Is anyone making a serious effort to connect good economists with governments that need them?
Hopefully someone else will remember the actual source for this, as I can’t find it quickly, but I believe the World Bank provides economic advice to African countries, which includes gems like “sell off commodity rights by public, transparent auction, rather than having the minister decide which country gets the rights,” which will lead to billions more in the country’s coffers (instead of millions more in the minister’s coffers).
I think the “print money and hand it out” plan is a terrible one. If it replaced price caps on basic foodstuffs, that would be better as a starvation prevention measure (since it would encourage more production, rather than less production).
I think the “print money and hand it out” plan is a terrible one. If it replaced price caps on basic foodstuffs, that would be better as a starvation prevention measure (since it would encourage more production, rather than less production).
Because inflation works as a tax on wealth- and the trouble with the undeveloped world is that there’s too little wealth, and in particular, too little incentive for many people to generate formal wealth. Basic income guarantees have their merits, but funding them by inflation instead of a tax on exports or land or so on just seems misguided.
No, it’s a tax on currency-denominated wealth, which is not the same thing at all. Wealth in the form of land, houses, mining rights, guns, loyal soldiers, gold, cows, or friends at court is not taxed by inflation. To the extent that the problem in poor countries is that a small elite controls most of the cash economy—I do not make a claim on how large an extent this is—inflation would indeed solve it, provided that the tax extracted was given to the poor. Which is somewhat unlikely, but there you go.
I’m aware; I strongly suspect that it is much easier for the poor (that would be receiving this help) to store their wealth in the local currency than any of the forms you listed.
The issue is more that the small elite controls the legal economy, with most of the economy occurring off the books, leading to very little in the way for legal protection of the more sophisticated economic organizations which help people accumulate wealth.
(de Soto tells the story of being a government economist in Peru, where they were all worried that the construction market was collapsing because of declining revenues and permits. But something seemed odd- there were still cranes and buildings going up all over Lima, and concrete sales were seeing steady growth. They scratched deeper and discovered that extra-legal construction, which they thought was a few percent of legal construction, turned out to be significantly larger- the majority of the construction economy in the country was off the books.)
I strongly suspect that it is much easier for the poor (that would be receiving this help) to store their wealth in the local currency than any of the forms you listed.
Ok, fair enough. As noted, I don’t make any claim on the extent to which the problem consists of cash being mainly in elite hands. That said, if you were willing to start with a blank slate, you might be able to redistribute with a one-time inflation event. Making up numbers: Suppose a 10% elite controls 90% of the wealth in both currency and non-currency forms, and suppose that these two are roughly equal. Do a 100% devaluation of the currency, ie full hyperinflation, redistributing the gains equally. The 10% still control 90% of the non-currency wealth, but now they only have 10% of the currency wealth. Presumably there is then some re-equilibration and you end up with some of the non-currency wealth making its way into 90% hands in exchange for the new currency.
Of course, in practice it is the wealthy who would be able to protect themselves from your scheme by moving their currency holdings into dollars, or whatever; and I’ve no idea how realistic my distribution between currency and non-currency is. If 90% of wealth is in non-currency form then you’re hacking about at the edges. In any case, though, a single hyperinflation event is probably a bit different from the steady-but-low inflation in the original question.
and in particular, too little incentive for many people to generate formal wealth.
I’m skeptical of that. The undeveloped world has less welfare (since they have less money to give) which means people are more desperate to make money.
I suppose it’s possible that the problem is that, since they tend to be much closer to the brink of starvation, their less willing to take risks for money. Better to have a sure subsistence wage than a risky luxury wage. In that case, giving the poor more of the wealth would seem to help.
I strongly recommend reading The Mystery of Capital. Its basic premise is that most developing countries have very weak legal systems, which dramatically reduces the level of trust individuals can have with each other, leading to dramatically lower incentives for wealth accumulation. Why bother improving your tin shack when your neighbors could collectively agree that it’s not your shack and kick you out, or the President’s cousin who officially owns the land you’re squatting on could bulldoze it at any time? Why enter into a business agreement with someone else, when you can’t enforce any written agreement between the two of you? Much safer to invest only with your family members who will have a much harder time running away with the profits, though they may not be the best people for the job.
The answers are also not found in modern American or European law, but in frontier American law; things like homesteading make great sense in most of the developing world, but are rarely implemented, often because of ignorance that it’s a good or possible option.
That’s an entirely separate issue. If you want people to make contracts, you don’t do it by making them desperate. You do it by making them keep their contracts.
That’s an entirely separate issue. If you want people to make contracts, you don’t do it by making them desperate. You do it by making them keep their contracts.
The claim is that it’s not an entirely separate issue, because bad legal systems are (in de Soto’s view, at least) the primary cause of poverty in the third world, and so fixing the legal systems will seriously reduce the poverty.
The phrase “too little incentive” may have been unclear; I meant it in the sense that income taxes reduce the incentive to put effort into earning income, not that the utilons that result from post-tax earnings are lower. A lack of legal protection for capital held by the poor makes it often irrational for the poor to invest heavily in capital that they are not sure will remain theirs, and so they remain poor. Adding legal protections changes the incentive structure, and thus changes rational behavior.
Claim: Primary controllable cause of poverty in the developing world is low incentive for the poor to develop formal wealth.
No, this is absurd. Poor people do not respond to complex tax incentives; in most cases they don’t have the education or information to even comprehend them. The primary causes of poverty in the developing world are lacks of resources of various kinds (capital, education, nutrition), which are themselves caused by past poverty, in a self-reinforcing cycle.
Poor people do not respond to complex tax incentives; in most cases they don’t have the education or information to even comprehend them.
Tax incentives aren’t the incentives I’m talking about here. I’ll point you to de Soto again, as he makes the argument much more convincingly than I can.
The primary causes of poverty in the developing world are lacks of resources of various kinds (capital, education, nutrition)
This agrees with de Soto’s view, but the resource he focuses on is “trust,” which can be developed by developing the legal systems.
The reason why I asked my original question is that GiveDirectly is directly handing money to the recipients, and this money is presumably competing with other money to make purchases. If one were to naively measure the effectiveness via the direct observation, “Ooh, the people with more money are better off than the people with less money!” then this kinda begs the question. It’s not obvious to me that foreign money behaves differently in this regard if it’s competing for goods that other low-income communities are also trying to purchase. Again, you can justify this model but it’s not as simple as observing that the people with more money are better off. You need the country to be running an NGDP deficit / aggregate demand shortfall, for purchased imports to help, for redistribution of purchasing power to be good, etc.
The reason why I asked my original question is that GiveDirectly is directly handing money to the recipients, …
What do you mean by “money” here? Local currency? They bought that currency in the foreign exchange market, so no, there’s no injection of cash into the broader economy. The only issue I can think of is that spending a lot of money (here meaning generally “resources”) in a very localized area might drive up local prices (i.e. land, local wages etc.) compared to the surroundings, making the locals not as much better off in PPP (purchasing-power parity) terms. But this is going to be negligible in a typical intervention.
Who would have otherwise bought that currency in the foreign exchange market? Where would they have spent it? Are higher prices on the foreign exchange market a good thing?
Oh, I agree with you that GiveDirectly has second and third-order effects that may be more significant than the obvious effect of “we handed them cash!”, which I why I prefer to view interventions in terms of how they shift incentives rather than their immediate visible impact. (This is the primary reason why I strongly prefer interventions that set up or alter institutions, rather than transfer resources. Unfortunately, directly exporting good governance has gone out of style, and so instead we have resource extraction firms exporting good resource extraction ability but little else.)
Hopefully someone else will remember the actual source for this, as I can’t find it quickly, but I believe the World Bank provides economic advice to African countries, which includes gems like “sell off commodity rights by public, transparent auction, rather than having the minister decide which country gets the rights,” which will lead to billions more in the country’s coffers (instead of millions more in the minister’s coffers).
I think the “print money and hand it out” plan is a terrible one. If it replaced price caps on basic foodstuffs, that would be better as a starvation prevention measure (since it would encourage more production, rather than less production).
I think a better path for economic advice from the developed world is the Hernando de Soto path; see his organization or his book.
Why do you think it’s terrible?
Because inflation works as a tax on wealth- and the trouble with the undeveloped world is that there’s too little wealth, and in particular, too little incentive for many people to generate formal wealth. Basic income guarantees have their merits, but funding them by inflation instead of a tax on exports or land or so on just seems misguided.
No, it’s a tax on currency-denominated wealth, which is not the same thing at all. Wealth in the form of land, houses, mining rights, guns, loyal soldiers, gold, cows, or friends at court is not taxed by inflation. To the extent that the problem in poor countries is that a small elite controls most of the cash economy—I do not make a claim on how large an extent this is—inflation would indeed solve it, provided that the tax extracted was given to the poor. Which is somewhat unlikely, but there you go.
I’m aware; I strongly suspect that it is much easier for the poor (that would be receiving this help) to store their wealth in the local currency than any of the forms you listed.
The issue is more that the small elite controls the legal economy, with most of the economy occurring off the books, leading to very little in the way for legal protection of the more sophisticated economic organizations which help people accumulate wealth.
(de Soto tells the story of being a government economist in Peru, where they were all worried that the construction market was collapsing because of declining revenues and permits. But something seemed odd- there were still cranes and buildings going up all over Lima, and concrete sales were seeing steady growth. They scratched deeper and discovered that extra-legal construction, which they thought was a few percent of legal construction, turned out to be significantly larger- the majority of the construction economy in the country was off the books.)
Ok, fair enough. As noted, I don’t make any claim on the extent to which the problem consists of cash being mainly in elite hands. That said, if you were willing to start with a blank slate, you might be able to redistribute with a one-time inflation event. Making up numbers: Suppose a 10% elite controls 90% of the wealth in both currency and non-currency forms, and suppose that these two are roughly equal. Do a 100% devaluation of the currency, ie full hyperinflation, redistributing the gains equally. The 10% still control 90% of the non-currency wealth, but now they only have 10% of the currency wealth. Presumably there is then some re-equilibration and you end up with some of the non-currency wealth making its way into 90% hands in exchange for the new currency.
Of course, in practice it is the wealthy who would be able to protect themselves from your scheme by moving their currency holdings into dollars, or whatever; and I’ve no idea how realistic my distribution between currency and non-currency is. If 90% of wealth is in non-currency form then you’re hacking about at the edges. In any case, though, a single hyperinflation event is probably a bit different from the steady-but-low inflation in the original question.
I’m skeptical of that. The undeveloped world has less welfare (since they have less money to give) which means people are more desperate to make money.
I suppose it’s possible that the problem is that, since they tend to be much closer to the brink of starvation, their less willing to take risks for money. Better to have a sure subsistence wage than a risky luxury wage. In that case, giving the poor more of the wealth would seem to help.
I strongly recommend reading The Mystery of Capital. Its basic premise is that most developing countries have very weak legal systems, which dramatically reduces the level of trust individuals can have with each other, leading to dramatically lower incentives for wealth accumulation. Why bother improving your tin shack when your neighbors could collectively agree that it’s not your shack and kick you out, or the President’s cousin who officially owns the land you’re squatting on could bulldoze it at any time? Why enter into a business agreement with someone else, when you can’t enforce any written agreement between the two of you? Much safer to invest only with your family members who will have a much harder time running away with the profits, though they may not be the best people for the job.
The answers are also not found in modern American or European law, but in frontier American law; things like homesteading make great sense in most of the developing world, but are rarely implemented, often because of ignorance that it’s a good or possible option.
That’s an entirely separate issue. If you want people to make contracts, you don’t do it by making them desperate. You do it by making them keep their contracts.
The claim is that it’s not an entirely separate issue, because bad legal systems are (in de Soto’s view, at least) the primary cause of poverty in the third world, and so fixing the legal systems will seriously reduce the poverty.
The phrase “too little incentive” may have been unclear; I meant it in the sense that income taxes reduce the incentive to put effort into earning income, not that the utilons that result from post-tax earnings are lower. A lack of legal protection for capital held by the poor makes it often irrational for the poor to invest heavily in capital that they are not sure will remain theirs, and so they remain poor. Adding legal protections changes the incentive structure, and thus changes rational behavior.
And what does that have to do with printing money and giving it to the poor?
Claim: Primary controllable cause of poverty in the developing world is low incentive for the poor to develop formal wealth.
Claim: Printing money lowers the incentive to develop formal wealth because it is a tax on formal wealth (in cash form, at least).
Conclusion: Printing money would exacerbate primary controllable cause of poverty in the developing world.
Now, this is not the total cost-benefit analysis, but it is the part that will dominate it given my values and discount function.
No, this is absurd. Poor people do not respond to complex tax incentives; in most cases they don’t have the education or information to even comprehend them. The primary causes of poverty in the developing world are lacks of resources of various kinds (capital, education, nutrition), which are themselves caused by past poverty, in a self-reinforcing cycle.
Tax incentives aren’t the incentives I’m talking about here. I’ll point you to de Soto again, as he makes the argument much more convincingly than I can.
This agrees with de Soto’s view, but the resource he focuses on is “trust,” which can be developed by developing the legal systems.
The reason why I asked my original question is that GiveDirectly is directly handing money to the recipients, and this money is presumably competing with other money to make purchases. If one were to naively measure the effectiveness via the direct observation, “Ooh, the people with more money are better off than the people with less money!” then this kinda begs the question. It’s not obvious to me that foreign money behaves differently in this regard if it’s competing for goods that other low-income communities are also trying to purchase. Again, you can justify this model but it’s not as simple as observing that the people with more money are better off. You need the country to be running an NGDP deficit / aggregate demand shortfall, for purchased imports to help, for redistribution of purchasing power to be good, etc.
What do you mean by “money” here? Local currency? They bought that currency in the foreign exchange market, so no, there’s no injection of cash into the broader economy. The only issue I can think of is that spending a lot of money (here meaning generally “resources”) in a very localized area might drive up local prices (i.e. land, local wages etc.) compared to the surroundings, making the locals not as much better off in PPP (purchasing-power parity) terms. But this is going to be negligible in a typical intervention.
Who would have otherwise bought that currency in the foreign exchange market? Where would they have spent it? Are higher prices on the foreign exchange market a good thing?
Oh, I agree with you that GiveDirectly has second and third-order effects that may be more significant than the obvious effect of “we handed them cash!”, which I why I prefer to view interventions in terms of how they shift incentives rather than their immediate visible impact. (This is the primary reason why I strongly prefer interventions that set up or alter institutions, rather than transfer resources. Unfortunately, directly exporting good governance has gone out of style, and so instead we have resource extraction firms exporting good resource extraction ability but little else.)