Violence is again swallowing Ciudad Juarez, according to the NYTimes. Just across the border from each other, El Paso, TX and Ciudad Juarez provide a stark contrast of how two different political environments, legal structures, court systems, and police forces can lead to drastically different economic and social outcomes; Acemoglu and Robinson regularly conduct this important institutional analysis across borders on Why Nations Fail.
Yet we must also remember that the violence in Mexico is not solely a Mexican problem, in need of a Mexican solution. The decisions we make in the United States play a huge role around this porous border. Los Zetas and the Sinaloa Cartel are largely funded by U.S. drug consumption, with marijuana likely being the most profitable drug. And many of the weapons that end up in the gangs’ hands come from Arizona, with its lax gun control laws and regulations.
Acemoglu and Robinson are right to look at the different institutional structures across the border: there are reasons why the violence takes place in Mexico and not as much in El Paso. And a long term, stable improvement will require that we develop institutions in Mexico that are more like those that we find in the United States. But recognizing the porous border also alerts us to the role that Americans play, and opens up some policy options to decrease the violence: (1) ban the sale of assault weapons in the U.S. (2) end the failed “War on Drugs” (3) decriminalize marijuana (and possibly other drugs trafficked through Latin America) in order to regulate the markets and divert funds from going to violent gangs.
However, these policy options are not even part of the political discussion in the United States. The problem is that we make political decisions on issues that we do not feel the consequences; there would be huge social benefits, but not to those who vote, so these discussions do not emerge. One might refer to this situation as a political externality, where actions are not taken on certain issues because their worst (or best) consequences are not felt within our borders.
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Some of my economics colleagues were certainly unimpressed by the President’s focus on encouraging manufacturing in the United States, and his condemnation of the outsourcing of jobs. Economists tend to have a great deal of faith in market forces, and consider the market price an accurate reflection of “all relevant information.” In economics, aiming for insourcing or encouraging particular sectors of the economy (and not others) is “distortionary” because those policies distort prices and quantities from their market price, which (sometimes!) in theory yields the most efficient price and quantity. Generally, economists have little faith in the government’s ability to “pick the winners.”
However, I found Obama’s focus on manufacturing in America, “an economy to last,” as one of the more promising aspects of the address. As I have written before, we should not ignore the benefits of the manufacturing sector in the economy. A healthy manufacturing sector not only affords well-paying jobs, which fosters a middle class, but also leads to R&D spillovers in related industries that may not even exist yet. Why are Japan and South Korea leading in lithium ion battery technology? Because electronics industries fled to there throughout the 1980s and 90s, and when it became clear that battery development would be the next global challenge, they were already far ahead. The U.S. is trying to catch up, but we are starting for our own goal line.
A great deal of research supports these arguments. One of the classic works on global competitiveness is Alice Amsden’s Asia’s Next Giant, which challenges the conventional wisdom that liberalization and market forces caused South Korea’s economic boom. Amsden attributes Korea’s success to a strong government that supported the manufacturing industry and worked with firms to import key technologies and train workers with relevant skills.
And this brings me to a second key aspect of The President’s address: the relationship between market and government. He is the first president in my lifetime to recognize that it is not about government vs. the market. (Even Bill Clinton favored a small government and lower taxes.) Obama’s speech recognized that the market and the government needed to support each other in order for our economy to succeed. The two are intertwined, and by supporting each other can achieve higher economic outcomes and realize more competitive firms. The debate should not be about whether responsibility lies with the government or the private sector to create jobs; the economy should not be understood as something apart from or in opposition to the economy. Rather, the government can support and even initiate certain desirable industries, so that we may achieve a healthy and resilient economy:
Think about the America within our reach. A country that leads the world in educating its people. An America that attracts a new generation of high-tech manufacturing and high-paying jobs. A future where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world. An economy built to last, where hard work pays off, and responsibility is rewarded.
*Third because the 2009 address shortly after Obama’s inauguration was technically not a state of the union.
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It’s hard to list all of the problems with American democracy: negative attack-campaigning, excessive lobbying influence, a lack of transparency, polarized political gridlock, a cable-news media with low journalistic standards, and a lack of civic engagement. But as explained by Lawrence Lessig, this tree of corruption of democracy has a single root: campaign finance. Attempts to reform these other branches will prove either impossible or meaningless as long as the current system of campaign finance is in place. Politicians in Washington spend anywhere from 30-70% of their time raising money. And it is not because they want to; it is out of necessity of the large sums of money required to run a successful political campaign. In order to raise this money, our elected representatives need to spend a great deal of time with donors. And the donors they court are typically not people like you and me. This makeshift system of financing campaigns gives a great deal of Washington access to a very small segment of the population (those with enough wealth to spare on politics).
Yale Law professors Bruce Ackerman and Ian Ayers propose a bold plan to reform the campaign finance system in their book, Voting with Dollars. Their plan includes basically two parts: (1) a system of public financing through vouchers and (2) a method to disburse all additional donations anonymously. The public financing gives every eligible voter a $50 “patriot voucher,” which they can donate towards any campaign of their choice. Donations beyond that would still be allowed, but would go through a fund, and all donations would be disbursed to the candidate in smaller denominations over time, render them untraceable to the candidate.
This reform makes a lot of sense, and I gather there would be widespread support from voters. The book even proposes some legislation. The only obstacle we face is mustering the political will. The major political parties have been unwilling to shake the established financing customs, since it works quite well for both of them. Perhaps a group such as Americans Elect would be able to produce a ticket with reform-minded candidates who would make campaign finance reform a priority. Buddy Roemer often mentions this issue in interviews ( and I could imagine him pairing with someone like Russ Feingold, who has also worked on campaign finance reform). But unfortunately, it is hard to imagine the necessary reform coming from the established parties.
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The New York Times Magazine “Food & Drink Issue” has arrived! [ht:av].
The entire magazine is dedicated to food (even the travel section!). It features many interesting sections, such a Food Policy section that deals with eating sustainable fish (try Bristol Bay Alaskan Salmon), prospects for eating algae, and the adequateness of food stamps. Michael Pollan answers reader’s questions, and in doing so gives his thoughtful views on food innovations, the role of government, and how to create a healthy and sustainable food economy.
Importantly, this issue of the magazine grapples with the ethical, philosophical, technological, economic, political, and cultural aspects of food production and consumption. Only through this type of conversation will our society succeed in building a healthy, sustainable, and just food system.
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The American Jobs Act would provide much needed stimulus to our ailing economy. However it is more like putting a bandage over the deep flesh wounds inflicted by globalization over the past two decades. The U.S. economy needs to be fundamentally restructured in order to address the prolonged recession in a sustainable way, a restructuring that involves political, legal, and business institutions. More stimulus is no silver bullet.
Germany provides a wonderful example of how a society can fight back and protect itself from the damaging effects of the spread of the market economy, (á la Karl Polanyi). Instead of just giving away manufacturing industries as the United States did, Germany took a very active role in preserving manufacturing. They have an entirely different institutional environment. Corporate boards have labor representation, the government works to encourage industries that provide jobs that they want in Germany, and the corporations are not chasing extraordinary short term profits like we do in the United States as a result of mandatory quarterly reports and their influence on the capricious stock market.
While it is important not to romanticize manufacturing, we must not ignore its benefits. Maintaining industry has had massive benefits for Germany. While unemployment is higher than it was before the crisis, it is much lower that we are still suffering in the U.S. (by some est., 6% vs. 9% in the U.S.). Industry provides jobs for middle skilled laborers; these jobs have left the U.S. and left a growing gap in income – and this is the cause of the disappearance of the middle class that everyone is talking about but no one understanding. In addition, R&D activities have been shown to follow manufacturing; certainly it is not difficult to imagine the benefits of having the research teams in close proximity to the manufacturing process. It is only a matter of time before R&D and “high tech” jobs also leave the U.S. in pursuit of the industries, unless we do something to protect our economy.
There are other spillovers, too. The article linked above details how German companies are exporting kitchens to China. These companies build the kitchens to fit European size ovens, which are smaller than American ovens. This has essentially blocked all competition from American companies that might want to export ovens to China, and has paved the way for a boom in German oven businesses as well.
The restructuring necessary for the health of the U.S. economy will require a multifaceted institutional reform, that includes the political system, the legal system, and the stock market.
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Patents may not bolster innovation, as commonly thought:
A new study challenges the traditional view that patents foster innovation, suggesting instead that they may hinder technological progress, economic activity and societal wealth. These results could have important policy implications, because many countries count on patent systems to spur new technology and promote economic growth.
PatentSim features an abstract model of the innovation process, a database of potential innovations and a network through which users can interact with one another to license, assign, buy, infringe and enforce patents. The software allows players to simulate the innovation process under a traditional patent system; a “commons” system, in which no patent protection is available; or a system with both patents and open-source protection.
“In PatentSim, we found that the patent system did not work to spur innovation,” said Tomlinson, associate professor of informatics. “In fact, participants were more likely to innovate when there was no intellectual property protection at all, or when they could open-source their innovations and share them with other people.”
Read the article here.
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