Will The Economic Stimulus Work?

The lack of modesty among economists is pretty amazing. A couple of years ago, most economists knew that the Fed was great at handling interest rates and only moderate recessions would follow. Then many people figured that financial innovation was actually making the world a less risky place. Now, people seem to be basically fine with throwing about a trillion dollars to kick-start the economy. Temporary stimulus? Many of the projected jobs are in government, and it seems hard to imagine anyone firing them in a couple of years once the economy recovers.

With so many people rushing so quickly to adopt ideas that were considered academic nonsense not too long ago, it's worth being a little skeptical about the feasibility about a stimulus plan. Mankiw has a number of items up along this line of reasoning, which derive mainly from misreading papers by Obama appointee Christina Romer.

There's another line of criticism, however, aired by Posner. A stimulus will work in a Keynesian sense if the government uses up slack resources made available by the economic downturn, rather than using up productive resources at work elsewhere in the economy. By contrast, well-designed government investments are targeted at the sectors of the economy with the greatest potential. There's a problem here; it may be most expansionary to hire a construction worker in Las Vegas, but most productive to give a health-care worker there a different job.

The problem happens when you consider the ways in which people in a modern economy are highly specialized into specific sectors and tasks. This is related to the degree to which the economy runs on skilled workers and technology (even if it were as easy to switch jobs, the nature of skill endowments would make people want to stay within a particular area). It's unrealistic to simply throw together an infrastructure project and expect anyone to show up; sure, you might need a number of unskilled laborers, but the laid-off auto and finance workers are going to be unlikely to show up. People also don't particularly like to move to get a job; particularly if they have a house, family, or working spouse.

You can see where this might be a problem when you look at Obama's job creation plan. First of all, any sort of assumptions and projections you make are going to be iffy, especially when you're crafting an unprecedented policy proposal in uncharted waters. But they have to give Congress something, so I'll let that pass.

More troubling is where you see jobs being 'created.' State relief and business tax credit for new workers both make a lot of sense (though I hear the Democrats want to axe the tax credit). But are we really going to see hundreds of thousands of new jobs in education and health care appear ot of nowhere? Of course the long-term trajectory of these jobs is rising. But exactly for that reason, there aren't a lot of unemployed teachers. You really need to convert the newly-unemployed finance guys into teachers (and energy producers and infrastructure managers) if you want to get any sort of stimulus. But because of workforce specialization, it takes a long time to make that happen. Workers are no longer interchangable parts, but are increasingly sector and even firm specific. One way of looking at it is that many of the jobs on the stimulus agenda are female-specific, while the present crisis has affected male workers to a much greater degree.

Middle East

Matt Ygelsias has some interesting discussion on American policy in the Middle East:

One way to think about U.S. policy toward the Persian Gulf since the beginning of the Iran-Iraq War is that we’ve been struggling to create a situation in which Iraq is strong enough to avoid being dominated by Iran while not being strong enough to dominate Kuwait and Saudi Arabia. Basically, right now there are four oil rich countries all very close to each other and we want to make sure that they remain four separate countries so that none of them becomes too strong. The situation is one of enhanced concern because not only are these countries oil rich, but they share important cultural affinities that make successful domination seem more plausible.

This seems about right.  The United States doesn't want to tolerate political monopoly of oil (the only country to worry about that; everyone else just buys it like any other commodity) so goes to extraordinary lengths to avoid political unification of areas controlling oil.  One interesting part about this is that in Iran, Iraq (before the invasion), and Saudi Arabia the oil is on ground occupied by politically marginal groups (Shias in Saudi and Iraq, Sunnis in Iran).  This is a great political solution--keeping both the oil politically divided, and each country riveted as well, led by unpopular autocrats dependent on the US.  The three of these, plus Iran, have all been supported by America in a bid to maintain 1984-like political jamlock.  

From this angle, it's pretty clear that the costs have been pretty disproportionate.  A more unified Gulf might be able to push harder than OPEC for higher oil prices; but Saudi Arabia--the oil producing state that thinks most like a monopolist--has always been the one pushing for lower oil prices to prevent the rise of alternative fuels. If the oil consumers really wanted lower oil prices, they could just form a cartel of their own to force down prices.  Spending on new technology would be nice, but as long as America's allies depend on Middle Eastern oil, America will probably care too.  Maybe the 'oil companies' push for this policy, but really they would be better off with higher oil prices.  

The big wrinke in this political dynamic is the rise of Shiites and assymetrical warfare.  Iran-Iraq of course get closer, but Hezbollah and Sadr are also interesting.  Both represent the power of mobilizing a young and growing population through social services and launching a bottom-up Maoist campaign.  Both are smart enough to use military force to the degree necessary to maintain control without requiring military occupation, which is very hard these days.  The dilution of power represented by RPGs, cruise missiles, rockets, SAMs, and assault rifles, and terror attacks--especially in crowded areas where an occupier can't strike back--means that even the strongest conventional power like Israel is hard-pressed to launch any sort of offensive attack.  There are parallels to the Pastuns, which is why the Pakistani Army is so desparate to move troops back to the Indian border.  

In the interests of continued Middle Eastern anarchy, you would try to forestall a realignment by hoping that the Shiite forced simply get spilt in bloody civil wars within mixed states.  That hasn't happened, as Lebanon and Iraq move much more Shiite, and Iran picks up nuclear weapons.  

Weather Derivatives

It doesn't look like there is a lot of this existing, but it seems like there would be a big market for weather derivatives and futures.  There are a lot of people whose profits is a function of the weather, where weather volatility can be a big problem.  Being able to hedge that risk away makes a lot of sense, even if the underlying asset doesn't really have a value.  Utility and heating companies would be natural customers, but really anyone with a weather-varying profit component can lower volatility.  Plus you can hedge for the psychic bads of really cold weather.  

Pay For Performance

Efforts to keep kids in school don't work well, so economists are trying paying kids for school. In Texas, they paid for AP tests and found that more kids passed them. In Israel, they paid for passing the exit exam and got more people to do that too. These cash incentives seem to work narrowly for only the item paid out on (no more graduation in Texas) and only for marginal students who are actually capable of meeting the bar. It's also a very behavioral story; the incentives for education appear very large, so high school kids need to have very "uneconomic" preferences to be swayed by small amounts of cash (or signaling and unobservables are biasing every estimate of skills gains very high). I haven't seen any effects of reducing kid's "intrinsic motivation." That doesn't surprise me too much; the people who are "motivated" are often just long term greedy. Why punish the ones who only want cash in the short run?

Overlapping Magisteria

The Templeton Institute has taken up the question of whether science invalidates religion. This debate has broken down along predictable lines, furthering their overall goal of blurring the boundaries between science and religion and making religious study more acceptable.

In some respect, it's obviously true that science has taken something away from religion. It used to be the case that the primary filter or worldview mediating all perception was religious or belief-oriented in nature. Science has taken a substantial chuck of that real estate. But science has substantial limitations as well; it only talks about things along physical, rather than meta-physical, terms and so is agnostic about the possibility of higher-order meddling. Hindu nationalists for instance have very strong support from many scientists.

The real problem for religion is humanistic attacks against sacred texts and religious practices based on skepticism and comparative analysis. From David Hume to Nietzche, why believe in miracles? You can look at the evolution of every religion as a useful social enterprise which recycles myths, operates in competition with other faiths, and is highly contingent on initial conditions. If every other religion is arbitrary and you don't want to believe in Zeus, then the case for any individual religion takes a hit. You can still be spiritual in general, especially if you get Temporal Lobe Epilepsy.

Innate Gender Differences

One of the best way to get yourself shunned in Academia is to speculate about gender difference in intelligence. That's why this guy--rumor has it, it's Robert Gordon--writes anonymously.

He (she?) discusses work put out by an Italian professor I once worked with, which shows that the gender gap in mathematical achievement disappears in more gender equal countries, and even reverses itself for sufficiently progressive societies. The unnamed genderist finds that such a gap exists and is durable. The Italians find otherwise because gaps close at high levels of ability--which are also countries where feminism is in vogue. Some statistics shows that this gap is largely explained through genetics. If you get tired of genetics-intelligence hand-waving, just check out Gladwell.

Cue the just-so evolutionary stories. I imagine telling these must be a high point of parenting.

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.  

Indian Foreign Policy

Some great stuff from my favorite South Asian diplomat about India's America delusion:

The past four-week period has also shaken up Indian illusions regarding Washington's regional policies. It is plain to see that the US never really abandoned its "hyphenated" policy towards India and Pakistan as South Asia's two important rival powers, both of which are useful in their own ways for the pursuit of the US's geostrategies. 

That's about right.  The pro-US bias in the Indian strategic community is driven by America-envy and regional disgust much more than it is by realpolitik.  Bush has done an expert job at playing on this Rodney Dangerfield ethos by convincing people that superpower status is possible if you sign on a sufficiently pro-US agenda.  This is really the status and respect Nehru cultivated people to expect, but India really doesn't offer enough to America to justify a broad licence.  Even the British are kept on a short leash, and their interests mesh pretty well.  

India's regional objectives--contain Pakistan, limit terror, hegemony over neighboring states, deter China, while getting guns and oil in exchange for tech support--overlap only partially with America's.  The decades old partnership with Russia is lapsing, while Iran is given the cold shoulder over a necessary pipeline deal, and other Middle Eastern states spurned, for what end?  So an English-speaking elite can feel good about being a star player on the Asian League of Democracies?  The American treatment of Pakistan shows that they value combating terror as a national priority, and India's treatment will be judged as a part of a regional settlement taking into account Pakistan's feelings.  In the 1960s, Johnson restricted food aid out of spite for India's non-cooperation with Vietnam.  

It's unreasonable to expect any more, and also bad to pass a nuclear deal which will solidify relations with the Americans at the cost of near-collapse of the government while bringing meager energy returns.  Just build some roads, privatize everything, and get the Russians on the phone.  Their Shanghai alliance has the same facade of autocratic unity that the Communists put up in the '50s, and beneath that you can see the tensions between a state which is rich in energy and land but short on people and one with the reverse endowments.  I'm sure the Russians could make better use of a South Asian ally (the Chinese already have theirs) with substantial technological expertise, the better to weigh against the Chinese, Americans, and whomever else they feel like annoying.

Some Internet Criticism

The great part about the Internet are the cascading torrents of links which turn the whole thing into an integrated network.  Of course, a small number of important sites do a great deal of the shifting through and highlighting, but it's not entirely a top-down system as the original sources are often spotted by topic specialists.  The entire enterprise remains hugely dependent on the big newspapers to generate things to complain about.  

The process is hugely addictive, certainly for consumers and likely for the intermediaries as well.  Pick up the Outrage of the Day, add a political spin, and send on down the line for supporters to fawn and denigrators to be outraged at your having brought up the subject up, having your view, etc.  It's like a jolt of crack to see the day's information, get pulled into the argument, weight sides, and scribble nonsense at the other side.  Most things people do offer delayed rewards, so it's no surprise to see millions flock somewhere which offers the constant allure of More Stuff To See, more information, more discussion.  That incessant flow disguises the fact that people rarely talk about the thing in itself, almost never have the background or understanding of the topic, and so most things are thinly covered politics.  But behind all the shallowness that comes with discussing even the most serious of topics you can see even broader dynamics of push-and-pull between broader personalities and outlooks, which do change even if no one ever changes their mind.   

One of my personal pet peeves is the autistic understanding of language which happens all around.  When people talk in the real world they bring all sorts of implicit meanings behind gestures, phrases, etc.  The anonymous and toneless nature of the internet grounds everyone in the literal meaning of words, which greatly impoverishes thought.  Take analogies for instance.  People make analogies all the time to compare certain aspects of A to certain aspects of B.  Any random A, B are likely to have something in common, but when people make this connection they generally mean that something in particular is going on.  This is after all how we learn; we link new things to things which we already know.  On the Internet, people will generally take the connection out of context, and mock it on face value.  People care less about how a statement is interesting than about it's truth value, but people also don't care enough to look up the thing's truth value and instead rely on heuristics.  

Broader psychological misunderstandings abound.  The urge for firebrands and activists to hear themselves results in a massive overpopulation of fundamentalists of every stripe.  Nearly everything on the Internet is reductive.  People everywhere search for validation and online they get it through low blows, petty remarks, and swift thrusts.  It's as if the place is run by the Oxford Debate Society.  The particular psychological rut of conspiracy theories, shallow thought, and general angst make the Interet a very motly but, well, a very "male" place.  Despite all the links, it's very antisocial, with very little in the way of relationships or empathy.  These aren't gone, however, but come up in the strangest of places.  

It's very much like a city in that way, with a blizzard of activity covering up a lack of introspection, memory, and history.  What has happened before, what is really going on now, and where things are headed are abandoned as people race to meet the demands of the current cycle.  It's like travelling the world with some smart, but not too smart, argumentative friends who have amnesia.  I don't know what this is doing to our intelligence, but someday the internet will drop the vicious circles and parlor tricks and become the thing it was meant to be.  The problem is not that it's escapist, but that it's not escapist enough and is still bound by the conventions other people set in other media.  I want to stumble upon Dutch's blog, see more passive-agressiveness, maybe some irony and parody.  Things that don't make sense, complex psychological issues, some other prose than dry and without adjectives.  A Russian novel in parts; something jointly written by people across the world.  

Wow, it's tough to talk about things in the abstract.  

The Death of Newspapers

Along the general vein of fretting over newly lost industries from cars to investment banking (Seriously, housing's gone, no one cares about 'renewable' garbage anymore, retail is gone, what exactly is the economy running on?), there has been a lot of talk about the decline of newspapers.  Generally, people tend to blame the Internet for everything and diss management for failing to take advantage of counterfactuals like starting their own Craigslist.  

Yes, the Internet is a really big deal, a fact which Google trends makes very clear to me.  But big brands, as Yglesias notes, are doing really well.  Magazines have done alright too.  It's the combination of the Internet plus all sorts of other stuff that are putting journalists out of business.  After all, virtually every newspaper now puts their content on the web.  They've realized that they're not in the business of selling paper, but rather of selling media content, which can happen in any medium.  

Online media distribution has very different economics though.  For one, you don't have the crazy diseconomies of scale which have supported cozy regional oligopolies.  If I'm on the web and searching for news, I might as well go to the best source of news, while in my hometown I might be limited to a few local papers (no, you don't want that mail subscription to the NYT).  The best online sources of content have generally done pretty well with respect to page views.  The strategy of many news teams, however, has been to respond to budget crises by cutting back writers, which pushes more people to other online sources, which hurts the budget more, which causes another death spiral of cuts... the WSJ and NYT, however, have kept up pretty good news teams and seen plenty of visits their way.  

But newspapers would still be fine if they were able to just move their customers online and still make similar ad revenue per customer.  They'd perhaps be better off since the cost of a newspaper is pretty close to the production cost.  The big problem is that Internet advertising is nowhere near as profitable as print advertising.  You behave very differently on the Internet than other media places, and advertisers don't really know how to deal with that.  They might fix this one day; the first TV ads were rip-offs of radio ads and no one paid them any attention.  Perhaps the defining characteristic of the Internet is the network structure of links and the quick diffusion between sites; it's not crazy to think that someday we'll want to click on those links, since we click on everything else we see without thinking about it too much.  Probably the best way to get there is to data-mine personal information to deliver links that look like things I click on all the time.  I click on the news stories at the top of my Gmail account, for instance.  People are going to lose a lot of privacy, hands will be wrung and the occasional sob story will hit Newsweek and people will be better off.  But right now Internet advertising is less profitable for newspapers by a substantial margin; it's not that they've lost customers so much as they've lost the profit/customer. 

The Internet also takes away a lot of the reason for their being a newspaper, which is after all a bundled product of various smorgasbord news items.  This used to be the most efficient way to deliver a mass of information to a person.  These days, people tend to use specialized sources--ESPN (or, even better, deadspin) for sports, gawker for entertainment, Slate for contrariness, blogs for opinion, and so on.  There are a handful of aggregators, and of course the best media brands with international coverage draw attention, but there's much less reason to use a mid-size town newspaper for this purpose.  There's maybe less serendipity of coming into wayward news events online, but really people use the internet for a lot of random stuff.  If historical evolution went from the internet to the newspaper, old hands would complain that young folk no longer get the educative experience of browsing Wikipedia.   

Some newspapers have responded by increasing specialized coverage to appeal to wider audiences, and letting reporters write blogs to create some personal information channels.  In the long-run, the Internet is a very un-democratic institution which makes everything follow a power law.  So a few blogs dominate, and many of these tend to be run out of big media institutions (and staffed by Ivy Leage grads...); the remaining big blogs are mostly legacies.  Again, the problem lies in monetizing all of these people.  It tends to be only possible with extremely rich people, which is probably why Murdoch decided to keep the WSJ behind a wall (while silently redesigning the site).  Yeah, that leaves you without ammo in the daily link barrage, but your proprietary blogs can still participate in that while you focus on profits.  

This has all been great for consumers.  Following the general trend of globalization--kill local options while increasing choices for everybody through trade--it's easier to get quality everything than every before.  Probably investigative reporting will take a big hit, since bloggers are better at shifting through things in the public domain rather than adding original reporting, but who really cares.  The top-quality newspapers will do very well, as will niche publications and anything that caters to rich people.  

The big unresolved problem in my mind is coming up with decent personalized aggregators.  Sites which take a person's given preferences to deliver things that 1) All their friends are reading 2) Appeal on the basis of 'you really should know this' 3) Provide some random flavor 4) Are similar to things you have read 5) Go beyond fetching stories to summarize ongoing debates 6) Provide "Internet criticism;" broad, meta-criticism of overarching trends and themes.  Of course, you'll be able to make this as personalized as desired, vote up/down on stories, send to friends, etc.   Google News doesn't really cut it--humans might need to get involved at some point.  Naked Capitalism is nice for some finance/economics stuff.  Newser is pretty interesting too, but there's a lot of room to get better.  Slate does some of this, and a service similar to Slate, but for everyone and user generated, recently went bankrupt. 

Basically I'm waiting for the point where I berate people for not reading/creating blogs like normal people and instead twittering or some nonsense.  

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.

One-Party Democratic Rule

Bryan Caplan wants to know why certain places, like Singapore develop as single-party Democracies.

The traditional two-party result in Game Theory makes the assumption that voter preferences lie on a linear continuum. So given any two people, one will be more "left-wing" than the other, and you can find some moderate in between. Parties then jostle for the median voter, and political dominance is unstable.

In reality, the political landscape tends to be more broken up. You have issues like abortion which cleave the electorate. With large population areas, such large Democracies, there tend to be sufficiently many issues that the two parties take on many differing positions and you can effectively think about a "marginal voter" who is torn about which policy preferences should receive greater weight. So any political dominance is always unstable, as the other party can create enough wedge issues to come back.

The problem in smaller political units is that voters are split on fewer issues. Voters tend to be much lower information on local races and go with identity more often. In Chicago for instance, the Daley machine can get at least 60% of the vote in primaries from their vote bank of Irish, immigrants, and other whites. It's hard to compete as another Democrat (let alone a Republican) since Daley serves his base very well (plenty of union and city jobs), and his base is over half the Democrat primary pool. Add to that the fact that city dwellers tend to have relatively uniform social preferences on issues such as abortion, gay marriage, teaching evolution in school, etc.

Similar ethnic divisions are at play in Singapore (Malaysia too). With a large Chinese supermajority, the Lee family makes sure to reward their supporters well. South Africa displays this pattern too, with the ANC commanding the undivided support of a large black base (though high-profile splits in that party might be important).

Explaining this paradox is all about showing why a competing party can't arise in small places while they can in large ones. If you can get >50% of the population to care about a simple set of issues, and then become the best person at providing them with their needs, you have a stable dominant equilibrium even in a democracy.

More interesting perhaps is explaining the long legacy of one-party rule in large and pluralistic democracies like India, Mexico, Taiwan. There the answer also has to do with the costs of building a political machine, and the use of state coercion to tackle political opposition, as well as reputation buildup in the freedom struggle (in India). Information costs in large democracies mean that the scions of politically powerful families start with a heavy stock of reputation capital, explaining the prominence of political dynasties in South Asian Democracies (Gandhi, Bhutto, Zia), and also American and Japanese Democracies.

This is also why you see a greater share of female political leadership in some foreign democracies than in America. In the US, political leaders tend to be drawn from the stock of well-connected lawyers (which is largely male), while in other countries leaders are often drawn from certain families (which are, presumably, half female). Hillary Clinton's rise was only possible from her position in the Clinton family, and Pelosi too is politically well-connected. Just like female rule in those countries, the rise of female politicians here is more a dynastic victory than a feminist one (just like how Queens Elizabeth and Hatshepsut didn't really advance women causes either). People like Merkel, Thatcher, and Mayawati seem like better signs of social progress. But it's also seems easier for women to run in Parliamentary systems rather than in a more direct democracy system. With a Parliament system, you can become a great advocate for your party's views, making you as valuable as any other person, with the added benefits of tokenism. When you're running for election among real people, you also have to deal with certain stereotypes. Successful female candidates always seem to behave hyper-masculinely (Clinton, Thatcher, M from Bond) or very nurturing and non-threatening (Palin, Sheila Dixit), but they have the advantage that it's harder to attack them without looking bad. Widespread acceptance of female leaders is going to take a bit.

I suspect that as China goes democratic, it will also follow a one-party democracy. Running political operations in all Chinese states is very expensive, so a single party can take advantage of economies of scale. Meanwhile, there is a relative population homogeneity and relative policy consensus. Most political disagreements center on personality differences between rival power cliques, which currently takes place behind closed doors but could easily be democratically decided. The government is very popular and would easily win elections; popular pressures already determine much of state policy. The big difference might be on foreign policy, in which a democratically elected government would be constrained into acting more hawkish on a world stage to save face domestically. Economic policy would also probably become more distorted through the influence of rent-seeking interest groups. On the plus side, voting out incumbents is a great way to let of political steam. Right now this is taken care of by the occasional execution or firing of the designated fall-guys, but if conditions are bad enough you want the guy at the top to change too.

South Asian International Relations

Two thoughts:

1.  There are not nearly enough Indian realists.  V.S. Naipaul's biographer and the National Interest are two good examples, but generally people respond with either a "invade Pakistan" or "as always, Hindu nationalists are to blame" perspective, neither of which are entirely valid.  Is it too much to ask for a government which can coherently formulate national goals, and execute them with a minimum of fuss?  Apparently it is, so you have a government which is both incapable of fixing national security or intelligence, and also lashes out at Pakistan in unproductive ways.  

2.  Am I the only one disappointed at Obama's foreign policy policies on South Asia so far?  He talked about publicly declaring strikes against Pakistan, which John McCain rightly criticized as leaving Pakistan no option but confronting you.  Obama had to establish enough of a warlike posture at the time (given his policy on negotiating with Iran) so I can overlook that.  But now there are all these thoughts coming out about how Obama wants to appoint an envoy to "fix" the Kashmir problem.  Daniel Larson and Reihan both point out how this isn't a terribly feasible option, and can be pretty counterproductive.  We'll see how this fusion of realism/liberal interventionism philosophy goes, but my suspicion is that it breaks down in the next crisis.

Mumbai Terror

Kristol points at this piece by Martha Nussbaum, which discusses all sorts of acts of terrorism except the one that prompted the piece.  It's almost as if the academics are not disinterested scholars, but ideologues with big axes to grind.  I really lose more and more respect for these sorts of academics the more I read the things they write.  This Slate piece is also fairly inane.  

In contrast, the Indian media has pretty good reporting (especially of government failures, which were many), while the Economist has been excellent.  The always valuable Asia Times Online has a great article on the attacks.  Read the whole thing, as they say, which shows (if true) how the attacks were planned out of Pakistan, aided by rogue ISI officials, and executed by the LeT, with Al-Qaeda involvement.  Of course the Indian Embassy in Afghanistan was also attacked with Pakistani assistance.  The civilian government appears to have little control over the actions of their intelligence agencies.  

One of the reasons this makes a lot of strategic sense for Pakistan's military is that cross-border tensions will expand the need for their traditional mission--mass troops against the border with India--and reduce the urge to attack terrorism near Afghanistan.  A really interesting response--not that it's going to happen--would be for India to deploy troops to Afghanistan where NATO won't go and continue to implicitly support separatist movements in Pakistan.  Pakistan has plenty to fear from asymmetrical warfare too.  This bears costs of its own, but India has a pretty solid track record in post-conflict stablization (and has the troops to do it with).  That would squeeze Pakistan pretty badly, and that's exactly why it makes for a great barganing chip in any Kashmir discussion.  

We're All Keynesians Again

The whole point of Friedman and Schwarts' book was to blame the Great Depression on poor monetary management by the Federal Reserve.  Free markets work, without crisis, if only the government can not ruin everything.

Well, it looks like the pair provided necessary, rather than sufficient, conditions for avoiding the chaos resulting from massive deleveraging.  Substantial losses in asset values destroyed bank balances leading to a crisis in solvency, and a consequent loss in financial sector trust.  We don't have the liquidity problems that were present in the Depression--the Fed got that right this time--but it looks like the problems in both time periods are related to all sorts of other stuff.  As consumers get out of debt, they decide they want to retire with something, and stop spending, and then the economy crashes.  

This is a straightforward Keynesian stimulus that shouldn't be necessary anymore.  Cowen makes the argument that a fiscal expansion didn't help in the last Depression, but that's because FDR hampered his own stimulus with higher taxes.  I think it's hard to get away from the stimulus plans of Krugman and Larry "never saw a stimulas plan he didn't like" Summers.