Sunday, May 25, 2014

Economic growth and poverty reduction.

Economic growth is what lifts people out of poverty:

A 2013 study of 118 countries over four decades finds that over 75% of the income gains of the poorest 40% of income earners is attributable to economic growth [1]. In an earlier study with similar findings, the same authors have noted:

"[These findings support] the view that a basic policy 
package of private property rights, fiscal discipline, macroeconomic stability, and openness to trade on average increases the income of the poor to the same extent that it increases the income of the other households in society. It is worth emphasizing that our evidence does not suggest a “trickle-down” process or sequencing in which the rich
get richer first and eventually benefits trickle down to the poor. The evidence, to the contrary, is that private property rights, stability, and openness [to trade] contemporaneously create a good environment for poor households -- and everyone else -- to increase their production and income...we emphasize that growth on average does benefit the poor as much as anyone else in society, and so standard growth-enhancing policies should be at the center of any effective poverty reduction strategy." [2]

This is very important. Instead of pursuing wealth redistribution we should be focusing on promoting economic growth.




BCL's guide to becoming an informed liberal.

This is BCL's guide to becoming an informed liberal. The following is a collection of online articles which should be read in order to become knowledgeable in economic matters such as Free trade, the effects of government spending and taxation on growth, how growth helps the poor, etc.

Free trade and globalization: 

Article: In Praise of Cheap Labor by Paul Krugman
About: Paul Krugman explains that 3rd world citizens are among the greatest beneficiaries from free trade and that any attempt to block trade or impose international regulations could backfire and cause 3rd world countries export industries to shrink, leading to lost jobs, lost economic growth, and ultimately a lower standard of living. 

Government spending:

Article: Government Size and Growth by Magnus Henrekson and Andreas Bergh
About: Examines the relationship between government size and economic growth. They generally find that larger government is associated with lower economic growth. 

Climate Change

Climate Change:

I was doing a bit of research on climate change today in order to learn whether or not the costs of mitigating it exceed the costs of doing nothing. Most cost/benefit analyses find that the benefits of mitigating global warming outweigh the costs. However, the validity of these studies is uncertain since they have to make many assumptions. Also, scientists have little faith in them since measurements of the "optimal" level of mitigation are entirely subjective:

"[T]he decision over what "optimal" is depends on subjective value judgements made by the author of the study" (Azar, 1998)

This is quite unfortunate. However, one thing worth noting is that, according to a University of California study:

"A comprehensive assessment of global fossil-fuel subsidies has found that governments are spending $500 billion annually on policies that undermine energy security and worsen the environment." [1]

So, predictably, governments are doing the opposite of what they should be doing, which is not providing any subsidies for fossil-fuels whatsoever. Economic theory suggests that the best way to reduce fossil fuel emissions is to take away their subsidies and instead tax carbon emissions.

Pollution is in fact a negative externality which affects third parties without their consent. It is a market failure. Most economists would suggest dealing with this market failure by use of a Pigovian tax on carbon emissions.

Pigovian taxes are meant to discourage whatever is being taxed, in this case carbon emissions (and thus, pollution). Unfortunately, taxes are almost always harmful to growth, the question in this case is whether or not the benefit of reduced carbon emissions exceeds the cost of reducing them (through a carbon tax).

However, according to wikipedia:

"Global studies indicate that even without introducing taxes, subsidy and trade barrier removal at a sectoral level would improve efficiency and reduce environmental damage (Barker et al., 2001:568). Removal of these subsidies would substantially reduce GHG emissions and stimulate economic growth."

Thus, while we can't be sure that the benefits of a carbon tax would exceed the costs of it, research already suggests that removing subsidies to fossil fuels is a sure way to reduce carbon emissions. While many libertarians may oppose a carbon tax, I doubt any of them would oppose removing fossil fuel subsidies.

What do you all think? Is a carbon tax the way to go? Should we just remove fossil fuel subsidies? Or both?

University of California study:

Tuesday, May 6, 2014

Free trade benefits everyone.

Many people seem to think that allowing free trade will lead to declining wages for American workers. This doesn't make sense to me, since we know that worker's wages are based off their productivity, not trade policy. Regardless, a plethora of empirical research has been done on the matter. 

According to the Organization for Economic Co-operation and Development (OECD):

"Of the 14 main studies undertaken since 2000 reviewed in the publication Policy Priorities for International Trade and Jobs, all 14 have concluded that trade plays an independent and positive role in raising incomes." [1]

According to research, workers in sectors of the economy which are more open to international trade make much more than those in sectors where there isn't much. This makes sense since opening a country to trade allows foreign companies to compete for domestic workers. For example:

"Over the 1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region."

Additionally, the OECD notes that studies either find free trade to not effect unemployment, or to decrease it. Thus, there is not evidence to support the notion that free trade will lead to unemployment.



Saturday, May 3, 2014

Thought provoking studies.

Challenge your modern liberals friends with this information:

Does government spending increase economic growth?

Apparently not. A recent survey of the empirical research on the matter states: 

"[When we examine] studies of the relationship [between government spending and growth] in rich countries, measuring government size as total taxes or total expenditure 
relative to GDP and relying on panel data estimations with variation over time... most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth
rate." [1]

Additionally, recent research suggests that the growth maximizing size of government in rich countries is no greater than 25% of GDP [2], much smaller than the 40% of GDP currently consumed by government spending in the US.

Is it true that regulations don't harm the economy?

According to a 2013 study published in the Journal of Economic Growth: "[Federal] Regulation’s overall effect on output’s growth rate is negative and substantial. Federal regulations added
over the past fifty years have reduced real output growth by about two percentage points on average over the period
1949-2005. That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as
of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if
regulation had remained at its 1949 level." [3]

This means that the average American household is $277,000 poorer than it otherwise would have been.

Does the minimum wage really have no impact on unemployment?

A summary of the last two decades of research from economists at the University of California-Irvine and the Federal Reserve Board found that 85 percent of the most credible studies on the minimum wage point to job loss for less-skilled employees. [4]

Does Capitalism (economic freedom) really make people worse off?

Economic freedom (measured using the Heritage Foundation’s Economic Freedom Index) is highly correlated with higher environmental protection, improved sanitation, cleaner water, longer life expectancy, lower infant mortality rates, more income equality, etc. [5]

Additionally, economic freedom is significantly positively correlated with economic growth and national income per capita [6]. There is significant evidence that economic freedom is the cause of this prosperity [7]. It’s also worth noting that this income isn’t just going to the very rich, rather, it is going to the poor as well. The poorest 10% of income earners in the most economically free countries have an average income which is eleven times greater than the average incomes of the poorest 10% in the least economically free countries (when adjusting for purchasing power disparities across countries) [8].

Please share this info with your modern liberal friends and see if it provokes some thought.










Thursday, May 1, 2014

Fraser Institute Study: The optimal size of government

In 2013, the Fraser Institute released an extremely thorough study on the relationship between the size of government and economic growth. According to the study:

- "After controlling for confounding factors such as population, lagged per capita GDP, net debt to GDP, institutional factors of governance, economic freedom, and regional variation, etc... annual per capita GDP growth is maximized at 3.1% at a government expenditure ratio of 26% [of GDP]; beyond this ratio, economic growth rates tend to decline." [Today government spending in the US is around 40% of GDP]

- After controlling for the effect of confounding variables the authors found that a 10% increase in the size of government [measured as a % of GDP] would decrease the per capita GDP growth rate by around 0.9%.

-According to these estimates, the economy of a country with a public sector size of 30% of GDP would grow by over 33% within a decade whereas the economy of a country with a public sector size of 40% of GDP would only grow by 20%.

- The authors also found that economic freedom was a significant determinant of economic growth rates. According to their estimates, a 1 point increase on the Economic Freedom of the World Index (10 being highest) would increase per capita GDP growth by approximately 0.6% after controlling for numerous other variables.

These findings verify the classical liberal belief that the economy will grow fastest if government stays small and fosters an environment of economic freedom.

Fraser Institute study here: