Surprising Things To Know About Robert Reich…And Some Notes on Neoliberalism

Robert Reich is oftentimes assumed to be on the left wing of the classic Rubin vs left wingers camp. And he was on this side in the Clinton White House. That’s because he supported more public investments, while Rubin was a deficit hawk. This used to be the central Democratic economic debate. But it’s since moved on to the question of trade. And while the divisions are roughly the same, Rubin, Furman, Summers et al want more, freer trade while Baker, Bernstein and Robert Kuttner are more skeptical. But there’s the exception of Robert Reich, the original casualty of the wonk wars. He, of course, is something of an unabashed free trader whose rhetoric on the issue is very similar to that of Rubin/Summers:

Well, I‘m still a free trader, although I will tell you, Chris, it is becoming—there are fewer and fewer of us. It‘s a very unpopular position.

In Michigan, you can find almost as many free traders as you can chicken hawks. There are not many. The trouble is that most people blame free trade and blame free trade for the failure of American middle class to expand, the decline of middle-class wages, all of the problems, theeconomic problems, we have.

This presents something of a problem for those (Steve Clemons, Chris Hayes) that call the centrist wing of the party “neoliberal.” That’s because neoliberalism has two distinct meanings that can often be confused. One definition of neoliberal is the domestic, political one. It describes those liberals who, in the early 1980s, turned on many liberal orthodoxies such as unions and welfare and advocated a more centrist approach to economic issues for Democrats. They mainly coalesced, originally, around Charlie Peters and the Washington Monthly. Bill Clinton was, in many ways, the apotheosis of the neoliberal vision. He embraced welfare reform, made a point of repudiating the left wing economic elements of the Party in the New Orleans Declaration he gave as head of the DLC and was a true third way politician. Furman and Summers are orthogonal to these original neoliberals, who were mainly political appointees, policy wonks and journalists, not academic economists.

The second definition of neoliberalism that is often intertwined with the first is the international, economic one. Neoliberalism in this context means adhereing to a vision of economics and economic policy which supports freer markets, less government control of the economy, free trade and privatization. In short, liberal economics that is rooted in the thought of 19th century liberals like Bastiat and Mill. It’s often argued the purest expressions of neoliberal economics were in the privizatization and deregulation pushes started by Carter and followed out by Reagan, the reforms of Thatcher’s Britain and the promulgation of the Washington Consensus in international development circles starting in the 1990s. It’s this vision of neo-liberalism that The Nation and much of the true Left (capital L is very deliberate) have a particular distaste for. Of course, they don’t like domestic neo-liberalism much either, which overlaps with the international version on some issues: namely trade - and entitlement reform and welfare  reform, but only somewhat. But even though they overlap on some issues, they are not the same and really don’t have much to do with each other. One’s an approach to development and economic policy on a global scale for all countries, while the other is a domestic political strategy for the Democratic Party . So one could be like Reich, a traditional liberal in terms of Democratic politics, and still support free trade (like a neo liberal!)

So when Clemons and Hayes are calling Furman a “neoliberal” they should make it clear whether he wants a centrist leaning (but still liberal) domestic economic policy, or whether he wants to implement the Shock Doctrine.

Scoring Points With The Lives of Millions of Africans

Development, and specifically foreign aid, is a perplexing, bewildering topic that, under a certain utilitarian criterion, is the most important issue in the world. That’s why I get disappointed when I read articles like Michael Knox Beran’s recent anti-Jeffrey Sachs screed in City Journal. While Beran is right on the big picture - ultimately it’s the development of functional markets with solid legal protections for their operating that reduces poverty - his treatment of those who want a more active governmental and foreign role in development is downright childish. It basically functions as “nyah nyah nyah, foreign aid has been tried for 50 years, and still millions of Africans are trapped in poverty, nyah nyah nyah.” Maybe it’s just my liberal inclinations, but the issues of development and aid are just too damn important for conservatives and free marketers to come in with just bleating about Hayek while scorning most active efforts to actually alleviate the symptoms of extreme poverty. Take this bit, for instance:

Like earlier practitioners of paternalist charity, today’s Africrats propose policies that treat the material effects of Africa’s problems—disease, dirty water, hunger—not their underlying causes, which the West, too, once struggled with. For thousands of years, high rates of death from infectious diseases were the norm throughout the world. Before the twentieth century, Western parents expected to lose at least one of their children to illnesses that are preventable today. Not until late in the nineteenth century did the White House itself have clean water; in 1862, Abraham Lincoln’s son Willie died of typhoid, likely contracted from the mansion’s tainted plumbing. Hunger, too, once darkened what is now the prosperous world, though so effectively has the problem been solved that countries like the United States face a looming obesity crisis.

How did today’s prosperous nations create the embarrassment of riches that they now enjoy? No benign magician descended, à la Jeffrey Sachs, on London or Washington to shower its inhabitants with money. Instead, the rich nations developed laws and freedoms that enabled people to take their futures into their own hands. As Peruvian economist Hernando de Soto has argued in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, the world’s poorest countries remain poor in part because they lack legal protections—property rights foremost among them—that enable people in the West to tap the potential of “dead” capital and invest it in wealth-generating enterprises.

Beran is right, the West didn’t get rid of the scrooge of massive, public pestilence until it got wealthy, and it’s likely that Africa will only truly be out of its public health hell when it’s richer, but what Beran’s trite historical example ignores is that today, part of the world has eliminated malaria, decreasing AIDS spreads and access to clean water. Another section of the world, has hundreds of millions without these basic health goods. This circumstance implies that there’s something that the rich part of the world, the Industrialized North, can do for the developing South. Sure, it seems like a Sisyphean task to eliminate malaria or various water borne diseases in Sub-Saharan Africa, but can Beran think of another thing to do?

Beran provides all sorts of examples of how food aid is bad, and while he distorts history to fit his ideological vision, he’s right, food aid is problematic because it can be easily manipulated and re-directed by corrupt leaders for their political ends and Africa actually has pretty decent food-production capabilites. The case for public health assistance is much different. Africa doesn’t have great malaria drugs or bed nets or DDT capabilites, there’s a certain level of western knowledge and expertise that probably can be exported out, and since it’s hard to spin out a scenario like Ethiopia in the 1980s, where Geldofian food aid was mainly used as a political weapon by the dictatorship, where water purification plants or bed nets are used to entrench corrupt leadership, it’s probably worth it to have signifigant investments in improving the public health capability of the poorest parts of Africa.

Beran also has an irritatingly triumphant view with evidence that foreign aid has often gone to bad regimes:

The cycle is vicious. The aid that ends up in corrupt rulers’ bank accounts enables them to stifle both free markets and the political and legal reforms that free markets need to operate efficiently. A recent Heritage Foundation study found that, of the 70 least-free countries on earth, nearly half have received U.S. foreign aid for more than three decades. The result is more poverty, more aid money, and more corruption. In Zimbabwe, for example, foreign aid enabled strongman Robert Mugabe to destroy property rights, introduce a command economy, and create a kleptocracy where the inflation rate recently reached 11,000 percent. Once southern Africa’s breadbasket, Zimbabwe now depends on subsidies to feed its people.

This is a bogus point for two reasons. The most obvious is that foreign aid, especially during the cold war (which was at its highest point “three decades” ago) was not all about helping those countries who could use it the best, it was often about buying support so that it wouldn’t go to the Russians.  The second point is almost blindingly obvious - of course the poorest countries get aid!  This is just representative of the type of myopia that these anti-aid critics like Beran so commonly display.  To them, the fact that foreign aid hasn’t resulted in massive successes on the same proportion of its large scale is a sign that we should probably just give up on the entire idea of helping the developing world.  Yet, it’s these same critics who tell us why foreign aid won’t work.  What Beran ignores is that there is a strong possibility that some aid has worked, and that not all aid is the top-down, centralized, buerecratic, egotistical mess he depicts.

Look at, for example, the Green Revolution.  Normal Borlaug’s project was as top-down and centralized as you could get.  He developed breeds of seeds and grain that were then exported to Mexico, India and Pakistan.   He also received signifigant western philanthropic funding.  And look what he achieved — he probably saved tens if not hundreds of millions of lives by making India agriculturally self sufficient.  Or the eradication of smallpox.  Even in the Horn of Africa, there was intense disease surveillance and immunization efforts - the type of interventions that Beran would probably call “paternalistic” -  and smallpox was eliminated by 1980.  Did these efforts result in economic growth — well in India they probably did — but the point is that foreign aid, when done well in the public health and education sector, has the potential to save millions of lives, which should hardly be scoffed at.  There are definitely problems with bad aid, aid dependence, propping up bad regimes, and sensible aid advocates and development specialists are very aware.  It’s no coincidence that while Beran is criticizing a model of aid that hasn’t been all that popular since at least the 1970s, there has been a proliferation of smaller scale, narrowly focused and even randomly tested aids.  Beran’s criticisms seem rather lame when looking at the Millennium Challenge Account, which puts better governance at the forefront, or the MIT Poverty Lab, which does randomized trials to see if aid projects actually work.

Beran’s seriousness is  again rendered questionable because he, unlike most development economists, actually thinks that “stop giving aid and privatize everything” is a real development strategy.  It isn’t.  There’s a reason the Washington Consensus is basically in tatters, and that’s because real development situations are complicated and a wide range of policy interventions can work in any given context.  But I seriously doubt whether Beran cares about what the best strategy is to address the most daunting challenge, by a sheer utilitarian calculation, of our times: extreme poverty.  Instead, he seems more interested in insulting the motives of foreign aid advocates and seriously distorting the record of foreign aid not so much to open up intellectual space for alternatives to aid, but instead to score ideological points.  Not a very useful exercise, if you ask me.

Can We Make Aid Work?

Everytime I read William Easterly, I get depressed. But there are few economists who know more about the historical failing of large scale foreign aid schemes to increase growth in the world’s poorest nations.  His most recent WSJ op-ed recounts his basic argument — foreign aid doesn’t work — but he is optimistic on the ability of indigenous, capitalist development to actually lift people out of poverty:

The number of poor people who can’t afford food for their children is a lot smaller than it used to be — thanks to capitalism. Capitalism didn’t create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.

The historical record certainly supports Easterly.  In China, we haven’t had hundreds of millions lifted out of crushing, deadly poverty by foreign aid projects, but instead by real productivity gains and development.  What I think Easterly underrates is the focus in foreign aid away from top down development projects like the infamous dams or just writing checks to corrupt, kleptocratic governments to a focus on areas where outside aid can be effective, namely public health interventions like distributing condoms and malaria nets.  Despite Easterly’s constant suggestion otherwise, I still can’t convince myself that it’s really a bad idea to have massive outside action to attempt to eliminate diseases that simply aren’t present in the developed world.

So, I ultimately support more foreign aid spending because compared to other governmental boondoggles — like our massive government spending — I think it’s worth it to err on spending too much on trying to improve the health outcomes of the bottom billion. Now, if aid could be dispersed along the model of MIT’s Poverty Action Lab, which actually does randomized trials to test the effectiveness of its projects, that would certainly be an improvement, but our foreign aid budget is so small and the possibility for massive improvements for so many is so great, that foreign aid will always be marginally worth it.

Sacrifice and Global Warming

Kate Sheppard has a very good post in which she explains that contrary to a lot of liberal and environmentalist rhetoric about global warming, we shouldn’t be framing the issue as one where we need to sacrifice some growth and material well being to prevent irreversible damage to the planet. This type of rhetoric is appealing for Democrats because their best moments, rhetorically, have come when charismatic leaders talk about sacrifice. JFK’s inaugural is a great example of this rhetoric at its best (ask not what you can do for your country…), while Jimmy Carter’s infamous “malaise” speech, though certainly admirable, has not had a favorable reputation. Sheppard’s point is that because the costs of doing nothing to reverse, forestall or even slow down climate change are so large, we aren’t sacrificing by expending capital and possibly slightly slow down growth in the short term, we are instead averting long term catastrophe that would make us all worse off.

Sheppard concludes that framing  climate change policy, as Barack Obama does, in terms of sacrifice will ultimately be self defeating:

“Sacrifice” is the message those who’d like to keep dragging their feet on climate change want the public to believe. Having failed in trying to convince the public that the world is in fact not warming, they’ve turned to arguing that solving the problem will be just too darn pricey. Yes, putting a price on carbon will raise energy prices, at least for a little while, but nothing spells big, expensive catastrophe like rising shorelines, increased heat deaths, ever-more-powerful tropical storms, and wars over ever-shrinking reserves of fossil fuels.

Rather than talking about the “sacrifices” Americans might have to make, Dems should be talking about how much we all stand to gain by addressing this problem. It’s not a choice, and the alternative to acting will prove even more expensive.

Ted Nordhaus and Michael Schellenberger make the argument in their book Break Through that the environmentalist movement will fail politically and practically if it is pessimistic, sees human intervention as always negative and insists that the only way to pursue green goals is to inflict pain on people’s pocketbooks and diminish their lifestyles. Instead of using the old “pollution model” of austerity and regulation, the best response to global warming is massive public investment in alternative energy so that the price of non-polluting energy is low enough that we don’t have to trade-off between economic growth and the health of our planet.

What’s odd is that Kate Sheppard reviewed Break Through and was mostly negative about it.  There are differences, as far as I can tell, in Sheppard and N&S’s approach — Sheppard is much more friendly towards pricing carbon and mandating emissions reductions — but their approach is very similar.  One reason why I think Nordhaus and Schellenberger were so poorly received among many green types was not just because of the inflammatory nature of much of the book, but also because their critique and message was already being absorbed by environmental organizations and advocates, and even by their critics.

What’s even weirder about Obama’s sacrifice rhetoric is that it doesn’t really match up well with his actual global warming plan.  The center-point of it is a “$150 billion over the next ten years to develop and deploy climate friendly energy supplies, protect our existing manufacturing base and create millions of new jobs.”  And, surprise surprise, Nordhaus and Schellenberger support it whole heartedly.  I think this shows that focusing on the framing of the climate change debate is only marginally important; if Obama can use sacrifice rhetoric while at the same time supporting the policy mix of massive public investment accompanied by necessary carbon caps, regulation and revenue raising measures, then maybe this sacrifice rhetoric isn’t part of his environmental approach or frame, but rather another manifestation of his inclination to describe policies as embodying some common purpose, and in some cases, common sacrifice.

Please, Be My Guest

I’ll join the rest of the Reason Happy Hour attending crowd in saying that Kerry Howley’s cover story looking at the guest worker program in Singapore and labor migration more generally is well written, incredibly informative, powerfully argued and mostly correct. In the last bit of the article, she deals with liberal objections to large scale guest workers programs, namely that such programs create an inegalitarian, hierarchical system, whereby guest workers have few rights, are largely at the mercy of their employees, disconnected from their families and aren’t even second class citizens: instead, they have no hope of citizenship. While these concerns are certainly valid, they are only tenable if you severely understate the economic gains migrant workers accrue and see the action of allowing fewer immigrants as morally neutral.

To properly frame this debate, it’s good to know exactly what the gains are from labor mobility and guest worker programs. Dani Rodrik estimates that a Mexican guest worker increases his income by $17,500 simply by working in the United States. With 200,000 workers a year over ten years, that adds up $35 billion for migrants from poor nations. To put that number in perspective, our current foreign aid budget is $23 billion and the projected gains for poor nations due to multilateral trade liberalization are $30 billion. If you look at American barriers to labor migration as essentially locking workers from poor countries into poverty and denying them enormous income gains simply by virtue of where they were born, the less concrete concerns about a guest worker program seem almost minuscule. Howley phrases this question best, “Does it reflect better on the American character to lock poor people out than to permit them entry on limited terms? “

Sure, Howley and myself would prefer that borders simply be open, but in today’s political climate, a guest worker program is probably the best we can hope for. And as long as Yglesias et al can’t offer us another politically viable way of getting more foreign workers here, guest workers are the way to go.

Also check out Howley’s response to Matt Yglesias on her heretofore undiscovered blog.

Micro-Credit Snobbery

One of the odd things about Muhammad Yunus being hailed as a humanitarian hero, and micro-lending’s positive reception more broadly, is that the loans the Grameen bank and other microcredit institutions offer often have very high interest rates, that to our Western eyes can look almost usurious. Sara Anderson and Cogitamus isn’t so happy about this:

These shady business practices are nothing new, but they sure sound a lot nicer when spoken of alongside Nobe Peace Prize-winning programs that extend small loans to businesspeople in the developing world who don’t have the collateral for traditional bank loans. It’s an association that most may not make with the payday loan model, though they are essentially the same thing. So it’s not surprising to learn that Mexican non-profit microlending institutions have transitioned into the for-profit world, and quite comfortably.

And so a shady business trades on its former saintly image, and the working poor are again saddled with higher costs for the same financial services that middle-class and upper-class consumers use.

There are two ways of looking at this situation. Either, you see it as a financial institution taking advantage of impoverished people by lending them money at usurious rates, or you see it as impoverished people with no collateral finally getting a chance to get some extra cash so they can make investments improving their lives. Sara is displaying classic credit snobbery – the belief that high interest credit is something the poor just can’t handle. What this attitude fails to do, however, is come to grips with the key question: how to get capital to the poor? Of course, we want poor people to get loans, but if we then turn up our noses at the institutions making these very small , high risk loans with necessarily high interest rates, then we’re stuck just thinking about getting capital to the poor, not actually doing it.

Maybe these high interest rates are necessary for institutions to get involved in micro-finance; after all, these loans are small with a high risk of default, not to mention that those getting the loans oftentimes have no assets to be used as collateral. It’s also worrying to see well-intentioned people like Sara think that it’s necessarily wrong for banks making micro-loans to then be very profitable. Is it not possible for interactions between banks and their poor customers to be positive sum? Shouldn’t we be celebrating banks making lots of money loaning to the poor, so that more banks might be encouraged to lend to the poor? This type of first world credit snobbery does little for those who wouldn’t otherwise be able to get any sort of capital.

So maybe instead of just saying “those interest rates for loans I’m not getting are just too high“, we should look at what happens when rather marginal lenders receive high interest rate micro-loans. The Economist profiled one South African bank that offered high-interest loans to customers that were just on the border of being credit worthy:

It asked its loan officers in Cape Town, Port Elizabeth and Durban to reconsider 325 out of 787 applicants who had narrowly missed out on approval for a loan. The lucky 325 were chosen at random—nothing distinguished them from the remaining 462, except the luck of the draw…

Most of the new customers took a four-month loan at an annual interest rate of about 200%: a 1,000-rand loan, for example, would be repaid in four monthly installments of 367.50 rand. For the bank, the study proved the wisdom of stretching its lending limits. The new clients were profitable, if not as profitable as the borrowers already on their books. The authors reckon the bank made a gain of at least 201 rand per loan.

Despite the demanding terms on offer, those reconsidered for a loan seemed to prosper. Six to twelve months later, they were less likely to go hungry, and their chances of being in poverty fell by 19%. Not coincidentally, they were also more likely to have kept their jobs, perhaps because the credit helped them to overcome emergencies that might otherwise have forced them to abandon their posts. About a fifth of them, for example, spent their loan on transport, such as buying or repairing a car that they might have needed to get to work…

Overall, the study suggests that profit-seeking lenders do not deserve the fate Dante reserved for them. Far from tempting the poor into unpayable debt, they help them keep their jobs, put food on the table, and build up a credit history. The authors show that poor people can make good use of borrowed money, even if they sometimes struggle to demonstrate this creditworthiness to lenders. If not hell, that is a kind of purgatory.

Sovereignty and Climate Change

I was reminded of this notion when reading the Daphne Wysham’s Bali dispatch for the Nation, which is basically all of the incoherent cacophony of complaints one sees at a World Bank/IMF meeting — except no mention mention of Mumia — applied to climate change.  The article rests on the assumption that because industrialized nations want carbon trading and that because it’s “neoliberal”, it’s a bad system for dealing with climate change.  While the article is full of all sorts of assumptions, gaps in reasoning and ideology surpassing analysis, there’s one claim I want to address.  Namely that we should be reenforcing sovereignty as part of a climate change solution:

Re-establish sovereignty. Carbon trading, as a neoliberal tool, strips governments of their regulatory authority and hands that power over to outside actors–either the carbon traders themselves or so-called carbon auditors who cannot be made accountable to the people. Sovereignty must be restored and reinforced in countries around the world if we are to truly get a handle on this problem. This means, among other things, making sure any climate change agreement trumps any trade complaint.

If there ever was an issue that calls for the curtailment of sovereignty, it’s climate change.  When trees are cut down in Brazil, or a coal-fired power plant built in Pakistan, the increase in carbon concentration affects everyone. Also, on the national level, special interest manipulation to forestall action to decrease emissions is easier. For example, Brazillian or Western timber companies are going to have a much easier time exerting pressure on the Brazillian government to allow deforestation, but if there were profits for Brazil in keeping their rainforests intact, or even sanctions for them not doing so, that would be a more effective countervailing power against localized interests. There’s also a pretty simple emprical argument: climate change and carbon emissions have been controlled (if at all) greatly at the national level, and we’re emitting too much carbon.  This implies that we should change how we look at carbon emissions.

Wysham attempts an empirical argument against this line of reasoning, claiming that climate change is due to…get this, free trade agreements:

Debt forces countries to remove barriers to free trade. It forces them to roll back regulations that protect their forests. It forces them to extract oil, gas and coal for export or to accept outsourcing of energy-intensive industries to their shores more readily than they would otherwise do. And it gives developing countries little choice but to get on the carbon-trading bandwagon, further expanding foreign control over their resources. These all have climate consequences.

I’m very skeptical that rapidly industrializing, developing countries would have particularly strong environmental protections even if they weren’t ensnared in the global trade system, but this is mostly a non sequiter, the reason developing countries (Nigeria, Venezuela, Angola, Indonesia etc) export and oil is because it’s profitable.  To expect that letting the developing world out of the global trade regime would somehow make it less likely that they’d sell oil is wishful thinking at best and deluded at worse.

Her other recommendations, like insisting the World Bank and IMF stop investing in oil companies, fundamentally fails to reckon with why we emit so much carbon despite the negative consequences of carbon change - because it’s costless to the emitters, and the negative consequences are distributed broadly (often outside international borders).  Pleas for debt cancellation and excoriating the World Bank don’t deal with central dilemma, carbon trading does.

Lant Pritchett Fact(s) of the Day

Small increases in labor mobility would dwarf the income gain of further trade liberalization.  From Let Their People Come.

  First, an expansion in labor mobility of the magnitude of 3 percent of the labor force in host (labor-importing) countries (an additional flow of around 16 million people) would lead to world welfare gains of $156 billion.11 Although a smallish (0.6 percent) fraction of world GDP, this is larger by nearly a factor of three than annual official development assistance in the 1990s and substantially larger than the same model’s estimate of the gains from all proposed remaining trade liberalization ($104 billion).12 These estimates are, if anything, conservative. The World Bank’s Global Economic Prospects report for 2006 focuses on migration. It uses the Bank’s standard general equilibrium model, LINKAGE, and estimates that for the same increase in the developed-country labor force (3 percent) the gain is more than twice as large, $356 billion, as the estimates by Winters and others (2002).13 The exact calculations depend on assumptions about wage gaps between sources and hosts of movement and the modeling of labor markets, in particular how “subsititutable” domestic workers and movers are, but in the end some simple arithmetic dominates. If, as the Jasso, Rosenzweig, and Smith (2003) estimates suggest, each worker gains $17,000 a year from the move, then 16 million people times that amount represents an annual gain of $272 billion. Moreover, these calculations are comparing a modest increase in labor mobility to all (further) trade liberalization. Hamilton and Whalley (1984) calculate that free migration could as much as double world income—which makes it very hard to stay motivated about the fractions of 1 percent that further trade liberalization can generate. These empirical results make intuitive sense. Goods markets are in fact quite deeply integrated, and though there are still gaps across countries in prices and evidence that the “border” effects inhibiting trade are still quite large, the price differences in goods across countries induced by restrictions on trade are very small relative to the observed wage gaps of as much as 10 to 1.

And while economists are, as a whole, more supportive of liberalized immigration than the general public, if one were to guess what economists think is more important by looking at their popular writing , it would clearly be free trade.  Sure, I support liberalized trade, but trade already is very, very open, and we are now mostly rolling back trade barriers at the margins.   Labor mobility, on the other hand, could be greatly increased.

Another useful comparison is that between labor mobility and development assistance.  We have a development assistance budget of 60 billion dollars, Pritchett estimates “Allowing an additional 0.5 percent of the rich-country labor force to enter from poor countries would produce gains in the monetary value of all official development assistance.”

Once again, if you want a how-to guide to improve the lives of the world’s poor, just read Let Their People Come. It’s free.

The Lant Pritchett Challenge

Chris Hayes links us to the equal parts fascinating and repulsive story of an Oklahoma businessman who recruited some 54 Indian workers to work in his steel factory. He immediately confiscated their passports, and then payed them 2-3 dollars an hour, fed them poorly, lied to them about the surrounding area so they wouldn’t leave the factory dormrooms and generally mistreated them. His justification was largely that these Indian college graduates — who had to pay a hefty fee to the recruiter to even get the jobs — were being rescued from desperate poverty and thus shouldn’t complain about their crappy conditions. Of course, in this case, my sympathy is with the workers that ultimately got green cards and could stay in the country. But I have to wonder about Chris’ ultimate conclusion, that this is “global capitalism at its finest.” Chris, erstwhile social democrat that he is, is clearly being sarcastic. But, in a slightly different world, the story of the Indian steel workers could be global capitalism at its finest.

The problem faced by the Oklahoma steelman was a familiar one: he simply could not compete with the price of foreign steel companies that had lower labor and regulatory costs. So, instead of moving all of his operations to Kuwait where he could build steel products for the oil industry, he went to India and recruited qualified workers. Instead of being fraudulent and lying about the conditions and the pay, and then confiscated their passports and abusing the workers when in the United States, he could have easily payed them minimum wage, or even the prevailing wage of, say, his lowest quartile of workers in Oklahoma. THe benefits would be huge. The Indian men would experience a huge jump in their standard of living, and their families who receive remittances would have a standard of living increase back home in India. The increase in skilled labor would contribute to the greater Tulsa community, which could then even become an attractor of skilled immigrants, who then attract business to Tulsa. In short, it’s easy to see how, under minimally demanding circumstances, labor mobility produces astonishly good outcomes for nearly everyone involved — or is, at least, on balance better that no labor mobility.

And so I issue to Chris Hayes — and social democrats in general — the Lant Pritchett Challenge.

Lant Pritchett is a development economist with a simple, yet radical idea. Massively reduce international restrictions on labor mobility. In short, if someone wants to hire a foreign worker from any country, there is no reason to stop them. In his book, Let Their People Come, Pritchett envisions of guest worker program with literally millions of workers from the developing world migrating to the developed world for work:

The rich countries of the world should actively look for ways to increase the mobility of unskilled labor across their national boundaries. They should do this primarily because it is the right thing to do, because of the enormous potential benefits to people who are allowed to move. The rich countries can allow labor mobility that is both consistent with their own economic interests and “development friendly”—that is, labor mobility benefiting not only the nationals but nations. The economics of labor mobility are simple: Because gains from exchange depend on differences and, in today’s economy, the same worker can make enormously higher wages in one location than in another, the gains from moving are obvious.

It’s impossible to underestimate the gains for those in desperate poverty from working in the developed world. But Pritchett does more than just talk about how fewer restrictions on labor mobility is a more rational or efficient economic policy, he attacks the very notion of looking at policy through the lens of national origin:

Indeed, Pritchett attacks the primacy of nationality itself, treating it as an atavistic prejudice. Modern moral theory rejects discrimination based on other conditions of birth. If we do not bar people from jobs because they were born female, why bar them because they were born in Nepal? The name John Rawls appears on only a single page of “Let Their People Come,” but Pritchett is taking Rawlsian philosophy to new lengths. If a just social order, as Rawls theorized, is one we would embrace behind a “veil of ignorance” — without knowing what traits we possess — a world that uses the trait of nationality to exclude the neediest workers from the richest job markets is deeply unjust. (Rawls himself thought his theory did not apply across national borders.) Pritchett’s Harvard students rallied against all kinds of evils, he writes, but “I never heard the chants, ‘Hey, ho, restrictions on labor mobility have to go.’ ”

The clearest analogue for our current global labor system is that of apartheid. Due to restrictions on labor mobility, billions of people are denied opportunity that those in rich countries have by virtue of their birth. It’s hard to imagine a system that contains more injustice than one that does allow for full labor mobility.

Which brings us to the Lant Pritchett Challenge. For Chris Hayes and anyone who considers themselves concerned with the least well off in society: do you support full labor mobility as envisioned by Lant Pritchett? If not, why not? Do you think having varying labor restrictions based on nationality is justifiable economically, socially or morally? If so, why so?

This challenge — especially coming from a 17 year old high school senior that has never really worked a day in his life — probably sounds arrogant and annoying, and I can’t blame you if you feel that way, but Pritchett’s work is just so exciting that I feel in every discussion of global inequality, poverty and development, Pritchett’s conclusions must either be assumed or explicitly refuted.

PS - As a more practical matter, the restrictions on your ability to read Pritchett’s work are very low. In fact, his entire book, Let Their People Come, is available for free.

For more background on Pritchett , here’s an extensive New York Times profile of him. Will Wilkinson’s blog introduced me to Pritchett , and this post on his work shaped a lot of my thinking

I Heart Western Union

Reading the New York Times piece on Western Union made me feel better about WU than any other company in recent memory. How can you not love a company who’s entire purpose is to encourage immigration and the transfer of money back to home countries. The anecdotes the article gives are great - Western Union reps in and immigrant detention center, sponsoring Filipino clubs in Saudi Arabia, trying to oust Tom Tancredo - but the underlying message is an even more heartening one.

This is a company that exemplifies how beneficial immigration is to the third world — more so than just about any change in trade rules or foreign aid. And the benefits are passed on largely through money transfers by Western Union. And what’s even more striking is how Western Union charges the most for their services — not only are their rates and fees higher than banks, but also are higher than any other money transfer services. And yet they still have the largest market share.

It would be easy for immigrant activists and assorted do-gooders to complain about Western Union’s fees and large profits — and they did, and Western Union had to pay out a multi-million dollar settlement. But Western Union decided to become the friend of the migrant, charge the same fees and are overwhelmingly loved by their clientèle. Just like credit snobbery gets in the way of the most innovative anti-poverty program - microfinance - so too could money lending snobbery slow down the most effective wealth transfer mechanism in the world. Fortunately, those who actually use Western Union wouldn’t stand for it.

“You could say they were ripping people off, or you could also say they’re providing a service that poor people desperately needed and were willing to pay for,” Mr. Terry said. “Any consumer company in the world would like to have the customer loyalty they have. They’re doing something right.”

It’s now accepted that the best way to get out of poverty is some involvement in the market, whether by labor or investment. The problem for financial institutions is that they are working on tiny margins — either they’re loaning small amounts of money with low expected returns or transferring small amounts of money. Thus, they need to charge high interest rates for loans and high fees for money transfers. Quite simply, it’s better than the alternative, which is financial institutions ignoring the global poor.

Pessimisitic Bias and Thanksgiving

While violence, pestilence and global poverty seem to be intractable problems, there’s some long term reasons to be optimistic.  One is that the UN massively overstated HIV rates by some 7 million, which may bode ill for the survey techniques,  but is still good news.  The second, or actually the second through sixth, are from Foreign Policy’s editors:

1. Safest year for air travel ever

2. Lower Child mortality

3. Fewer wars

4. Less extreme poverty

5. Improved life expectancy

What’s interesting about this type of data is that there seems to be very little use for it.  Is it useful to know that extreme poverty is lower, largely due to Chinese economic growth?  While that news is very good, there’s very little incentive to go shouting from the rooftops about massive improvements in living conditions and life expectancy when some 985 million still live on less than a dollar a day. One of the great things about Gregory Clark’s research is that it solidifies just how much we’ve improved, with the exception of the bottom billion, living standards.  From the Stone Age to 1800, he argues, life expectancy and living standards weren’t much improved, or were even getting worse.  Just look at where we are now.  Yet, our psychology and institutions can’t seem to recognize this miracle.

Since I’ve only lived since 1990, I can easily bemoan the fate of the bottom billion, or those lives lost in Iraq — when, in fact, wartime causality rates are relatively low and worldwide poverty has never been lower.  If you look at the Nobel Peace Prize, the winners have largely been those who’ve forestalled, or tried to, political violence.  Of all the winners, it’s Norman Borlaug who can claim to have actually saved the most lives, especially compared to Mother Teresa, Albert Schweitzer, the Quakers and most other winners.  Of course, Deng Xiaoping, who one could argue is largely responsible for the two out of the five trends FP identified, was never recognized by the Nobel committee.  Since we seem designed to not recognize how exceptional our lives are, maybe just on Thanksgiving we should reflect on how good most of us really have it.

The Social Democratic Shock Doctrine

While I’m very biased against both the substance and tone of Naomi Klein’s work, even those who like her find that her claims that neoliberal, Washington Consensus creates the “shocks” or “disasters” in whose wake they can implement their unpopular policies are sloppy and overblown. A more nuanced criticism, which I feel is pretty basic, is that any fashionable ideology among academics and intellectuals will take advantage of external shocks to polities to implement policies that would otherwise not be very popular.

A great example, which many free marketers have made in response to Klein, is the New Deal. Keynesian economics and large scale scoial insurance didn’t have a huge base of popular support before the Great Depression, but when the biggest shock of them all hit the US, a social democratic revolution was possible. Add on World War II, and you have two huge shocks that allowed the molding of the US into an anomalously egalitarian society that Paul Krugman fondly looks back on. Does the fact that the “Great Compression” grew out of unique historical times make it any less legitimate? I don’t think so, and the same generosity ought to be extended to competing economic ideologies for the developing world.

This all makes the Nation’s recent editorial, entitled “Crisis as Opportunity” seem a wee bit ironic. Literally sharing the same webpage as Klein’s exploration of the Shock Doctrine in Latin America. Should the Nation editors call their proposed reforms for the financial and housing markets the “Shock Response”? Or should all drastic reforms only be proposed and implemented when there the status quo isn’t demanding them?

PS - And while I’m criticizing the Nation, is it at all odd that they had Daniel Brook review Gregory Clark’s magnum opus, Farewell to Alms? While I’m pretty skeptical of his thesis regarding the genetic dispersal of bourgeois values as the cause of the Industrial Revolution, I’m the sure the Nation could have gotten a left-wing economist to review the book. One who doesn’t just assert that low wages in the developing world are due to overpopulation (which would kinda support Clark’s general thesis, and likely isn’t true) and a race to the bottom due to globalization (also likely not a big factor) as opposed to differences in productivity. The review is full of this stuff - couldn’t they have at least gotten Jared Diamond?

People Who Deserve More Prominence: Alex De Waal Edition

There are few writers who I trust more to be intelligent, provocative and generally correct than Alex de Waal. Since the late 80s, he’s been writing about the intersection of conflict, environmental degradation, famine and disease (mostly) in East Africa. His doctoral thesis, published in 1985, was on famine in Darfur. His work is especially useful in blasting Western misconceptions about Africa, namely how people actually experienced and oftentimes survived famine in a way Bob Geldof would not recognize. He recalls a perhaps imaginary model of an intellectual — he has never held an academic appointment, instead he has spent much of his time in Africa-related activism and research on the ground.

Specifically, his work on Darfur has been my guide to an oftentimes bewildering conflict. His pieces in the London Review of Books have punctured the simplistic calls for intervention that dominate so much of our discourse about the conflict. His Logos essay, “Is It Too Late for Darfur?” is as good a history of the conflict as I’ve read. His Newsweek debate with John Prendergast is exceptionally heated, but he comes off very well. It’s nice that after so much time in the trenches of activism and research, Harvard has given him a gig at their Global Equity Initiative. His Harvard bio is here. His blog “Understanding Darfur” “Making Sense of Darfur” for the Social Science Research Council is here.

Agricultural Subsidies Really Are Evil

Before I started blogging, back when I was much more libertarian and cynical, the only political issue I professed to care about was agricultural subsidies. I would detail to anyone willing to listen to a nasally voiced, strident 14-15 year old just how undeniably evil it was to depress agricultural prices and impoverish millions of farmers in the developing world. Oh yeah, and ethanol, I hated ethanol. While we were gearing up for war in Iraq, I was preaching on the evils of tariffs on Brazillian sugar ethanol. To me, the face of political evil were the Midwestern and southern legislators who were responsible for these godawful polices. I still think that agricultural subsidies are pretty bad, but I’ve broadened my political focus a bit and try not to be so annoying. But reading this Michael Gerson column got those old globalist libertarian juices flowing:

The effects in the cotton-growing regions of West Africa are dramatic. American subsidies result in overproduction, which depresses the global price of cotton, which keeps millions of Africans on the edge of malnutrition. In some of the poorest countries on Earth, cotton farmers are some of the poorest people, earning about a dollar a day. The typical cotton-producing household has 10 members. About 40 percent of children under 5 are malnourished.

Who benefits from the current system of subsidies? About 20,000 American cotton producers, with an average annual income of more than $125,000 — a portion of which goes to hire lobbyists. And these lobbyists do their work well. Even after the World Trade Organization in 2005 found U.S. cotton supports to be illegal, Congress made only cosmetic changes in policy. And recently the compliance panel of the WTO reaffirmed that America remains in violation.Who would benefit from a reform of subsidies? A recent report by Oxfam America, ” Paying the Price,” estimates that family incomes for perhaps 10 million people in West Africa would increase by 2.3 to 5.7 percent. This extra cash would feed an additional 1 million children a year, or pay the school fees for 2 million children, or allow farm families to pay for medicine and buy fertilizer to increase their yields.

What possible justification can there be to give any money to TWENTY THOUSAND cotton producers?! More people go to f***ing Raiders games, we deserve that cash more because we have to put up with our awful team. Reading about policies like this make me want to head to George Mason and start worshipping at the feet of James Buchanan.

All kidding aside, cotton subsidies are ultimately a moral issue. How many Africans need to die so that 20,000 cotton producers can continue to grow crops inefficiently supported by out tax dollars? This is the tradeoff, and it reflects very poorly on our politics that we’ve answered this question in such an appalling manner.

Don’t Make It Fair, Make It Die

Garance and Yglesias are linking to this Oxfam video, part of their “Make the Farm Bill Fair” campaign, decrying that the biggest recipient of agricultural subsidies are not the “family farmers” but instead those devilish industrial agricultural operations.  Oxfam is being slightly dishonest here.  They really don’t care about how the subsidy pie is cut — they just want the subsidies, tariffs and quotas that negatively affect the third world poor to be eliminated.  Of course, taking away money from the hearty American farmer so that Haitian children don’t starve and die has never been a good way to sell policy, so Oxfam is instead going with “take money away from the corporate fat cats and give it to the hearty American farmer.”  While this pitch will increase the probability of getting serious agriculture reform from p=.0 to p=.001, Oxfam’s proposals ought not to be the subsidy reform panacea.

Why should “family farmers” be subsidized at all?  What is a family farmer?  If subsides are bad because they undercut the prices of local farmers in the developing world, doesn’t the wheat a “family farmer” grows still undercut a Ghanan farmer?  What about the quotas and tariffs that unfairly advantage all American farmers?

Family farmers needn’t all die out in a world without perverse subsidies and price supports.  The growing interest in local, organic and humanely grown food all benefits small, non-industrial farms.  But it’s still not clear to me why it’s in the government’s job to devote billions of dollars protecting any farmers — be they family or corporate.

Ultimately, well meaning groups like Oxfam and well meaning people like Yglesias and Garance are just going to have this rhetoric of the noble family farmer — who’s never been a smaller portion of the US population — used against them to justify the continuance of our insane agricultural polices.

Why Dishonest Altruism is Necessary

Daniel Larison flags George Will’s column of questions for Obama to come back to a favorite theme of his, that the material conditions and day-to-day security of the world’s poorest really has nothing to do with the national security of the United States, or as Larison puts it in a post from April, “[Obama] seems to have no sense of proportion of what constitutes a particularly dire threat and what poses a more long-term, manageable danger; diseased Indonesian chickens and loose Russian nukes seem to worry him equally.”

Well, Daniel, I agree.  The million or more deaths from Malaria each year, millions of people infected by preventable water borne diseases and the approximately one billion people in extreme poverty doesn’t negatively impact our national security, strictly defined, as much as say the ungoverned tribal regions of Western Pakistan being lousy with Taliban and Al-Qaida.  And, if you talk privately to most people who say that extreme poverty of “tropical diseases” are threats to America’s national security, they’ll –after enough drinks — probably admit that they’re playing fast and loose with what “national security” means.  The reason people do this, however, is that America tends to act in the international arena when it thinks that the action will make us safer — and when we do act, we act big.  This is why NGOs, activist and academics in work in the areas of development and international public health have re-tuned their message — governments are more likely to listen if you’re presenting something that’s not just killing hundreds of thousands of foreigners, but is a threat to the US.

The Life Expectancy Miracle (Sorta)

Tyler Cowen links to this interesting paper by Charles Kenny, touting the “life expectancy miracles” of the last 50-100 years, especially in areas that we generally think are underdeveloped:

Between 1962 and 2002, life expectancy in the Middle East and North Africa increased from around 48 to 69 years – each calendar year that passed added more than six months to average life expectancy in the region…It was the strongest performance of any region in the World. Aver annual life expectancy growth over the 1962-2002 period was .9 percent in MENA compared to .85% in second place South Asia, .72 percent in East Asia, .53 percent in Latin America, .28 in Sub-Saharan Africa and .17 in Eastern Europe and Central Asia….The Gambia, Yemen, Bangladesh, Nepal, and Libya were all in the top ten gainers in life expectancy, 1962-2002.

I’d argue that life expectancy is a decidedly poor frame to judge comparable development. First of all, it is possible for countries to make huge advances in life expectancy (like the countries Kenny talks about) relatively easily. Wider availability of vaccines and antibiotics will cause life expectancy jumps of around 20-30 years, (usually from averages of around 40 up to 60 or 70). Of course, in some places - like parts of Sub-Saharan Africa - the jump hasn’t been made, but at least we know how to make it. This is roughly similar to how third world countries oftentimes have the highest economic growth rates in the world - because they have such a small base to build on, that any expansion is relatively very large. The marginal difficulty/cost of increasing life expectancy from 40-50 is much, much less

The second reason life expectancy isn’t a great development metric, especially at the Yemen-Gambia level, is that many countries have the very similar life expectancies as other countries that are much more developed. Let’s look for example at the United States, in 2000, the US average life expectancy was 77.1 years. Other countries in the 70s are Costa Rica (75.8), the Bahamas (71.1), Bosnia (71.1), Cuba (76.2), Malaysia (70.8), and Libya (75.5). It would be absurd to say that Costa Rica or Libya’s development outcomes are comparable to the United States. People in the United States are richer, freer (positively speaking) and in general have the capability to live a more fulfilling life. So sure, life expectancy gains are impressive, but all they really say is that a country isn’t enmeshed in an AIDS epidemic or haunted by infectious diseases that are easily treated or prevented most other places in the world.