Monday, December 21, 2015

The San Antonio Express-News Printed An Article By Me On Terrorism

It does not seem to be online anywhere. It is titled "Fight Terror With Entrepreneurship." It is in the Monday, Dec. 21, 2015 edition on page A11. Here is what I sent them:

Last year the Peruvian economist Hernando de Soto wrote an article in The Wall Street Journal titled The Capitalist Cure for Terrorism Military might alone won’t defeat Islamic State and its ilk. The U.S. needs to promote economic empowerment . He favored promoting economic empowerment in less developed countries.

In his research, de Soto has documented the great difficulties poor people face in legally starting a business and establishing titles to property. When you can’t get title to a property and establish that you own it legally, it makes it hard to get credit at a bank. That limits your business’s size and income.

Any business a poor person starts remains in the underground economy and can’t grow and flourish to its full potential. Just starting a business legally in a less developed country can take months of filling out a great deal of paper work, something only the well off and well educated can do easily.

In Egypt, de Soto says in another article, Egypt's Economic Apartheid “To open a small bakery… would take more than 500 days” and “an aspiring poor entrepreneur would have to deal with 56 government agencies.”

He explained how the Shining Path terrorists were defeated in Peru. A change in policy “gave indigenous entrepreneurs and farmers control over their assets and a new, more accessible legal framework in which to run businesses, make contracts and borrow.”

This led to more economic growth than the rest of South America as well as a faster growing middle class. He recommended doing the same in Arab countries.

In the Arab Spring in 2010, the big problem was small entrepreneurs being harassed by government bureaucrats who constantly demanded bribes and payoffs to let them continue operating their businesses.

James Surowiecki wrote a similar article in The New Yorker in 2011 called The Tyrant Tax. He argued that the stifling of entrepreneurship was especially hard on young people since it limits their opportunities and slows down economic growth.

That just increases their chances of turning to terrorist groups like ISIS. But given we have a case, Peru, where terrorism was successfully fought through the expansion of entrepreneurship, we should again be looking at it as a viable policy option.

The views of de Soto and Surowiecki are supported by more widespread research done by economists William Easterly and Ross Levine. They found that institutions matter more for economic growth than natural resources.

What are those institutions? They include, along with political stability, protection of property, security of contracts and freedom from regulatory burdens.

How much difference can this make? If Mexico had the same institutions as the U.S., its per capita income would be just as high, instead of only being about one-third as much.

If there were greater opportunities in Arab countries because regulatory burdens were eased, then maybe fewer young people would turn to terrorism.

Fighting terrorism through reduced regulations might seem farfetched. But George McGovern, the very liberal democratic candidate for president in 1972, told of how the regulatory burden affected him.

He ran an inn after he left the senate. It went bankrupt and he wrote in a Wall Street Journal article that costly regulations may have played a role. He also noted that we should make sure policies are not “choking off those opportunities” for entrepreneurs.

If someone like McGovern had problems with regulations, just imagine how hard it is for a poor entrepreneur in a less developed country who faces even more bureaucracy, delays and red tape. We get slow growth economies that fall short of opportunities for young people, creating a breeding ground for terrorism. Hernando de Soto shows us this can be reversed.


A good resource on these issues is the book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity By William J. Baumol, Robert E. Litan, Carl J. Schramm

Tuesday, December 15, 2015

What Anthropologist Melvin Konner Fails To See When He Criticizes Economists And Their Views On Gift Giving

See What Economists Fail to See in the Act of Gift-Giving: New research suggests why holiday gifts—unlike purchases for oneself—have a value far higher than some economists previously thought from the WSJ. Here is a letter I submitted to the WSJ:
"Melvin Konner takes economists to task because they ignore the fact that gifts symbolize your friendship with someone else and instead focus only on their efficiency ("What Economists Fail to See in the Act of Gift-Giving," Dec. 5.) He argued that gifts have sentimental value, too. That may be true, but we could just as easily see gift giving as an example of what economists call signals. If I spend money on a gift for you, that signals that I am willing to incur a cost to show to you that I am truly your friend. You would not spend money on another person if you did not think you were friends. Konner actually hints at this when he says we feel cheated if we give gifts to a friend but they never reciprocate. Their not spending money on us signals their lack of feelings for us."
 To me, just the very fact that we spend money to prove to another person that we are their friend shows that economics is a very significant part of gift giving. Konner did not mention this possibility at all.

Friday, December 04, 2015

The unemployment rate held at a 7-1/2-year low of 5 percent

See Sturdy U.S. employment report a green light for December rate hike.

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers.

We could look at the employment to population ratio. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work). Click here to see this data from the BLS.

The percentage of 25 to 54 year olds employed went from 77.2% to 77.4% in Nov. It was 79.7% in Dec. 2007, month recession started. So there might still some catching up to do.