Farewell To Alms (II)

Gregory Clark has a reply to his critics up.  I wrote about him before here.  His big idea is that the traits required for success in a modern economy, like performing repetitive tasks after basic needs are met, are not 'natural' but rather diffuse across populations which are in a Malthusian stress environment.

Apart from some nasty academic bickering, there's a lot of interesting stuff in his reply.   Agriculturalists in New Guinea seem to fight as often as hunter-gatherers, while other settled people tend to be relatively peaceful.  The big change here is probably political, as villages take on tribal and clan identities and go to war as parts of larger agglomerations.  There's probably enough variation along this degree to see if that relation holds in general.  So rather than just Hunter Gatherer--building Pyramids, there are a few steps in between.  

There are other interesting simulations testing the degree in which genes/culture can diffuse, and some calculations suggesting that hereditary plays a big role.  Ultimately, this is never going to be entirely convincing until people actually find the genes in question, and nail down which characteristics are best at predicting economic success.  If IQ by itself can do so well, then more disaggregated measures--verbal, mathematics, however Howard Gardner you want to get--should be able to do even better.

Clark also takes up a bit what I see as the biggest hurdle to all distance-from-agriculture-based explanations: The income variance across Asia.  Agriculture has been dominant in East and South Asia for some time now, so you need to bring in political explanations to explain why Japan is so rich and North Korea so poor, and why relative income has changed over time.  Peasants from these populations sent overseas as indentured servants tend to do well--after Britain abolished slavery, populations largely from Tamil Nadu and North India were sent all over the Carribean, Indian Ocean, Africa, and Southeast Asia and are orders of magnitude better off than populations in India.  This would imply substantial "slack" available in long-standing agrarian economies for capitalist buildup.  Also see Yasheng Huang and the entrepreneurship of rural China.  

Clark addresses this issue in his book by recourse to low labor productivity across Asia suggesting that supply is slow to respond to economic incentives.  But as Deepak Lal shows, indigenous Indian responses during British occupation was fairly quick quick.  Cotton mills went up about a century before the Tigers, taking advantage of free market, free trade competition spread by the Raj.  Sure, you can say that only the banias, Marwaris, Gujarati entrepreneurs, Jains, Parsis, etc. took over as entrepreneurs, but by the Smart Fraction theory that should be enough.  

The proximate cause of lower labor productivity with respect to early Japanese competition is that the Japanese mills domiciled female laborers and made them work all day.  In India, a coalition of English philanthropists and mill owners pushed very labor-friendly regulations limiting hiring and firing, encouraging strikes, and so forth.  The English mill owners of course wanted to kill the competition, but political economic considerations kept and built up these laws after Independence.  The core of Arvind Panagariaya's great new book is that these regulations raise the cost of labor--India's greatest endowment and source of comparative advantage--pushing the manufacturing sector into skill and capital intensive production.  With the end of industrial licensing and ability to trade on the world market, these new industries are soaring, while the bulk of the garments industry--in contrast to places like Bangladesh, old Taiwan--remains small scale.  Foreign trade looks very important here, as central as it was to just about every growth explosion except America.  

So the story goes that you need enough heterogeneity in the population to allow for natural capitalists and entrepreneurs, who finance and start industries in an agrarian society.  If local farmers are their only customers, they go bust.  But if they start producing for the world, they take advantage of economies of scale and ramp up productivity.  Everyone gets richer, the Flynn effect kicks in, and more people are drawn in.  Not so great at explaining places with significant resource endowments, or places where agriculture growth has been dominant (Denmark, South Germany...), but for those places interaction and trade with the industrializing segments was crucial.  

Population Heterogeneity and Income Inequality

Economic explanations for income inequality across nations have changed a lot. Easterly does a good summary, but basically people used to look at things like capital (ie, Rostow big-push) but then figured out that sometimes countries don't attract capital because they're poor, rather then being poor only because of a lack of capital. The search moved on to deeper causes of poverty, such as quality of institutions and policies, development of human capital and productivity, and political issues like violence.

Now, some people are looking at the underlying dynamics of why those things happen. Galor has an interesting scheme in which populations under Malthusian pressure gradually change their value structure to become more market-biased, and Gregory Clark claims that genetic and cultural changes lie behind Europe's economic dominance. Other folks at Brown have come up with some research which traces the population heritage of different groups, finding strong historical presistance for generating income.

This intersects nicely with other population genetic research. Heckman has done a lot of work on the technology of skill formation, finding that the amount of skills you can build up when early determines a lot about your future. So while everyone faces similar incentives to pursue education, people have differing abilities to do so, so you get income inequality. A major cause of population differences is time distance from agriculture. Groups that have been settled for a long-time look very different from groups that just picked up agriculture, the the latter groups have a very very difficult time adjusting--in terms of building up a tolerance to alcohol, for one.

There are a few issues with this picture:

1) How do the underlying cultural/genetic population parameters intersect with broader political themes? Presumably South Chinese populations across Hong Kong, Macao, Taiwan, Guandong are similar, but different largely exogenous political changes had very, very different results. But often, political institutions are built from other grassroots pressures, and interactions are complicated.

2) Why is this historically a bad predictor? If you go back thirty or fourty years, you see African countries living in a Malthusian environment where a high disease burden keept income relatively high above subsistence level. Post-colonial growth wasn't bad, while poverty was really concentrated in East and South Asia. Latin American countries weren't doing bad either (Argentina was one of the world's richest countries at one point) despite having a large population with minimal state history. Then things changed and historical stereotypes started to look like they have some relevance.

3) Among populations with similar experience in State-building, why is there so much variance? Mesopotamia/Egypt have a very long history of urbanization, while in England Romanization was very weak and the real state-building happened much later. But England made the transition into a Neoclassical economy first, and presumably carried the spillovers to other nearby northern European states with similarly short development history. The Mediterranean region, which is where you have the long state histories, still remained a backwater. So even within Europe, there are a lot of political/technological confounds. You can start to explain some of this by soil degration and salinity; early Mesopotamians destroyed the land so Persia and Greece became more important; and so forth until gradually the seat of power moves further north and west away from the site of initial agriculture, but this really adds to the complexity. This is also specific to irrigation-based technology for certain cereals.

Once you expand outside Europe, things get even trickier. China of course has a great long history of technological innovation and highly capable state formation, and rice cultivation with effective fertilizers kept soil productivity high. Income, however, lagged up till a few decades ago even the poorest of African nations. Catch-up growth has been significant, but that was not the only way it could have gone. India also has a very long state record, but the parts of the country with the biggest heritage in that direction are also some of the poorest right now. The point of much of this research (also Jared Diamond) is that you can kind of predict the important countries from 1500 and also some relative rankings since history matters, but this alone doesn't tell you why Europe and Japan have done well, and not Persia or Turkey. Explanations that try to do this (ie, Diamond's argument that Europe is near a lot of water) look pretty ad hoc.

4) Non-linear post agriculture histories play some part in this. For instance, many tribal people in India have known about agriculture for a long time, many are agriculturists, and all are in symbiosis with other settled groups. But they're not the same as either other agricultural groups or the more isolated groups such as the Senitalese. In India, long periods of political violence and a general lack of centralized authority (as well as whatever the effects of caste may be) probably kept the population in less of a "settled" mentality than other parts of the world. But it was still more prosperous in aggregate historically than places which only recently have seen wealth, say Eastern Europe.

5) Supply-side responses dominate how much money you have only recently (and maybe not even now). Brute force has generally been much more important.

6) Most likely, population parameters established through cultural and genetic selection determine cognitive and non-cognitive skills (The non-cognitive skills--persistence, motivation, learning to follow orders, etc. are pretty underappreciated and possibly more important). In a country like America, which is a pretty meritocratic place, you can look at the population's wealth share for a rough guide of the "potential" income (selection effects on immigrants and other historical legacies are important here too). You can look at Mauritius and Singapore similarly. Relative ordering may be fixed within a country, but explaining difference in average levels of income, even holding population composition constant, is a good deal about various geographical and political factors. In the long-run, a country's politics should respond to keep income at potential, especially in a competitive international environment, but this can take a while.

The slow rate of response of human labor to the demands of a commercial economy generates rents for the people who catch up. Capital is pretty elastically provided, so interest rates are pretty similar across time, but it's much slower to get a skilled human supply-side response, so some people collect substantial rents and you see a lot of inequality.

Real America

Here's a county level map of presidential voting in 2004:















Here's a similar map for this election:












Not that much changed, though Obama made incremental progress in many places. Here, however, is where McCain did better than Republicans in 2004. Arizona and Alaska make sense, and of course southern Lousiana lost a lot of black Democrats. But McCain made his pickups almost exclusively in a particular geography--the upland south.



This is a rough breakdown of that region. It's a pretty distinctive part of the South. Slavery was never big here; there is virtually a total complement between this and the following graph.










The share of African-Americans.












Similarly, this is also where Bill Clinton won his votes in the Democrat primary (purple is where he won > 65% of the vote). Hillary Clinton did very well here in those areas as well.
















This gets at ethnic breakdown in this area. This is be a bit hard to read, but basically the plurality ethnic group reported to the census here is "American"--these people are Scotch-Irish who predominately identify by nationality. The regions where such groups are numerous map very strongly to those places where McCain/Palin grew the Republican vote share. Household incomes tend to be fairly low, with some of the biggest pockets of isolated poverty anywhere in the country.

Presumably this reflects the impact of adding Palin to the ticket. You have cultural identification by "real Americans," a strong evangelical turnout, and racism, though I suspect Condoleezza Rice or Colin Powell would do well here. Further South, record turnout of black voters pushed Obama's share upwards, while further North, social conservatism, broadly, is a smaller force.

This illustrates the point that the South is both "larger" and "smaller" than people think. The Deep South plantation economy was restricted to the far southern geographies where that was economically viable, while broader southern culture is shared by a larger community of Scotch-Irish that stretches into Ohio and Pennsylvania.

Politically, it doesn't seem to make a lot of sense in retrospect for Republicans to double down on this demographic. One of the post-election quotes from MN governor Pawlenty caught my attention. The original Sam's Club Republican was caught saying that his party needs to focus on attracting women, Hispanics, blacks, and young people. Well. What demographics was your party targeting to begin with?

The young vote doesn't bode well for them, as young people these days are fairly liberal on a range of economic and social issues. Some of this will obviously fade away over time, but the social liberal bit will probably stay; roughly, every generation moves out a step more liberal than the previous one and stays there. The cost of catering to the real Americans is felt in the plummeting support Republicans see among young voters, minority voters, and the educated. Obviously, these groups are pretty large and growing, while whole communities of Rockefeller Republicans are going extinct. The electoral benefits are pretty slim, as the bordering states were Republican anyway. The Republicans faced a very bad fundamental position and were probably going to lose barring some crisis. But McCain's decision to head even further right after winning the Republican nomination, target this crowd through a VP pick, and then run a campaign centered on inconsequential right-wing dogma points and attack ads did little to endear him to the broad swaths of American independents who swing randomly from party to party, and for whom McCain is actually fairly popular. It's enough to make you nostalgic for some Rovian tactics. At least he realized that you need more than half of the population to win, even if hubris over statistically dubious "political realignments" did them in.

The Great Depression and Now

There's an interesting pair of articles out there looking at the source of the Great Depression.  The usual Friedman story is that the Federal Reserve cut liquidity at a time when they should have raised the money supply, leading to a wave of bank crashes and other effects.  This interpretation is central to Bernanke's current handling of the crisis. (even though Anna Schwartz, Friedman's collaborator, sees the current crisis as coming from solvency problems, rather than liquidity.  John Cochrane, as well as the rest of the Chicago GSB, would probably agree with that assessment, and have been against the Treasury bailout plan for that reason.)  

The argument goes that long-term trends that improved corporate profits at the expense of consumption led to a structural crisis devastating the economy.  Corporate profits, in the face of weak consumer demand, was then fueled into speculative activities such as the stock market.  The stock collapse was made worse by these firms pulling out their investments, and long-term recovery was fueled by the gradual expansion of consumer demand through government supported efforts.  

The recourse to "shares" of income doesn't appear very causally important, as it ought to be the levels of consumption and corporate profits that matter, rather than their relative ratio--though it may be useful as a marker for those constituent changes.  But leaving aside the explanatory power of the consumption and corporate profit story with respect to the Great Depression, it doesn't seem like a great way to explain today's problems.  

One reason is that it misses consumer holdings of assets.  Many people before the Depression of course held stocks, and the collapse in asset value spurred additional saving.  Similar things are happening now, as consumers smoothed their consumption by relying on the increase in their home value (and stocks, to a lesser extent) to finance additional spending.  The drop in home and stock values are going to reverse the massive indebtedness of the average American household, and the resulting drop in spending will make it much harder to come out of the recession.   Certainly the share of corporate profits (in retrospect, inflated due to asset bubbles and leverage) to consumption has been rising.  But household consumption has also done well lately--the problem in fact being that consumption was too high, fueled by debt collateralized over overpriced assets.  

It's not clear either that stocks were overpriced because corporations faced weak consumer demand and instead blew profits on speculative investments.  Some may have, but by and large it appears that thrifty corporations saved cash, while consumers splurged.  

The broader picture, however, of weak consumer demand, and corporate profits chasing speculative investments with low rates of return do seem to be present in various Asian countries.  As James Surowiecki notes, the enduring cheapness of Japanese stocks is fueled by the depth of the fall from overpriced asset values in the 1980s, thrifty Japanese consumers, and bad corporations.  Return on equity is notoriously low in Japan, as companies rely on cheap debt funneled from sister companies to make value-destructive investment decisions.  It's really becoming apparent that Japanese corporate structure is not really capitalist (as someone pointed out, it's the only Communist country that has worked) but rather works to maximize the interests of corporate insiders.  

Another place where you are seeing something of this pattern play out is China.  Krugman some time ago was skeptical of the productivity of the Chinese economy, claiming that it was instead fueled through expanding inputs.  Since then, it's clear that labor productivity has played at least some role, but recently the picture is more mixed.  Consumption remains low as a portion of GDP; the bulk instead goes towards investment or (much smaller) exports.  A powerful case has been made that the Chinese economy is becoming less capitalist, rather than more.  

The argument goes that Chinese growth in the last few decades was dominated by small-medium enterprises, many of them local.  Growth recently has been capital intensive, and dominated by state-owned enterprises.  The banking system is filled by bad loans and provides easy credit to flailing politically-connected firms.  The most salient consequence is the wholescale devastation of the landscape from Beijing to Shanghai--commissar command of the economy results in undervaluing natural resources, which are cheaply converted as inputs.  Energy and water efficiency are horribly low, even comparative lto other countries.  

Speculative investments have also dominated the landscape.  Real estate was valued highly, as was the stock market.  Company investment in equities resulted in vicious circles (my company's value depends on the earnings of other companies, who are also invested in my company's stock...).  So large part of the recent boom is probably fictional, a relic of the hunger of state-owned-enterprise for overinvestment and speculation.  The image of capital investment--skyscrapers, factories--is impressive, but really not as relevant from a capitalist point of view as the return on investment.  Now, it turns out that a lot of this investment is worth less, while of course much of the export-oriented facilities is endangered.  Shifting to more domestic consumption is the obvious next step, and that's presumably the way things are going to head.  

It's hard to imagine the political consequences of necessary adjustments.  Everyone says "growth down into the single digits," but one hedge fund guy I've talked to expects a falling economy.  The long-term growth potential is clear, but recent and future growth is looking much more tenuous.  This is obviously a problem, given the lack of ways of political expression.  The Tibet riots came out of nowhere; doubtless others are mad about the falling stock market, health safety failures, a collapsing housing market, and looming economic issues.  

Heterogeneities

I'm aware of no economic theory that claims this, but it is case that countries and people do not grow, but rather certain areas and communities that shift into a capitalist mindset.  Most human societies can be characterized by sharp stratifications.  One group of course handles agriculture, others fight over wealth, and usually you have some group that does the trade.  These are the Jews of Europe, Chinese Hakka in Southeast Asia, Lebanese and Hausa in West Africa, Portuguese in Spanish America, Indian Gujaratis and Punjabis across the Indian Ocean, along with Parsis, Armenians, and many other groups.  The pattern for many of these groups is similar--you maintain an outsider status in another area while trading with them, combining knowledge of trade routes with local connections.  The advantage is that you get the trust and finance of a close-knit community essential for controlling risk and the potential for theft.  While a rich farmer is expected to redistribute his income to family and friends, a rich trader can loan that money out and hire his relations.  

This model of trade relies on a starkly pre-modern set of constraints due to the costs of abandoning openness and accessibility.  It really only makes sense for economies characterized by a complete lack of trust, third-party interactions, and liquidity, because really trade is one of the simplest forms of arbitrage and should happen frequently.  So it's interesting to see the success of this model through times of free trade and to the present day essentially due this system's ability to transmit certain values.

It's popular to complain about British colonialism of Asia as an outright plunder along Burke's lines, and there is much to that.  However as far as empires go, it was a relatively light one that encouraged free and open trade--certainly in contrast to intrusions after de Gama leading to the control of maritime chokepoints and a sharp reduction in inter-Asian trade conducted by Asians.  The evidence for British openness is given by the success of not only State-approved traders but third party merchants.  Be they Baghdadi Jews or Parsis or wandering Scotsmen, there was a lot of money to be made in this part of the world.  Beyond trade, you had a big rush towards offshoring manufacturing into these areas as well, including infrastructure and cotton mills.  The big question is why India and China didn't gain more from this growth, and why more communities didn't take part.  Odeg Galor's answer to the first is that the gains from trade led to greater income per capita in richer countries and greater aggregate population in poorer countries.  As far as the second goes, it's tough to say.  A regime of relatively open trade and commerce enriched some groups while others failed to take part.  Arguably, the inequality of economic power accruing to certain groups is inevitable in a free market and leads to violence when paired with democratic politics.  

Okay, both pre-modern economies and colonialist systems impose many constraints encouraging group identities, but the real suprise is that modern economies, if anything, amplify the advantages held by certain groups, largely because of the values these groups possess.  This is an amazing time to be alive, with a roughly meritocratic system and outsize opportunities for driven and educated people.  So it's amazing to find that people still fail to respond to these incentives.  On the other side of the distribution, former advisor to President Clinton William Galston says that you need to do three things to not be poor: finish high school, marry before having a child, and wait until age 20 to have a child.  8% of people who do these things are poor, while 79% of people who do not are poor.  Getting into family breakdowns gets into a world of unemployment, spatial mismatch of jobs, and deviant family structures.  Men really have no excuse, responding to the responsibilities of being primary bread-winner by falling behind academically and extending adolescence.  The media doesn't really provide any good role models here either.  

But the broader point is that there are people in a culture of success and other people who are not.  These build on long-existing differences in attitudes towards work and education held by different groups in society, and extend on an array of political, cultural, and arguably genetic grounds.  While economists like to assume that people are in some sense similar and respond to incentives equally, there is clearly some sort of culturally conditioned response to opportunity.  In many ways, the capitalist mindset is inhuman and difficult to adjust to as a whole group.  One consequence is that the demographic composition of a standard American elite college in no way mirrors that of the country as a whole, but these people comprise an elite class, and the admissions officers staffing the gates prefer to diversify on the basis of superfluous characteristics while blaming poor schools for colleges' inability to draw from large segments of the population.  The great thing about such a meritocratic system is that you co-opt exactly all of the people who would otherwise complain.  There has probably been too much hand-wringing about whether there is a "genetic" or "cultural" basis.  Cultural connections established at an early age seem rather as firm as those established by genes.  

I realize that this is not very original, but I don't see many other people talking about this.  This trend doesn't look like it's going away.   

More Regional Disparities

The point of talking about changing political competition is to explain the regional disparities that prop up in many places. So far there is the story of how that happened in the South--that the end of Democrat political dominance and the beginnings of economic growth are related--but I think this is broadly applicable in many places.

In India, you have the result that the Congress Party saw an close to their political monopoly in 1991 and many good things started around the same time. These are commonly seen as unrelated but my sense is that there is a relation. This appears to make that point, though a little dated, while this makes the argument with respect to human development indicators.

One interesting consequence of this idea is that wedge issues that break up an otherwise indifferent electorate really matter. The end of Democrat power in the South was fueled by such issues as abortion and Civil Rights, while several Indian states have seen the rise of regional parties that exploit various linguistic differences and petty concerns. The actual issues may be inconsequential, but they perhaps explain why southern Indian States--in which these issues were more salient, resulting in greater competition between the regional parties and Congress--generally developed more before 1991.

After 1991 you have the development of a plausibly national party of the Right as well as many other regional parties. It's tough to tease out the effects on the national level, but on the state level there were many differences coinciding with the growth of state-level disparities. The effects are not entirely positive, as in order to gain popularity the parties do all sorts of things such as incite violence, go for blatant populism, and so forth. The current Reddy-led Congress government in Andhra Pradesh is a great negative example of this--aside from bad populist schemes catered to every group, they went to far as to declare a cease-fire with Maoist rebels to allow them time to rearm, so now you have more violence than ever. And the anti-incumbency factor being what it is, many parties plunder as much as they wish while in office and rail against corruption once out of office.

But in a general climate of institutional decay, you do see some degree of improved state-level governance spurred by political competition within states and economic competition across states. To some degree this has happened across all parties: the current BJP governments in Gujarat, Madhya Pradesh, Rajasthan, Chhattisgarh, and Karnataka are all reasonably promising, while BJP-supported governments in Orissa and Bihar have upended both political dominance and bad governance. Bihar is a particularly good example, as former Chief Minister Lalu put together a populist majority and let the state wither away. New governance has improved conditions, while Lalu himself--pulled by the incentives of ascending to Prime Minister one day--has turned out an unexpectedly good manager of the Railway system. Meanwhile, Congress control of Delhi has turned out extremely well.

There's much, much more to this than just that. An excess of competition (this seems similar to the excess-entry argument in IO) in places such as Uttar Pradesh seems to simply make governing anarchic. When parties compete on grounds of solidarity or identity rather than issues or ideologies (no matter how apparently distant from actual conditions) there are fewer incentives for governments to perform well. The growth of the middle-class is really important as well, as parties begin to compete on the basis of their political values. There are many particular state-level dynamics--in Gujarat the BJP has simply dominated for some time and run a tight ship--that complicate issues. But the basic theme seems right to me, and also relatively unexplored in past studies.

Edit: It would be awesome if I knew the politics of more than two democratic countries.

More New South

Thanks to those of you (especially Chris) who had things to say about the South.  To the left is some data that gets at the point I'm trying to make.  You have a graph of per capita personal income growth relative to 1948--so this is measuring post-WWII regional disparities in growth.  The Southern states appear to be moving in unison faster than the other plotted "blue" states like California and Illinois.   

Obviously, some of this is catch-up, as the South was relatively undeveloped for a while and then various changes made it economical for companies to take advantage of the income differential.  But the development literature is also clear that convergence requires meeting certain hurdles.  Going back to 1948, armed with knowledge of future trends in services, manufacturing, and agriculture, I think you'd be hard pressed to imagine the South as a leading area of growth in the country, but that's in fact what has happened.

So then the question is why did this happen.  Here is a long list of potential explanations, implicating among others a big push in infrastructure, human capital development (the Rockefeller-funded hookworm and malaria eradication projects were also useful), climate, and of course AC.  I find these explanations slightly ad hoc and they really seem to beg the question, while also better at explaining the earlier takeoff rather than the current trajectory.  My suspicion is that within a country like the U.S., state-level institutional differences explain at least some of the difference.  

And there is in fact a political explanation which largely makes my point by arguing that the breakdown of the Democrat majority after 1960 spurred economic growth.  While I emphasized Republicans, the point is really more about the changing electoral dynamics and the growing political power of people who do not have quite the entrenched economic interests as people elsewhere in the country (though if I read the paper right, the Republicans do have a larger impact on growth).  So the argument is that the South grew because it got better political leadership which prioritized high-growth policies, though of course other things were involved.  

If you look at the right of the graph, you'll see that the growth gap appears large and growing (though blue states remain richer).  These are very partisan viewpoints, but they argue fairly convincingly that Southern states are doing well and Blue/Rust Belt states are not doing so well.  In some sense it's no surprise that the Chicago politician sees a bad economic climate and the Arizona senator sees good fundamentals.  Of course assigning causality is hard, but it's much easier on a state level--where governors can get legislation passed and attract businesses--than on a national level, where all one really has to do is not make too many mistakes and hope you get lucky.  

If you really believe these results, they point to a radically different American regional differentials.  This New Yorker article is an interesting view on Rust Belt/Appalachia and their future prospects.  They really don't look great, and I somehow doubt that Presidential politics--which was the focus of the piece--is really going to change that.  Of course, there are really two issues here.  One is the increasing regulatory and business advantage certain states hold, and the other is the continued breakdown of the American family.  The second is a lot more important--I know of no community in this country that doesn't prioritize stable families, education, and hard work that isn't doing pretty well for themselves--but the first is much more open to political change.  But again that comes from the grassroots, and the South was lucky in that it lacked the unions and pork and could jump ahead to the jucier bits of development.  It's hard to imagine this happening in many struggling states and cities, which seem to face single-party dominance and not much of a constitutency for change (more of the same?).  

The overall situation here seems to be a global trend, in which the world as a whole converges with substantial hetergeneity on political and cultural grounds.  India is a good comparison as a pluralist democracy with substantial political devolution of powers to states.  And you see the better run states getting better while other struggle.  Freer markets seem to accelerate this process; amplifying the gains while making it harder to deny people their rationalizable worth.  Many people see a "race to the bottom" but optimistically, the incentives are there for everyone to govern and produce better.

The New South

There is no guarantee that the following makes any sense.  

Many people are interested in the notion of economic convergence.  Economic theory predicts that in the long-run, all economies should move to the frontier of development.  So Japan meets the West, expands a lot, and now has has the same standard of living as other rich countries while growing at the same rate.  Obviously this doesn't happen everywhere, and the question is whether the sources of those differences lie in genetics, culture, institutions, policy, or something else.  

One such convergence situation is the post-WWII behavior of the American South.  The South had always lagged the North in development, but this was earlier a geographical issue as the Southern plains attracted the Barbados-based plantation elite while the North pursued trade and manufacturing.  This gap continued.  The geographical barrier to convergence disappeared with a higher level of technology, and the fact that the South and the North are in the same country mean that a lot of other barriers to convergence were not a big deal.  The main barriers to there being similar economies in the North and South became institutional and related to the quality of governance.  

My argument is that ultimately changing institutions created the "New South," and that this really started to change with the political dominance of a group of socially conservative Democrats and Republicans in the '60s with a constituency broadly in favor of different economic ideas.  The shape of this new ideology--Goldwater Republicanism--was formed by many things.  There was an influx of Northerners.  Broadly, there were push and pull dynamics creating essentially a new party.  On a more national level, this is covered negatively by people like Krugman, who sees a basically racist Southern strategy, and more positively by people like Brooks or Douthat.  

The push factors include the racial fallout of the Civil Rights movement, which both increased Democrat votes from black voters and shifted many white voters into the Republican Party.  Liberal judicial decisions were another factor, from busing (again, more racial stuff, but one that lead to more private schooling, which was Christian, and so led to more evangelicalism) to Roe v. Wade.  The growing Christian gap would become a larger factor later on.  There were pull factors as well, as the newly constituted Republican Party was better able to attract natural conservatives, with their focus on law and order issues, taxes, welfare, cultural topics, and so forth.  I can imagine tipping effects, in which more and more conservatives join the Republican Party, which markets itself as more Republican, and so forth.  It's easy to call this racism, but it seems to me a more basic consequence of a pluralist society.  Societies riveted by ethno-linguistic divisions display much less social trust as a whole, and tend to have less redistributionist institutions.  This is not necessarily linked to race, look at India, in which caste divisions behave politically much like ethnic rivalries, and really hamper coherent policies.  

The product of these forces was to yield a much more ideologically consistent and partisan set of political parties in the south.  With a median voter that's conservative in the South, you end up with rotating conservative Democrat and staunch Republican governance.  The traditional base of the new conservatives consisted exactly of the sort of people open to a more upwardly mobile, free enterprise system of government, so an economic conservative approach became a natural fit to this program.  

Of course, the development of the "New South" had to do with many things, among them the rising importance of service industries not linked to geography, technology, AC, highways, and the positive impacts of Civil Rights bills in desegregating the population.  But many of the proximate causes of the convergence between North and South needed to take place in a tolerable institutional environment, which was then supplied by the new Republican governors.  Low-tax regimes, opposition to union labor, State subsidies, spending on infrastructure, education, and research, and so forth attracted an array of manufacturing (car manufacturing) and service (banking, telecom) interest; even as many economic fundamentals were in long-term decline (textiles, furniture, cotton, agriculture).  

With the recent transformation of the Republican Party into the Party of the South, it's popular to talk about how the social hangups of Southerners have become the stuff of national cultural wars.  But it's interesting to see that the institutional barriers between North and South has largely revesed itself with the South in an arguably better position.  There have been some attempts to take on the old guard in blue areas--especially by moderate Republicans like Romney, Bloomberg, Giulianni, and Schwarzenegger, and some moderate Democrat responses like Daley, Spitzer, and Cory Booker (Are these attempts to be a Clinton Democrat on a more local level?).  But largely, Blue states continue to hemorrhage people and jobs to the Sun Belt.  This election continues in many ways that trend, with the choice between a Chicago politician who promises more regulation, higher taxes, and a host of industrial policy technocrat intitiatives to solve problems in health care, energy, and education and an Arizonan politician who combines sufficient deferrence to the socially conservative wing of the party with a support for lower taxes and less regulation.

The ultimate consequence of this state variation in development policies is the Housing Bubble.  In some sense, it's a myth that we had a "national Housing Bubble"; it remained in many ways a regional problem with certain areas like California, New York, Chicagoland, and (yes, somewhat counter to the point) Florida.  Tight land regulations in these areas artificially inflated the value of land, creating the actual housing "bubble" that encouraged poor lending tactics and eventually the securitization problem.  Places like Texas, Georgia, Arizona or othern Southern areas that don't have quite the zoning regimen had a flexible response to demand in housing and so never suffered quite the price movement up or down.  These places are really being spared the worst of the current problems, while continuing to attract more corporate headquarters and operations.  Another housing implication is that since Democrats generally run cities, and since Democrats generally favor regulations, you have city-level housing markets that are absolutely horrible, with the attending higher housing prices diminishing to a large extent the value of a College degree (since of course you don't attend a top-tier school and move to Nebraska).  

Of course, the old Democrat holdouts are still home to some of the most amazingly productive sectors of the economy (Sillicon Valley, New York) with the associated Universities and so forth.  So the combination of highly productive people with an increasingly pushed middle class yields greater inequality issues in Blue States, and then of course that's all they talk about.  You could probably make the case that what Blue States now need is Republican governance, and Red States some Democrat policies.  

One reason for the general success of the Republican method is that state-level government has many different spending priorities and issues than on the national level.  And since state governments can't hold a deficit; national-level Republicans have of course run up the national debt, while state-level Republicans have not.  So while the national level assessment of Republicans is mixed--they might have saved the economy from turning into Europe, but they also messed up a lot of stuff on spending--the state-level economic assessment tends more positive.  

I think the crucial point is not that the Republicans are smarter, but that the people who vote for them are generally social aspirers open to new business with little personal stake in bureaucratic pork, which leads to broader support of a certain free-enterprise economic agenda, combined with the fact that the Republican talent pool is incorporating business-minded people.  Look at the ranks of prominent Southern state-level Republican politicians, and you see both a bias for religion and business.  Bush fit this model rather well, what with his MBA and so forth.  Of course you still have the lawyers (in America and Britain, politicans are chosen from the stock of lawyers, while in Korea and Germany it tends to be engineers), but it still seems to me a contrast between the sorts of people who have run Democrat machines in other parts of the country.  Edwards, Hillary, and Obama were all of course lawyers (on the other side, you have Romney a businessman-turned-governor, Huckabee a rather effective preacher-turned-governor, and so forth) and the primary race at times really felt like a battle between the UNC-educated lawyer who specializes in court cases and the Ivy-trained lawyers who focus a bit more on the academic stuff.  Arguably, neither group is really set to run an economy.  Corruption seems like an inevitable outcome, but really no one cares about corruption paired with actual development. 

I guess one of the things this is a reaction to is the notion that economic conservatism is just a really bad idea that was pushed on the Americd toan people, with universal devastating consequences.  I hear this from a lot of people, who just can't imagine that the Regan/Bush gang were really anything but absolutely horrible.  I ten push a little against this idea.  

Update:  There is also the cultural change in the South where more people become evangelical Christian and that starts to matter.  Is that another factor?

I'd love feedback on this to figure out whether to actually pursue this idea.  

Regional Disparities

It's a myth that countries grow and that unequal growth is somehow pathalogical. Generally, a few people in a small area start growth, which then feeds into the economy as a whole. Trickle-down does in fact work, which is why the poorest decile of a rich country is much better off than the richest decile in a poor country. When the relevant area to figures out growth coincides with the political grouping--say in Botswana or Hong Kong or Mauritania--we say that the country is getting richer. When that area is inside of a larger political unit, we say that there are regional disparities.

And so you have the well-chronicled fact that India's growth is regionally unbalanced. This is often sold as the claim "western and southern states do well" but there's a bit more to it. This map (blue and red are good, brown and yellow bad) is a little dated--from the 1991 census--and so does not capture recent unequal growth, but does look at some measure of development at a district level.

One thing to note is that the landlocked northern "bimaru" states in the Hindi belt--Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh are not doing so great. Most inland areas in general are doing fairly poorly as well. Development is largely clustered into two sets of districts: Those near the coast and those along the far northern Delhi-Punjab corridor. Of course, there are some cities here and there that do well, and the whole of Maharashtra appears well-run. Coastal Andhra and Orissa are not uniformly great, but those two states have made a lot of progress in the last fifteen years not seen on the map.
This disparity is a little striking as northern India was for a long time the richest portion of India. It was the seat of the Mauryan, Gupta, and Mughal Empires and home to the British Raj. This wealth persisted even after independence.

Political mismanagment goes a long way towards explaining this gap: National Congress rule tried to eliminate regional imbalances, which involved neglecting the richer states. On the state level, coastal and far Northern states are simply run better than those in the center. Geographical size seems to matter, as smaller states tend to be better run, while the bimaru states are all massive (Though Maharashtra is rather large as well). This was the rationale for breaking off some states from the larger ones, a policy that seems to have worked rather well.

You also have to wonder if being landlocked is a curse, as per Sachs and Collier. State-level variation in GDP in America does not seem to be especially correlated to distance from the coast, but that also reflects massive investments in infrastructure that reduce transportation costs. Those inland states in India that got rich did so by exporting crop surpluses on highways and railways.

Increasing the ties betwen inland India--which includes the bimaru states as well as rural portions of coastal states--into the part of India which is growing rapidly is obviously important. It's also essential to tapping into India's "demographic divididend"--India's relatively youthful workforce. It turns out that this bonanza is largely expected in the high-fertility bimaru states--which already contain about 40% of India's population between them. For labor-intensive industry to take advantage of these workers, inland states will need to be as investment-ready as coastal states. Otherwise, the rich parts of India will see large wage inflation and the poorer parts significant unemployment.

Massive investments in human capital and infrastructure are necessary to close this gap, and accountable governance in smaller states is the way there. Plans for a freight corridor between Delhi and Mumbai along Tokyo-Osaka lines are promising, and the Golden Quadrangle linking major Indian metros is working well. Another corridor from Delhi to Calcutta along the Grand Trunk Road could hit another quarter of the population.