional environment – that is conducive to growth.”

I’ll leave you with a question. Why do we need single simple big ideas here? Why look for a “one size fits all” strategy? In this paper (pdf) Dani Rodrik says we should abandon such ideological pretension, and just ask: what exactly is the main bottleneck stopping this particular country from growing? What’s wrong with this?

Another thing: If you accept the view that there's no link between tariff barriers and growth, it does not follow that you should support trade restrictions. There's a world of difference between believing tariff barriers in general don't retard growth, and believing that a particular tariff on a particular product will do positive good.

Blair's economic vandalism

In Labour's manifesto, Tony Blair boasts - yes boasts - of having started to destroy the UK economy. By this I don't mean his tax-and-spend policies. I'm referring to a far greater damage. He says New Labour  has "banished the demons...of outside toilets in our schools."
This poses the gravest threat to our economic future. Outside toilets, particularly for children, are a much over-looked contributor to economic growth.
The fact is, the cold is a vital stimulus to intelligence and education. Just look at the cross-country evidence. Except for a few east Asian countries, tropical nations have generally low education. It's colder, north American and north European countries that have the best qualified people.
Look at Russia. Their idea of fun is playing chess.
Which university has produced the most Nobel prize-winners in economics? Chilly Chicago. Not the University of Mobile, Alabama.
Or just look nearer home. Who is the greatest genius this country has produced? Isaac Newton, inventor of thre catflap. Born and raised in Lincolnshire. Wind sweeps in straight off the Urals.
And what about the Scottish Enlightenment? How can a small country have produced such a great flowering of intellect? Because the stimulus caused by the cold offset Scotchmen's natural genetic weaknesses, that's how.
It's not just the cross-sectional evidence that shows how important the cold is to intellectual endeavour. Look at the time series. There was a little ice age  between the 14th and  19th centuries. Several studies agree that temperatures were especially low in the mid-1400s and early-mid-1600s. One gave us the renaissance. The other was the formative period for the fathers of modern philosophy: Descartes, Spinoza, Hobbes, Locke. Coincidence? Pah.
And just look at anecdotal evidence - me. Went to a Victorian grammar school, Oxford and Manchester  universities - the last in a cold winter. Left them a clever bloke. But since I've lived in the warm south, I've turned into a mushy-headed moron.
Case proven. People need to feel cold if their intelligence and learning are to develop. Anything that warms them up, like inside toilets, therefore deters human capital formation and innovation. The two major sources of economic growth, then, are in jeopardy from New Labour's reckless policies.
And not just those two. Outside toilets also promote capital formation.
It's a biological fact that you can't crap when you're cold. Outside toilets therefore teach kids to bake their turds. This instills in them the importance of deferred gratification. And this, in turn, encourages savings and therefore investment. Is it a coincidence that the decline of outside toilets a few decades ago  has led today to worries about a looming pensions crisis? I think not.
So, the abolition of outside toilets in schools poses the gravest threat to the future of the British economy. In years to come, generations will look back on this dark period in history and curse the name of Blair.