Month: June 2014

I\’m usually opposed to book-burning, but I\’ve recently discovered that Haverford College, where I graduated in 1982, used to have a tradition of book-burning that seems to me admirable and even enviable. It worked like this: Back in the 1880s, the sophomore class was responsible for choosing their least favorite book. They then planned an elaborate ceremony–marches, costumes, songs–to be held near the end of the academic year. A common highlight of the ceremony was that the worst book was put on trial, with arguments for and against, and when the inevitable conviction was announced, a copy of the book was burned at the stake. Of course, the fact that a book was convicted and executed one year didn\’t mean that students were able to avoid reading it the next year.

Some details are available at at a website run by the Quaker and Special Collections part of the Haverford Library. Here\’s one of the invitations to the event (the pointing fingers are added to the image by the librarians, and at the website they link to comments and translations):

When Americans consider the costs and benefits of policy actions, should we also be counting costs and benefits for people  in other countries? Ted Gayer and W. Kip Viscusi point out in \”Determining the Proper Scope of Climate Change Benefits,\” (June 3, 2014) that U.S. environmental regulators seem to have started counting global benefits when looking at costs and benefits of U.S. policies with regard to climate change.

Of course, any benefits from reducing climate change have global effect. Gayer and Viscusi refer to one which estimated that for a global reduction in the effects of climate change, the United States would receive 7-10% of the benefits. They point out that if the U.S. benefited relative to it share of world GDP, it would receive 23% of the benefits from reducing effects of climate change. Here\’s a recent example comparing global benefits to domestic costs (footnotes omitted):

More recently, the EPA proposed regulations to limit CO2 from existing power plants.
For this rule, EPA estimated climate benefits amounting to $30 billion in 2030 using a 3 percent discount rate. However, assessing these benefits in a manner that is consistent with the methodology developed by the Working Group, only 7 to 23 percent of these benefits would be domestic benefits. As a result, the domestic benefits amount is only $2.1 billion-$6.9 billion, which is less than the estimated compliance costs for the rule of $7.3 billion. (Note, however, that EPA also claims substantial air-pollution co-benefits for this rule, associated with reductions in particulate matter and ozone.)

In other words, the estimates are that the global benefits of the rule exceed the costs, but the U.S. benefits are much smaller, and may possibly (depending on how other factors are counted) not exceed the costs.

This concept of counting global benefits of U.S. regulatory actions is a clear departure from established practice. U.S. environmental laws and guidance for regulations are quite careful to specify that the cost-benefit calculations should be done for Americans. Explicit guidance for regulatory authorities from President Obama, as from previous presidents, has emphasized that they are to consider costs and benefits for \”the American people.\”As once example, Gayer and Viscusi write:

Subsequently, the U.S. Office of Management and Budget (OMB) developed a guidance document (known as Circular A-4) for regulatory impact analyses that maintained an emphasis on domestic benefits but permitted the reporting of foreign benefits if reported separately: “Your analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.”

But even if this practice of counting global benefits in the cost-benefit calculation is a departure from the norm, should it become standard practice? Or is it the kind of practice that will only be followed when convenient? The practice of counting global effects in U.S. government cost-benefit decisions raises some tricky issues. As Gayer and Viscusi point out, if U.S. government actions are to take benefits to foreign citizens into account on a regular basis, the policy implications could be striking.

It is important to note that granting the GHG [greenhouse gas] benefits to non-citizens equally to the benefits to citizens represents a dramatic shift in policy, and if applied broadly to all policies, would substantially shift the allocation of societal resources. The global perspective would likely shift immigration policy to one of entirely open borders, as the benefits to granting citizenship to poor immigrants from around the world would dominate any costs to current U.S. citizens. It would suggest a shift away from transfers to low-income U.S. citizens towards transfers to much lower-income non-U.S. citizens, elevating policy challenges such as eradicating famine and disease in Africa to the most pressing concerns for U.S. policymakers, trumping most domestic efforts in terms of their impact on social welfare. And a shift in policy towards fully counting the costs and benefits towards citizens of all other countries would suggest a drastic change in defense policy. A shift in policies to foster such efforts, while in many cases worthwhile, would not be consistent with the preferences of the U.S. citizens who are bearing the cost of such programs and whose political support is required to maintain such efforts.

It\’s easy to imagine other difficult situations that would arise. Imagine that U.S. environmental standards are tightened, and that as a result some U.S. companies decide to locate their manufacturing elsewhere. In this case, the economic gains received in other countries would be counted as a plus for the policy, which would presumably could be used to offset any economic costs the policy created in the U.S. economy.

Even if one takes the reasonable position that the U.S should give weight to benefits and costs incurred in other countries, there is a question of who determines how much weight will be given. Imagine a U.S. law which requires that U.S. companies abroad operate in a way that has certain standards for lower pollution, worker safety, not bribing public officials, and the like. Now also imagine that the other country would prefer not to have such laws, or to have lower standards. If the government of another country does not favor such laws, does the U.S. claim that people of that country gain anyway?

Economists often work with models that assume a diminishing marginal utility of of income: that is, gains or losses to people with low levels of income should have more social value than same-sized gains or losses to those which higher levels of income. (For example, this is the standard justification why society should favor a degree of redistribution, because the social cost of transferring a certain amount of income from those with higher incomes is less than the social benefit received by the recipients who have lower incomes.) But if this kind of cost-benefit analysis is to be applied to the world as a whole, costs and benefits in low-income countries will receive a greater weight than costs and benefits of the same size in high-income countries.

It seems to me that as a practical matter, the current federal rules about evaluating costs and benefits of government regulatory policies are correct: that is, evaluate them first in terms of effects on U.S. citizens, and if there are also effects on the rest of the world, by all means list them–but list the non-U.S. effects separately.

Bayer and Viscusi write: \”The question of whose preferences are to be counted in the calculation of net benefits is known as standing. There has been limited academic discussion about economic standing, with the more recent studies suggesting that standing cannot be resolved based on principles of benefit-cost analysis but instead depends on the ethical consensus of society …\” Of course, this is both true and a way for economists to make sure that the buck does not stop with them, but instead is handed off to \”the ethical consensus of society.\”

Epilogue: When thinking about how people regard their own well-being, in comparison to how they regard the well-being of people who live in faraway places, I always remember the comment by Adam Smith in his first book, The Moral Sentiments (Chapter III, Part III), where he points out
that for most people, losing your little finger would feel like a much larger calamity than the death of hundreds of millions of people in a faraway place like China. (Here, I quote from the ever-useful version of the book at the Library of Economics and Liberty website.)

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

Smith goes on to argue that people should and in fact do care about those who live elsewhere. I would add that governments should care about those in other places, too. But whether it\’s the case of climate change, or some other issue, it\’s important first to be clear on whether U.S. policies have benefits that exceed costs for the U.S. population, and then to look at the global dimensions.

In August 2013, the Federal Reserve Board of Governors, the key decision-making authority, had a full complement of seven members. Since then, four of them have resigned and one had their term in office expire, meaning that President Obama has found himself with a need to fill five slots. Here\’s the membership from August 2013:

• Ben Bernanke  (chairman, resigned January 31, 2014)
• Janet Yellen (vice-chair, became chairman on February 3, 2014)
• Elizabeth Duke (resigned August 31, 2013)
• Sarah Bloom Raskin (resigned March 13, 2014)
• Daniel Tarullo (term expires January 31, 2022)
• Jeremy Stein (resigned May 28, 2014)
• Jerome Powell (appointed in 2012 to a term that expired January 31, 2014) 

The prospect of having one president appoint five of the seven positions on the Board of Governors at about the same time is not how this institution is supposed to work.  Each member of the Board of Governors is appointed to a 14-year nonrenewable term, with confirmation required by the U.S. Senate. This pattern is intended to guarantee that the president can make a new appointment once every two years.

But the reality of terms and appointments to the Fed has one key difference from how it is drawn up on paper. People often leave terms early–that is, in less than 14 years. In that case, the replacement appointee serves out the remainder of that term, and the replacement then can be appointed to their own 14-year term after that. For example, Alan Greenspan first joined the Federal Reserve Board of Governors in 1987 and served out the remainder of the term that expired in 1992, before then being appointed to his own 14-year term which expired in 2006. Ben Bernanke was filling out a partially completed term at the Fed when he was a member from 2002-2005, but was then appointed to his own 14-year term in 2006.

So far, President Obama has appointed Stanley Fischer, who was confirmed by the U.S. Senate for a spot on the Board of Governors on May 28, but needs to be confirmed again to become vice-chair. The president has sent the Senate two other nominations: one for Jerome Powell to begin his own 14-year term, and Lael Brainerd, who had been undersecretary of international affairs at the U.S. Treasury. Powell and Brainerd are wending their way toward confirmation votes before the U.S. Senate. But even if or when they are confirmed, two of the seven slots on the Board of Governors will be empty. [Added: Powell and Brainerd were confirmed by the Senate today, June 12.]

The Federal Reserve has highly competent staff, and it can certainly continue to operate with its current complement of three official members (or four, given that Powell is continuing to serve while waiting to be confirmed to a new term). But the rationale for a seven-member board rotating on a 14-year cycle is that debate and discussion among a cohesive group are important to diagnosing the economy and to making policy decisions in this area, and that there is a value in continuity of experience with a slow and occasional inflow of fresh voices.

The Fed faces a number of tough decisions in the next few years: when and how to back away from policies of quantitative easing and return interest rates to more historically normal levels; how to deal with its new regulatory and consumer protection responsibilities in the aftermath of the Dodd-Frank financial reform legislation; and more broadly how to think about U.S. monetary policy in a globalizing economy where the euro is a soap opera and the U.S. economy is a decreasing share of world output. Although the new arrivals at the Board of Governors are certain to have background experience in at least some aspects of central bank operations already, the only way to accumulate experience on the job is actually to do the job.

There\’s no particular blame to be placed here for the high level of turnover at the Fed. But it\’s not how the institution is supposed to work. Here\’s my pledge: In the extremely off-chance that I am nominated to fill one of the vacant Board of Governor slots, I will only accept with the intention of serving the full 14-year term.

Yu Xie asks \”Is U.S. Science in Decline?\” in the Spring 2014 Issues in Science and Technology. The article is an abbreviated version of the Henry and David Bryna Lecture for 2013 that Xie gave at the National Research Council. The talk can be viewed here, and I\’ll lift a few of the slides from the talk for this post. As an overall perspective, Xie writes:

\”Science is now entering a new world order and may have changed forever. In this new world order, U.S. science will remain a leader but not in the unchallenged position of dominance it has held in the past. In the future, there will no longer be one major world center of science but multiple centers. As more scientists in countries such as China and India actively participate in research, the world of science is becoming globalized as a single world community. . . .Just because science is getting better in other countries, this does not mean that it’s getting worse in the United States. One can imagine U.S. science as a racecar driver, leading the pack and for the most part maintaining speed, but anxiously checking the rearview mirror as other cars gain in the background, terrified of being overtaken. Science, however, is not an auto race with a clear finish line, nor does it have only one winner. On the contrary, science has a long history as the collective enterprise of the entire human race. In most areas, scientists around the world have learned from U.S. scientists and vice versa. In some ways, U.S. science may have been too successful for its own good, as its advancements have improved the lives of people in other nations, some of which have become competitors for scientific dominance.\”

[O]ur analysis of earnings using data from the U.S. decennial censuses revealed that scientists’ earnings have grown very slowly, falling further behind those of other high-status professionals such as doctors and lawyers. This unfavorable trend is particularly pronounced for scientists at the doctoral level. . . . [S]cientists who seek academic appointments now face greater challenges. Tenure-track positions are in short supply relative to the number of new scientists with doctoral training seeking such positions. As a result, more and more young scientists are now forced to take temporary postdoctoral appointments before finding permanent jobs. Job prospects are particularly poor in biomedical science . . .

At some deeper level, however, Xie\’s article doesn\’t quite come to grips with fundamental problem. Many people support public funding for scientific research because they believe that it will translate into a stronger U.S. economy, along with better-paying jobs and a rising standard of living over time. This argument as a strong historical foundation: that is, there are many examples in the U.S. and in other countries where scientist and industry interacted in this way. But in a globalizing economy, the linkage from science to the economy is less clear. If a new scientific discovery leads to a company with a U.S. headquarters and research lab, but production facilities someplace like Mexico, China, Indonesia, or South Africa, the economic payoff from that scientific discovery becomes less clear. Thus, while I would support a dramatic expansion of R&D efforts, I also believe that the U.S. needs to be rethinking the institutions and information pipelines that connect scientific discoveries, new and expanding companies, and a productive U.S. workforce.

I have viewed Fair Trade labeling as a benign if rather limited movement. On one side, the Fair Trade organization certifies that a product like coffee was produced in a way that lived up to a certain code of conduct for how workers were treated, environmentally friendly practices, and the like. On the other side,  consumers in high-income countries who are willing to pay higher prices for goods like coffee produced according to such standards could then identify this output. But how much does Fair Trade really help workers in low-income countries? The Fairtrade, Employment and Poverty Reduction in Ethiopia and Uganda (FTEPR) research team, based at SOAS at the University of London, set out to gather evidence on this question. The main authors are Christopher Cramer, Deborah Johnston, Carlos Oya and John Sender, but the process of data collection and processing was extensive and required a full-time research officer in the UK, as well as research supervisors in Ethiopia and Uganda, and many other contributors. The total cost of the study ran about 700,000 British pounds. The group has now published \”Fairtrade, Employment and Poverty Reduction in Ethiopia and Uganda\” (April 2014) and the results will be disheartening for supporters of fair trade.

The researchers chose about a dozen local areas by to collect detailed evidence in rural areas of Ethiopia and Uganda, focusing on coffee and flower producers in Ethiopia and coffee and tea producers in Uganda. They then sought to interview enough people in each of these local areas that they could have a locally representative sample of wages and earnings for that area, looking both at those who worked for a local certified Fair Trade producer and those who didn\’t. They tried to gather data on each member of entire households, including children, and they returned to these areas for either 2-3 years to do follow-up surveys.  Some people were surveyed more intensively or by different methods than others, but the overall result is that data was gathered from thousands of local farm workers. As the study authors wrote: \”[T]he over-arching research question was whether a poor rural person dependent on access to wage employment for their (and their family’s) survival is better served by employment opportunities in areas where there is a Fairtrade certified producer organization or in areas where there is none.\”

And after several years of effort, what did the researchers find?

\”This research was unable to find any evidence that Fairtrade has made a positive difference to the wages and working conditions of those employed in the production of the commodities produced for Fairtrade certified export in the areas where the research has been conducted. This is the case for ‘smallholder’ crops like coffee – where Fairtrade standards have been based on the erroneous assumption that the vast majority of production is based on family labour – and for ‘hired labour organization’ commodities like the cut flowers produced in factory-style greenhouse conditions in Ethiopia. In some cases, indeed, the data suggest that those employed in areas where there are Fairtrade producer organisations are significantly worse paid, and treated, than those employed for wages in the production of the same commodities in areas without any Fairtrade certified institutions (including in areas characterised by smallholder production). At the very least, this research suggests that Fairtrade organizations need to pay far more attention to the conditions of those extremely poor rural people – especially women and girls – employed in the production of commodities labelled and sold to ‘ethical consumers’ who expect their purchases to improve the lives of the poor. . . .

Another issue of importance both to the Fairtrade literature and more widely is the governance and structure of producer cooperatives. The research finds a high degree of inequality between members of these cooperatives, i.e. the area cultivated with the certified crop (tea and coffee) and the share of the cooperative’s output are very unevenly distributed among members: there are large numbers of members who have tiny plots of land and sell very little to the cooperative, and there is a small number of members who dominate sales to and through the cooperative. One clear implication of this is that the many benefits of being a member of a Fairtrade certified cooperative – tax breaks, direct marketing channels to high-value niche markets, international donor financed subsidies – accrue very unequally. Fairtrade may ‘work’ but it does not quite do what it says on most of the labels: it aggravates rural inequality and at best may do so by supporting the emergence of rural capitalist producers; and it fails to make a difference, on the data collected, to the welfare of the poorest people involved in the Fairtrade chain, i.e. manual agricultural wage workers. . . .

In conclusion, it may be argued, for the areas and producer organisations where this research was conducted, that Fairtrade certification has failed to benefit poor wage workers because it has overlooked their existence, because it has proven institutionally incapable of monitoring effectively the wages and conditions of those working in production conditions (e.g. flowers) where there is acknowledged hired labour, despite the existence of auditing procedures against the Hired Labour Standard, and because it is relatively ineffective compared to other factors that are more likely to influence both productive efficiency and working conditions. … 

The reasons for Fairtrade’s failure to make a clear positive difference to wages and conditions, or to the amount of work offered, are fairly clear. They have to do – especially in the production of “smallholder” commodities – with what this research suggests has been in the past a wilful denial of the significance of wage labour and an obsessive concentration on producers/employers and their organisations. … [T]his research suggests that a large number of obstacles remain in implementing improved standards in a way that will benefit rural workers. First and foremost is the need not just for more monitoring and evaluation, but also for better methods. And they have to do – again, especially where Fairtrade certification is awarded to cooperatives – with the espousal of a romantic ideology of how cooperatives operate in poor rural areas.

Of course, it would be unwise to condemn all of Fair Trade based on a single study of about a dozen local areas in two countries. Matt Collin and Theo Talbot at the Center for Global Development take on the task of putting the results in context in a blog post. They point out that although the study was focused on wage-earning farmworkers, not on the farm-owners. Although the study tried to compare farmworkers at Fair Trade operations to similar farmworkers at similar non-Fair Trade operations, such comparisons are always difficult. The results show that the Fair Trade workers were paid less, but they do not conclusively show that Fair Trade is what caused the workers to be paid less. Some other studies of Fair Trade have have found more positive results for how the pay of the small number of Fair Trade producers is increased.

Perhaps you don\’t quite remember this event. But back in 1982, the videocassette recorder was just about about to wipe out the movie industry, and probably also the television industry. We know this is true because of the April 12, 1982, Congressional testimony from Jack Valenti, then the President of the Motion Picture Association of America, given in hearings before the House of Representatives, Committee on the Judiciary, Subcommittee on Courts, Civil Liberties, and the Administration of Justice.

Valenti was arguing in favor of a bill that would allow a charge to be imposed on all makers of VCRs and blank videotapes, most of which were at that time made by Japanese firms, with the proceeds to be distributed to the U.S. film and television industry. If you need a reminder to be skeptical when business leaders prophecy doom and gloom if their industry has to adapt to new technology, here\’s a sample of the rhetoric from Valenti. It\’s a minor classic in the genre of special interest pleading, in which an industry is about to experience worse than a tidal wave, worse than an avalanche, but indeed a jungle, where it will hemorrhage and bleed and be strangled–but the industry\’s real concern, as we all know, is that it just wants to protect the old and the poor and the sick.

I am merely coming to start off by talking about the American film and television industry, not as an economic enterprise, but as a great national asset to this country, to the U.S. Treasury and the strength of the American dollar. And I am not just talking on behalf of people whose names are household words, like Clint Eastwood and some of his small band of peers. I am speaking on behalf, as he is, as he will no doubt tell you on behalf of hundreds of thousands of men and women who without public knowledge or recognition, who are not besieged by fans, but who are artisans, craftsmen, carpenters, bricklayers, all kinds of people, who work in this industry, not only in this State but in the 50 States where American films are shot on location. And they deserve no less, Mr. Chairman, than the concern of the Congress for the preservation of their industry. . . .

But now we are facing a very new and a very troubling assault on our fiscal security, on our very economic life and we are facing it from a thing called the video cassette recorder and its necessary companion called the blank tape. And it is like a great tidal wave just off the shore. This video cassette recorder and the blank tape threaten profoundly the life-sustaining protection, I guess you would call it, on which copyright owners depend, on which film people depend, on which television people depend and it is called copyright. … 

Because unless the Congress recognizes the rights of creative property owners as owners of private property, that this property that we exhibit in theaters, once it leaves the post-theatrical markets, it is going to be so eroded in value by the use of these unlicensed machines, that the whole valuable asset is going to be blighted. In the opinion of many of the people in this room and outside of this room, blighted, beyond all recognition. It is a piece of sardonic irony that this asset, which unlike steel or silicon chips or motor cars or electronics of all kinds — a piece of sardonic irony that while the Japanese are unable to duplicate the American films by a flank assault, they can destroy it by this video cassette recorder. . . .

Now, I don\’t have to tell anybody in politics — I have spent most of my adult life in politics and you learn one thing. Nothing of value is free. It is very easy, Mr. Chairman, to convince people that it is in their best interest to give away somebody else\’s property for nothing, but even the most guileless among us know that this is a cave of illusion where commonsense is lured and then quietly strangled. That is what it is all about. Now, these machines are advertised for one purpose in life. Their only single mission, their primary mission is to copy copyrighted material that belongs to other people.  . . .

The permission of the copyright owner is required for the use of their programs in all markets. Now, I those markets include theaters, cable, pay cable, pay television, prerecorded cassettes, network television, syndicated television, video discs. Every one of those markets is going to be competing for Mr. Eastwood\’s new film \”Firefox.\” They are going to license that film at a negotiated price. Now, we cannot live in a marketplace, Mr. Chairman — you simply cannot live in a marketplace, where there is one unleashed animal in that marketplace, unlicensed. It would no longer be a marketplace; it would be a kind of a jungle, where this one unlicensed instrument is capable of devouring all that people had invested in and labored over and brought forth as a film or a television program, and, in short, laying waste to the orderly distribution of this product. . . .

This is more than a tidal wave. It is more than an avalanche. It is here. If those aftermarkets are decimated, shrunken, collapsed because of what I am going to be explaining to you in a minute, because of the fact that the VCR is stripping those things clean, those markets clean of our profit potential, you are going to have devastation in this marketplace. . . . We are going to bleed and bleed and hemorrhage, unless this Congress at least protects one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and the ravages  of this machine. . . .

I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone. …

Movies are the single most recorded program type accounting for approximately 30 percent of all the recorded minutes. Now, what I am about to read you now boggles my mind and it is going to boggle the mind of everybody in the movie and television business in this city. If 56 of the 93 movies recordings made by the 250 households during the first 3 days of a diary week — just 56 of those movies are saved for the shelf and for additional playback — then the number of movies collected in a year by the Nation\’s 2.4 million VCR households, only 2.4 million, the number of movies collected would be 6,537,216. At a prerecorded purchase of $50, they would have a retail value of $3.2 billion.
Mr. Chairman, things like that could make a grown men cry. . . .

By 1990, the Japanese estimate that 30 to 35 million U.S. homes will be equipped with VCR\’s. VCR owners will buy about 225 million or 300 million blank tapes. But, and here is an explosive political fact, Mr. Chairman, two-thirds of U.S. households will not own VCR\’s, Mr. Chairman. One-third of VCR households will not be on cable or won\’t have access to cable. Now, if there is a scarcity of film and television entertainment, it won\’t be the well-groomed and the well-heeled that will suffer. It is going to be, as always it is, Mr. Chairman, the less-affluent, the disadvantaged people pressed against the wall, out of work, who can\’t afford these expensive machines, and free television to the sick and the old and the poor will remain the primary source of home entertainment. . . .The loser will be your public because they don\’t have these expensive machines. And that is what I am saying, sir. The public is the loser when creative property is taken and here is the reason why. The investment of hundreds of millions of dollars each year to produce quality programs to theaters and television will surely decline. … 

Mr. Chairman, I am done. The public interest is at stake here. It is the public interest that you have by solemn oath sworn to serve because what I am talking about and what the rest of these witnesses are talking about is making it possible for a steady stream of quality entertainment to reach people through their television sets and to keep the incentive and reward mechanism in line so that people can risk great sums of money in this very dicey forum. That is what is at stake, and, finally, the preservation of a huge and valuable trade asset that can\’t be duplicated by any country in the world.

Last week, I noted that I have authored an essay for the June 2014 issue of Finance and Development on the subject of \”Economics and Morality\” (51: 2, pp. 34-38), and I offered some snippets from the article.

There there is also an accompanying six-minute podcast/interview from the IMF where I talk about some of these issues. It\’s called \”How Economics Can Inform Moral Decisions.\” It\’s on Soundcloud, and a free registration is required to listen or download.

When other nations send foreign aid with the intention of helping those enmeshed in a civil war, does the aid make the conflict worse? The question has been asked by some with high credibility in these matters, like the 1999 Nobel Peace Prize winner Médecins Sans Frontières. In reflecting on their attempts to help those in the conflicts in Chad and Darfur, the organization wrote:

We are unable to determine whether our aid helps or hinders one or more parties to the conflict … it is clear that the losses—particularly looted assets—constitutes a serious barrier to the efficient and effective provision of assistance, and can contribute to the war economy. This raises a serious challenge for the humanitarian community: can humanitarians be accused of fueling or prolonging the conflict in these two countries.

Nathan Nunn and Nancy Qian offer this quotation as a starting point for their investigation of the relationship between \”US Food Aid and Civil Conflict,\” which appears in the June 2014 issue of the American Economic Review (104:6, pp. 1630–1666). (The AER isn\’t freely available on-line, but many readers will have access through library or personal subscriptions.) They find that \”an increase in US food aid increases the incidence and duration of civil conflicts.\”

There is considerable anecdotal evidence that foreign aid may prolong civil conflict. Here\’s Nunn and Qian (citations and footnotes omitted):

Humanitarian aid is one of the key policy tools used by the international community to help alleviate hunger and suffering in the developing world. The main component of humanitarian aid is food aid. In recent years, the efficacy of humanitarian aid, and food aid in particular, has received increasing criticism, especially in the context of conflict-prone regions. Aid workers, human rights observers, and journalists have accused humanitarian aid of being not only ineffective, but of actually promoting conflict. These qualitative accounts point to aid stealing as one of the key ways in which humanitarian aid fuels conflict. They highlight the ease with which armed factions and opposition groups appropriate humanitarian aid, which is often physically transported over long distances through territories only weakly controlled by the recipient government. Reports indicate that up to 80 percent of aid can be stolen en route. Even if aid reaches its intended recipients, it can still be confiscated by armed groups, against whom the recipients are typically powerless. In addition, it is difficult to exclude members of local militia groups from being direct recipients if they are also malnourished and qualify to receive aid. In all these cases, aid ultimately perpetuates conflict. A large body of qualitative evidence shows that such cases are not rare, but occur in numerous contexts.

Of course, a bunch of anecdotes don\’t prove the general case that aid increases civil conflict. As social scientists like to say, \”data\” is not the plural of \”anecdote.\” But figuring out a persuasive statistical approach for investigating whether food aid causes additional conflict is tricky. After all, if civil conflict and dysfunctional political and economic institutions lead to a situation where it looks like more aid is needed, then there might be a positive correlation between conflict and aid–but the conflict is causing the need for aid, rather than the aid causing additional conflict.

In a perfect world for social science, there could be experiments with foreign aid, where aid would be randomly given for some civil conflicts but not for other equivalent civil conflicts, and over a period of a few decades researchers could then study the results. In the real world, the challenge is to find some way of looking at the existing evidence that can approximate this thought experiment of the effects of random variation. Nunn and Qian offer an approach that is a nice illustration of a method called \”two-stage least squares,\” and which I\’ll try to explain here in words.

The authors focus on two reasons why food aid for countries can vary that are not related to whether the country is currently experiencing a civil conflict. One is the size of U.S. agricultural harvests; bigger US harvests are correlated with  more food aid. The other is how likely a specific country is to receive food aid in any given year over the 36-year period of the data, from 1971-2006. These trick is first to estimate how much of the year-to-year variation in humanitarian food aid for any given country is determined by these two factors. This calculation will determine what share of the rise and fall in food aid is determined by U.S. weather, which can be viewed as an event that is increasing or decreasing food aid randomly whether there is a civil conflict or not. (This is the \”first stage\” of a two-stage least squares approach.)

Next, calculate whether these random rises and falls in food aid are correlated with civil conflict in the recipient countries. (This is the \”second stage\” of two-stage least squares.) Nunn and Qian summarize the results:

[T]he 2SLS [two-stage least squares] estimates identify a large, positive, and statistically significant effect of US food aid on the incidence of civil conflict, but show no effect on the incidence of interstate conflict. The estimates imply that increasing US food aid by 1,000 metric tons (MT) (valued at $275,000 in 2008) increases the incidence of civil conflict by 0.25 percentage points. For a country that receives the sample mean quantity of US food aid of approximately 27,610 MT ($7.6 million in 2008) and experiences the mean incidence of conflict (17.6 percentage points), our estimates imply that increasing food aid by 10 percent increases the incidence of conflict by approximately 0.70 percentage points. This increase equals approximately 4 percent of the mean incidence of conflict. 

In more detailed statistical work looking at large-scale and small-scale civil conflicts, as well as whether conflicts are starting or the length of conflicts, they find \”these findings suggest that the primary effect of food aid is to prolong the duration of smaller-scale civil conflicts.\”

Perhaps the bottom line goes without saying, but I\’ll say it anyway: These results certainly don\’t prove by themselves that food aid is overall counterproductive, or overall a bad policy idea. They do suggest that food aid, regardless of its humanitarian intentions, has a mixture of effects, and that sensible public policy will seek ways to tilt the balance toward the good and away from the bad.

The Food and Agriculture Organization at the United Nations suggess estimates that 870 million people are undernourished–roughly one in eight people in the world. Moreover, the world population has risen past 7 billion and is headed for about 9 billion by mid-century. Thus, it may seem contrary-minded, even for an economist, to suggest that the world may already be growing a sufficient quantity of food. But that\’s a finding of that same Food and Agriculture Organization,which together with the United Nations Environment Programme is focusing on the issue of food waste. For example, here\’s UNEP, referring to a 2013 report from the FAO:

Research shows that at least one-third, or 1.3 billion tonnes, of food produced each year is lost or wasted – an amount corresponding to over 1.4 billion hectares of cropland. Even a quarter of this lost food could feed all the world\’s hungry people. According to the FAO, almost half of all fruit and vegetables is wasted each year. About 10 per cent of developed countries\’ greenhouse gas emissions come from growing food that is never eaten, and food loss and waste amounts to roughly USD 680 billion in industrialized countries and USD 310 billion in developing countries.

This notion of food that is \”wasted\” can be an elusive one. After all, most food products can spoil, and they can do so in the field, in storage, in a processing or production facility, in a wholesale or retail establishment, or in a home. Calling something \”waste\” can involve judgments about what counts as food: for example, one of the the websites linked to this effort offers suggestions like the joys of eating fish heads. Measuring what is \”wasted\” is a tricky empirical problem. Indeed, the whole idea of \”waste\” is tricky for economists. If the food that is \”wasted\” has economic value–and could be sold to someone–then there would be strong incentives not to waste it. Thus, an economist is tempted to infer that \”waste\” really means \”not worth the costs of saving it.\”

The problem for the world food supply isn\’t a physical inability to grow enough food. Those around the world who are severely malnourished often live in a geographic areas where the supply of food is broadly adequate for the population as a whole: they just have very low incomes and find it hard to buy enough food. Thus, a substantial part of feeding the world isn\’t about raising the physical supply of food, but instead raising the buying power of those who need the food most.

In addition, while the world has the physical capacity to feed its population a healthy diet, the task becomes harder if the obesity rate keeps rising. Depending on just how you measure obesity and undernourishment, it is likely that the two problems are now about the same size from a global perspective–but undernourishment is shrinking and obesity is rising. Here\’s an illustration from a 2013 World Bank report, showing the trends in the share of world population that is obese or undernourished.

Various studies suggest that well-focused technological progress and productivity growth can create enough of a rise in food supply to cover population growth in the decades to come (for discussion, see here and here). The efficiency gains from reduced food waste at all the stages of the food production process would surely help in this task as well. But even with sufficient food being produced, the question of sufficient diets for some and appropriate diets for others will remain.

One of the biggest economic adaptations for high-income economies in a globalizing world is the recognition that the lion\’s share of economic growth in the next few decades will be happening outside their borders in \”emerging\” economies. The U.S. economy, with its enormous domestic market, has been somewhat insulated from world markets in the past, and European companies have often focused more on building ties across the internal market of the EU. Such a strategy made sense back around 1980, or perhaps even 1990. It won\’t make sense in the next few decades. A team at the McKinsey Global Institute–James Manyika, Jacques Bughin, Susan Lund, Olivia Nottebohm, David Poulter, Sebastian Jauch, and Sree Ramaswamy–sketches how the world economy is evolving in an April 2014 report, \”Global flows in a digital  age: How trade, finance, people, and data connect the world economy.\” They write (footnotes omitted): 

\”Yet the fact remains that even the world’s largest multinational companies remain underweight in emerging markets. In 2010, McKinsey research found that 100 of the world’s largest companies headquartered in developed economies derived just 17 percent of their total revenue from emerging markets—despite the fact that those markets accounted for 36 percent of global GDP and are likely to contribute more than 70 percent of global GDP growth between now and 2025. Business leaders need to not only invest more in emerging markets but also understand how the role of these countries in the world economy is undergoing a historic transformation. In the first wave of globalization, developing countries first supplied commodities and raw materials for production and then economies recently became an abundant source of cheap labor for global supply chains. In the current wave of globalization, the emerging world is increasingly becoming a source of new customers. But a third wave is coming, enabled by digital technologies. In the new era, emerging economies will increasingly be the source of new talent pools, innovations, competition, and partnerships. Companies need to look globally for the right talent, suppliers, and innovation—and much of those could be in emerging markets.\”

Large companies based in emerging economies are already changing the shape of global competition.

[L]arge companies from emerging markets are increasingly formidable global players. For instance, Bharti Airtel, the largest telecommunications company in India, has more than 260 million mobile customers around the world, more than the combined population of Germany, Japan, and Spain. Lenovo is the largest PC seller in the world. Mumbai’s Tata Sons is now the largest private-sector employer in the United Kingdom with more than 40,000 workers across Tata Steel, Jaguar Land Rover, Tata Consultancy Services, and TGB, a drinks branch that acquired British tea company Tetley. Two Mexican companies—Cemex and Bimbo—are the US market leaders for cement and bread, respectively.

For a deeper sense of these changes, contemplate how quickly economic growth is moving in some of the converging economies. This figure shows the amount of time that it took various economies to double their per capita GDP from about $1300 to $2600. In the UK, this process took 150 years from about 1700 to the mid-1800s. In the U.S. and Germany, it happened in a little more than half-century in the middle of the 1800s. It took Japan 33 years in the early 1900s. Not only has that process been much faster in China and India, but look at the size of the populations involved. When the US started its process of doubling per capita GDP between these two levels in about 1820, the U.S. population was about 10 million. When China and India started the same step, their populations were close to 1 billion people each. Buying power is shifting to the emerging markets of the world.

The greater involvement of emerging markets in most aspects of the international flow of goods, services, finance is already underway. Here are the changes in the share of emerging markets in the last decade or so. For example, emerging markets were 22% of global GDP in 2002, and 39% of GDP in 2012, just a decade later.

Sometimes it\’s the more specific facts that help drive home some of the changes around us. For example, the McKinsey team reports that \”China is already a larger market for BMW than the
United States.\” Computer-to-computer Skype calls barely existed a decade ago; now, they are almost 40% of the volume of traditional international phone calls. \”Netflix, which provides movies and television shows online, has become an increasingly international business. By 2013, nearly one-quarter of its streaming customers lived outside the United States, a testament to the speed at which companies can establish a global footprint courtesy of digital technologies. Some 40 percent of
Amazon’s revenue in 2013 came from sales outside of North America.\”

The United States and other high-income countries are competing for what roles they will play in the globalizing economy, and thus how they can experience domestic economic benefits from the rapid growth of emerging economies around the world. But except for what sounds mostly like 20th-century talk about trade agreements and big-company export sales, the discussion of how to reorient high-income economies around these global realities seems to me barely underway.