1. The worlds perhaps leading expert of Haiti's economy is a Swedish economics professor, Mats Lundahl. His research has emphasized the political economy of Haiti, overpopulation and a vicious cycle in resource use (which he links to ill functioning institutions). In "The Root of Haitian Underdevelopment" (1985) Lundahl writes:
Population growth in a country where the institutional environment did not enable an industrial sectorled to more and more labor intensive agricultural techniques and products (food instead of coffee). This led to land erosionand a vicious cycle : erosion made useful land even more scarce, which leads to an even higher labor to land ratio, more labor intensive agriculture, more erosion etc.
Another problem that Lundahl studies in depth has been the kleptocratic nature of Haiti's political leadership. People who are interested about Haiti should read some of his work.
2. Between 1960 and 2008 Haiti received $8.6 billion (real) dollars in Official Development Aid, not a shocking amount by most comparisons. If someone would have invested this aid money in a bank account earning 3.5% real returns, it would be $16 billion, twice Haiti's nominal GDP. Haiti has become somewhat more aid dependent in recent year, as this graph shows.
The failure of development aid is no argument against catastrophe aid, quite the opposite. The problem with development aid is that it does not increase productive investment, it typically gets consumed. However the purpose of catastrophe aid is to get consumed. The lesson of 50 years of aid failure is that the west should give more catastrophe aid and less (no) development aid.
3. Much of the discussion about Haitis poverty centers around pre-WWII history. Any debate should however take into account that Haiti in 1950 was not poorer than the Dominican Republic. Only by the mid 1960s does Dominican start to diverge. if historical forces are at work they are operating with a lag (needless to say these figures are nowhere as reliable as for industrial countries).
4. There are about 800.000 Haitian in the US. If they were treated as their own a country their per capita GDP would be $28.200. The total income of this group is twice the GDP of Haiti (population 10 million).
This graph points to a pattern popularized by Edward Prescott. The standard argument of the left has been that Europeans work less than Americans because they enjoy leisure more. Prescott pointed out that a little more than a generation ago Europeans actually worked more than Americans! It is only in recent years that a work gap emerged. Did preferences change in such a short time?
It shows total hours worked in the economy divided by the working age adults (so hours worked by young teens and those 65 and above are assigned to the rest). Europe is weighted average of EU.15 minus 4 small nations for which OECD does not have complete data (Luxembourg, Portugal, Greece, Austria).
During the same period that this happened European countries expanded the welfare state and increased taxes, while the size of the government was relatively constant in the US (and marginal taxes decreased). Prescott thus argued that the two events were related, the fewer hours being caused by taxes. However he also pushed an estimate of the responsiveness of hours worked to taxes that most economists consider unrealistically high.
I personally think Prescott made it too hard on his model by only looking at direct taxes, and not including implicit taxes as part of social insurance and welfare programs. A Swede that is considering entering the labor market will not only have (say) 40% of his income taken by the state, he will also lose generous welfare programs. The implicit tax is often 80-90%, and sometimes over 100% (you actually make more on welfare than working).
The difference in effective taxes is thus higher between Europe and the US than Prescott's data suggests, and a more reasonable measure of responsiveness is enough to explain the differences. There are however no good data that include the total marginal tax each individual (or a representative group) faces, so it is impossible to do this calculation right.
Another argument is that countries with high taxes also have other characteristics that depress hours worked, such as strong unions that drive up wages and demand reduced hours rather than wage increases. However I believe that there is no convincing reason unions intrinsically would demand fewer hours worked rather than wage increase for their members. They do this in high tax countries because they are responding to the taxed: their members keep 100% of reduced hours the union negotiates, but might only keep half of the wage increases. Ultimately unions do what they believe will help their members.
Lastly some economists have pointed out that Europe was growing faster than the US in the immediate post war era by adopting American technology, and that once they stopped converging they also started working less. There is a chicken and egg problem here (if they had not stopped working they might have continued converging), but certainly this argument is remember to keep in mind as an alternative or at least complement to the policy explanation.
It is common for the left to assign most of the higher American per capita income to a "leisure gap" between Europe and the US. I show in a previous post that this is implausible, only a minor part of the difference in income can be explained (away) by leisure.
Here I want to make an additional point, that one third of the gap in work is due to lower employment rate in Europe. The welfare state taxes work, subsidizes not working and tends to push up wages so high that the unskilled cannot get jobs. Lots of free time for those shoved outside the labor market is a problem, not a sign of prosperity.
The source of this data is different than for my previous post about leisure, it is good to show you both types of data. The OECD data is based on calling thousands of people each month/quarter and asking them how much they worked. Time diaries have a smaller sample, but much more detailed information. The results are really very similar (which I hope is a sign of reliability).
Remember also that differences in market work are not the inverse of differences in leisure. Europeans work more in the household sector than American, which I show in the old post.
Whoever said economists are people who don't ever get anything right?"Economic growth in Germany probably stagnated in the fourth quarter from the previous three months, the Federal Statistics office said. Still, the figure is “surrounded by uncertainty,” Norbert Raeth, an economist at the office, said in a press conference in Wiesbaden today."So German GDP was probably more or less flat quarter
"In general, rich countries normally stay rich and poor countries normally stay poor."
Theory and a mass of empirical evidence show that in general, richer countries grow slower and poorer countries grow faster (this is, by the way, simultaneously true with richer countries remaining richer. I will let clever Yglesias figure out the false dichotomy himself) .
The fact that America has not only kept its advantage over Europe but also even expanded the gap is extraordinary. The US is the exception, the only country in the top five 100 years ago that is still in the GDP top five (and yes, the snide remark aside, the US in 1900 had far more pro-market institutions than Germany or France). And even the gap between the US and Western Europe has closed in the last 100 years, it only stopped converging in the 1980s.
The pattern during the last 100 years has been for countries with functioning economies to grow faster the lower they start. If Yglesias was an trained economist he would know all this. Conditional Convergence is one of the most robust relations in growth theory. Krugman knows this, but Krugman is a liar, he just wants to maximize his ideological argument at any given point, deceiving his readers if he has to.
That's why Krugman has not explicitly made the claim that growth rate and levels are unrelated, he just ignored the levels altogether. He knows that writing what you wrote would make him look foolish to other economists. While Krugman knows what he is doing (he just doesn't care), my guess is that Yglesias is honest in his argument, following Krugman where Krugman himself carefully does not step. Matthew Yglesias is left standing with his naive post on growth theory, his just reward for trusting Paul Krugman.
Allow me to demonstrate. Krugman compares per capita growth figures for Europe and the U.S. between 1980 and 2008. I have plotted the per capita growth rate 1980-2008 and starting per capita income in 1980 for available OECD countries (Eastern European countries and unreliable Luxemburg are excluded). The U.S and E.U.15 are included in the plot, but NOT included in the simple regression line (the individual members of the E.U.15 are already there).
See any pattern?
Note that the US performance is above the linear prediction and the E.U15 slightly below. This is not in any way scientific, but using the simple linear framework the US, starting above average, "should" have grown by 46%, and the EU.15, starting around average, "should" have growth by 74%. In fact the US grew by 71% and the EU by 66%.
Here is another one with even more countries (more data available, I threw in Luxembourg so no one will accuse me of cheating, although their GDP figures are not reliable) from 1995-2008.
Still care to deny the relationship between growth and level?
Here is the same logic, applied to U.S states. There is only data available from 1990, so here I have plotted 1990-2008 growth and starting level in 1990.
Again, notice any pattern?
American states that started of richer in 1990 have grown faster since.
I pointed out yesterday that the E.U 15 has the same per capita GDP as Alabama. Being a poor American state, Alabama grow faster than the US average between 1990-2008. In fact it grew by 1.75% per year. During the same period the EU.15 managed to grew at 1.64%. (in other words Alabama per capita earnings grew by 37%, the E.U 15 by 34%). In the same period rich Maryland grew by only 1.39%. By Krugmans "logic", Maryland should be learning from Alabama.
Alabama has the same per capita income and slightly faster growth rate as the Social Democratic EU.15, which Krugman wants us to believe is a "Dynamic" region that the US should "learn from". Has Paul Krugman ever written a column asking us to learn from the economy of Alabama? Of course not. That would be simply idiotic. Alabama is poor, and has a lower standard of living, just like the E.U 15. It only manages to grow faster than others because it starts off at such a low level (the EU doesn't even manage to do that).
Being poor and growing at average or slightly above average is not something that anyone (at least anyone not driven by dogmatic liberal ideology) would recommend as a shining example for others to emulate.
What is most scary is that the left either denies the American advantage or seems to think that the wealth advantage of the US is somehow god given. It is just a historical coincidence that the capitalist pro-market economy does better than the more leftwing nations. They can make American policy Social Democratic without making US economic performance Social Democratic.
PS. As a dysfunctional part of a well functioning economy, Alabama has more social problems with the same level of income compared to Europe. The quality adjusted standard of living is certainly higher in Europe, for a given level of GDP. On the other hand the standard of living of low income rural American states with small social problems such as Maine is probably higher than Europe, for a given level of GDP.
Additional data:
Some people in Marginal Revolution are denying conditional convergence in income. In order to convince more readers,here are the p statics, R-square and correlation coefficient of simple linear regressions of starting per capita GDP and average growth, so you are not forced to rely on your eyes:
Growth 1980-2008,
24 OECD countries:
p=0.003
R-square=0.331
Correlation-coefficient=-0.575
Growth 1995-2008,
35 OECD countries:
p=0.000
R-Square=0.322
Correlation-coefficient=-0.570
Growth 1990-2008,
50 US states:
p=0.000
R-Square=0.4206
Correlation-coefficient=-0.6485
I think most economist would consider a correlation of -0.57 pretty decent.
Remember that Conditional Convergence is not something I made up, it is the dominant theory with strong empirical support among the OECD countries (and regions within rich nations).
Krugman cannot be allowed to make up economics as he goes along, asserting whatever suits him that day (if he does, he better have data on his side).
Here is Bob Lucas, in the Journal of Economic Perspectives:
"the model fits the fact that in the postwar period growth rates vary much less among the advanced economies than among the poor and middle income economies. It presupposes the existence of an ever-growing "convergence club": a set of rich economies within which income inequality is falling, even in a world in which overall inequality is rising or not changing very much. It can be interpreted as implying a focus on conditional convergence, since conditional on both having left the stagnation state, any two economies are getting closer to each other."
Robert E. Lucas (2000). "Some Macroeconomics for the 21st Century" Journal of Economic Perspectives vol 14(1)
Here is a picture from a recent Lucas paper, for open countries:
Robert E. Lucas, (2009). "Trade and the Diffusion of the Industrial Revolution," American Economic Journal: Macroeconomics, 1(1)
Additional data and argumentsII:
I replied to Yglesias in the Marginal Revolution comment section. He wrote:
"I can't even tell what this argument is about anymore.
Initially, Jim Manzi said that Europe had grown more slowly than the US in recent decades, and that this shows that social democratic policies are bad. Krugman observed that it's not true that the US has grown faster than Europe.
Then Greg Mankiw came along and observed that some European countries with similar growth rates to the US, nonetheless have lower per capita GDP levels, implying that this is the economic problem with social democracy.
So I observed that the per capita GDP gap between the US and countries like Germany and Italy long predates the emergence of post-WWII social democracy.
Now you're "rebutting" this, I guess, with references to the conditional convergence literature. But what does this rebut. Go back and read my post and you'll see that, exactly as you're saying, the US-Europe gap was bigger in 1900 than it is in 2010. This makes it hard for me to see evidence for the claim that the adoption of social democratic policies in the postwar era can be to blame for European countries having lower per capita GDP than we have in the United States. The existence of the gap is longstanding and has declined over time even as a substantial "leisure gap" has opened between the US and Europe.
I note that this whole debate could be made much simpler by people saying "what Jim Manzi wrote was wrong, but I still think there are other reasons to believe that free market economic policies are superior.""
I wrote:
"Mattew,
1. You are making erroneous claims to begin with. Krugman did not only question Mazis claims about growth. He went much further. Here are Krugmans claims:
" the image of Europe the economic failure is so ingrained on the right that it’s never questioned,"
" the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works."
If you want to evaluate "economic success", you simply cannot rely entirely on growth rates. Levels are what we ultimately consume. By that measure Alabama is an economic success story and Delaware is economic failure.
Krugman pay no heed to the fact that Americans each year, each month, each day produce 36% more than Europeans.
The difference between levels is 8 times as high as all the yearly output lost in the recent crisis. This makes Europe an economic "failure" when compared to America.
And if Krugman thinks a 36% is too low to count as success, he should explicitly say that. Instead he simply IGNORED the most relevant figure for his claim.
2. Krugman's argument ignores a salient fact about growth theory, that with functioning economies poorer countries grow faster that richer ones. This has been the trend the entire century. When it comes to America and Europe, this has been true for the entire post-war period, up until the 1980s.
Here something strange happened. Not only did Europe stop naturally (according to growth theory and historical patterns) converging, it started to lose ground. the US grew 6% faster than Europe, when the lower starting level of Europe suggested it should grow.
This phenomenon has been noted by economist, and policy makers in Europe. They are discussing ways to turn it around (the Lisabon Strategy), with explicit reference to this pattern.
Instead Krugman pretends the entire controversy is due to faster population change. But of course economists and policy makers across the world are not stupid, they knew how to adjust for population growth. The striking fact was Europe stopping to converge in a per capita basis.
Note, the pattern of convergence did not stop. Within Europe and for other OECD countries it continued. Only America was doing better than it should have based on levels alone, and EU.15 worse.
3. Up until now I am pointing out distortions so blatant that even the left cannot deny them. Now a subtle argument, that I don't really expect non-economist liberals to accept:
The central debate is about the effects of Social Democratic policy on living standard. Economic theory basically predict that your level increases each year with technological improvement, and also converges in response to exogenous changed.
Once the convergence is finished, the country will again grow at the rate of technological improvement, but with a different level.
If we for example believe that high taxes reduce hours work by 10% and that this is reflected fully in GDP, the effect of a tax increase is to first lead to a few years of reduced growth (lower than what it should be, not necessarily negative) and, once the economy is 10% below where it would have been, to AGAIN start growing at the rate of technological change.
Do you see now why Krugmans comparison of growth rates is deeply misleading? Once the effects of Social Democratic policies have taken hold already (they certainly have had plenty of time), there is no reason we should expect Europe to grow slower. But that does not mean they had no cost! They still produce less, year after year.
The standard theory of the right is that taxes reduce living standard, reflected in a few years of lower growth followed by a lower level. If bad American policy also reduced the long run rate of technological increase it will do so by the same numbers for the US and Europe alike.
This debate would be much simpler if Krugman acknowledged that the policies he proposes would, as a best guess compared to Europe, lead to a 35% decline in American per capita income. Once his policies have taken their toll on the economy the growth rate would return to normal, but at levels forever below where they would have been."
Funny that Yglesias does not link the fact that the "leisure gap" opened precisely at the point in time when Europe started to tax labor, subsidize not working, and stooped growing.
Let me just add for the sake of being pedantic that unlike what Yglesias claims the US-Europe is not smaller now than in 1900. Partially because of Europes weak performance since 1980, the gap between the 12 western European countries is actually slightly bigger now than 1900. I don't want to push this mistake, since it is not central to Yglesias argument (he looks at Nationmaster, he should have looked at the original data by Maddison).
A few more world on convergence, while we are at it. Here is western European per capita GDP as a share of US, from 1950-2006.
Notice the early consistent convergence. At some point in the 1970s or early 1980s the convergence stops. I use 1980 here, the year Krugman chose to prove Europe was a success story.
There are two leading possibilities. One is that the US is naturally better at making goods and services than Europe, and that the earlier convergence was merely recovery from WWII.
The other possibility is that it reflect policy differences, with the convergence stopping a few years after Europe started to diverge from the US. Social Democratic Europe is "stock" at permanently below the US (or until the US also becomes a Social Democracy).
I just want to show you another picture, to remind people about how "normal" conditional convergence looks like. Instead of comparing western Europe and US, it compares outlier Switzerland with western Europe in the post war period. This is what Europe's experience compared to the US should have looked like, if we believe Americans are not inherently superior to Europeans (I certainly don't), and if there were no policy differences between the two regions.
Looks different, doesn't it? The question Yglesias should as himself is why it looks different. Just coincidences that we can ignore for the sake of discussing policy, or are deeper economic forces in play?
A commentator asked about the value of leisure time. As it happens I have written a report about this (not yet published).
Based on time diaries (ATUS and HETUS) Americans 20-74 on average have 15.25 hours of sleep, leisure and personal care per day. Swedes this age have 15.55and Europe (population weighted average of Germany, France, Italy, UK, Spain, Poland, Hungary, Baltic nations, Slovenia, Sweden, Norway, Finland and Belgium) has 16.01.
Europeans have almost 280 hours more leisure per year compared to Americans. Some of it is involuntary (or tax and benefit induced) unemployment and other forms of social insurance. About 40% of the differences in work/leisure are explained by the higher American labor force participation rate.
The question is how much we should value leisure. The hourly wage in the US is $18.4, and $15.6 PPP adjusted for the Euro-area (the latest figures I could find for Europe are for 2002, they have probably gone up a little). On one hand this underestimates the cost, since this is a usually measure for production workers, and does not include many high-earners, self-employed etc.
On the other hand this is the marginal value of work, which is higher than the average (if you have lots of free time you value each hour less than someone who only has a little free time). Also, much of it is involuntary unemployment, people would like to work for $15.6 or even less, but no one would pay them that.
Let us be generous and value each hour at $16. That is about $4400 in leisure time advantage for Europeans compared to Americans. This accounts for third of the raw GDP gap between Europe and the US.
What about the demographically adjusted gap? I estimate that to be $19.600 per capita. However European-Americans also work more, and have less free time. According to the American Time Use Survey non-Hispanic whites had 65 hours less leisure than the US average. So Europeans enjoy a 342 hour advantage in leisure. For the average value of free time to account for the Europe-US difference, it should be $57 per hour. I don't value my free time that much, do other people? At the European hourly wage of $16 their advantage in leisure is worth $5.500 per person, accounting for 28% of the gap in income between Europeans and European-Americans.
I (it should be emphasized subjectively) believe this overestimates the differences. Americans, the British and Scandinavians have good norms, and enjoy and take pride in their work. In all societies people who have intrinsically rewarding jobs, such as teacher, policemen or researchers, derive less dis-utility from working. The main achievement is for society and individuals to take pride in work that is not intrinsically rewarding, but nonetheless valuable for society (administrators and welders are needed).
According to the latest available World Value Survey87% of Americans, 83% of Brits, and about 60% of Swedes say that they take "a great deal" of pride in the work they do.
Other European countries, France and Germany in particular, have after decades been influenced by Social Democratic ideology in considering work a form of exploitation that should be avoided.
The corresponding figure for Italy is 30%, Netherlands 26%, Germany 18%, France 15%.
In a healthy society working and doing something (anything) well, is part of life satisfaction and a purposeful life. Like Marx I believe that alienation is a huge problem, but unlike Marx I don't believe it is the structure of work in a capitalist society that leads to alienation of production workers, it is Marxist ideology itself!
For the benefit of the readers of a certain Swiss-American, I have included some additional groups that were not central to the comparison with western Europe. All the data is ancestry group, except Indians and Somalians, which are foreign born only (no data on ancestry). Groups marked with star have a high percentage of immigrants.
Some things to note:
1. Russia has the second highest per capita income. Many Jewish Americans come from Russia (which, at the time of Jewish immigration, covered most of Poland, Ukraine and the Baltic states). My guess is that many Jewish immigrants that say they are from Russia are probably from one of the these countries. An estimated half of the Jewish people of the world lived in what was Russia in 1900. 28% of Russian-Americans have graduate degrees, compared to 10% for the U.S population.
2. South Africans do very well in the US. 24% have graduate degrees.
3. The West-Asian immigrant groups (gold chains and hair on our chests) combine high average income with high poverty rates.
4. For Indians 41% have graduate degrees. Wow. I believe Indians are the richest of the larger groups.
5. Somalians have not done well in the US. Their per capita income is very low. Only half work. The poverty rate is 53%. This is noteworthy for me, because the Somalians in America are often presented as a success story in Sweden (I will write a full post about Somalians at some point).
6. My home country of Iran does well. In contrast Iranians in Sweden have only 40-50% employment rate, and very low average income (but also high variance). Selection or policy? I think the later.
7. "Americans" don't do well. I included all of this group in the British, although I suspect based on location that a few are African-American. Could not find any data on this (too lazy to download the raw data and find out).
