Economics & Finance

Anarchy Boomtime

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In Newsweek, Silvia Spring marvels that the Iraqi economy appears to be booming even while the country remains mired in violence.

People are often surprised that economies can thrive without a high degree of politically enforced social order, but history tends to show that too much government is more likely to cause economic stagnation than too little. Most 3rd-world business people face the worst of both worlds. The government does a very poor job of providing physical security and a fair judiciary (important to enforce contracts), yet it imposes strangling taxes, jealously guards its prerogatives to decide who can and cannot engage in any particular economic activity, and individual government agents usually extort vast sums. As a result, the descent of a country into mild anarchy usually improves the situation. The actual security situation may not be that much worse, but all the parasitic government activity disappears. The situation turns into a net gain. It is quite common to read reports from 3rd-world countries during a civil war that shops and other businesses seem more full and busy than they did in time of “peace.”

The legendary economy of Hong Kong from 1945 to 1999 arose in large part due to the laissez-faire approach that the British government blundered into as a result of geopolitical concerns. The British needed to keep Hong Kong as a full colony to protect it, but that meant they could not allow a full fledged local democracy with the moral authority to impose a welfare and regulatory state. So they ended up with just a bare-bones government appointed by Britain that never tried to lay its hand too strongly on the people of Hong Kong.

Business people in Iraq find themselves in something of the same environment. The occupation government did not wish to get involved in potentially contentious economic policy, and the same lack of experience and consensus that keeps the newly elected Iraqi government from wiping out the insurgency also prevents it from implementing destructive economic policies. Left to their own devices and with huge pent up demand the Iraqi people are driving their economy strongly forward.

Discuss this post at the Chicago Boyz Forum.

Milton Friedman, 1912-2006

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Requiescat in pace.
Lengthy FT obit here; U of C News Office release here.

Quote of the Day

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…what has helped the less fortunate is economic growth. Today’s elderly are affluent not because of Social Security, but because of all of the wealth created by private sector innovation over their lifetimes. Government involvement in health care and education is an impediment to progress in those fields. Job training and welfare are demonstrable failures. I think that treating a national community like a family is a grave intellectual error. A national unit is an institution that creates a legal framework for a large group of strangers to interact. A family is a small group that interacts on the basis of personal bonds. Strengthening government serves to weaken families and other vital civic institutions.

Arnold Kling

(You absolutley must RTWT. Mr. Kling puts terribly important ideas across in clear, plain English.)

You can’t ‘manage’ trade without huge costs

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A while back Richard North posted this at EU Referendum :

Is there anything the EU has ever done that can be considered, unambiguously, an unalloyed success?

Well, if you are to believe the hype, one such is the Asia-Europe Meeting, or ASEM to its friends, a “cooperation forum” for Asian and European countries. It was initiated in 1996 “to strengthen dialogue and interaction between the two regions” and to promote “concrete cooperation that aims at sustainable economic and social development”.

Yet, via chron.com [the link doesn’t work anymore, the article can be found here, though] Associated Press writer Robert Weilaard puts a different spin on it. Normally, AP is the most Europhile of all the press agencies, but Weillaard is definitely not of the Kathy Gannon mould.

Heading his piece, “Unhappy Birthday for EU-Asia Relations”, he tells us that at a summit in Bangkok in 1996, European and Asian leaders pledged to boost economic, trade and political relations to offset America’s disproportionate weight in global affairs. Today, he adds, both sides agree that has failed miserably.

As so often, I disagree with Richard as to the merits or lack of same of the European Union, but I’ll leave that for another post.

Either way, attempts to manage trade politically always fail. I replied in the comment thread to the post in the EU Referendum forum, just arguing on general priciples, without going into the details too much:

It failed because the whole idea is wrong-headed, both in concept and in the idea “America’s disproportionate weight in global affairs” is a bad thing (I’m adding that last bit just for completeness’ sake, for it goes without saying).

We talk about “global trade” all the time, but the importance of trading partners increases more or less exponentially the closer they are to your own country. Since Asia is so far away from Europe, other trading partners take precedence, meaning that European countries necessarily trade mostly with each other as well as the United States (oil imports from Arab countries aside).

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Class Warfare Statistics

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Engram has compiled some data on the after-tax income levels of American taxpayers, comparing them from the last three years of the Clinton Administration and the first three years of the Bush Administration. The raw data seems to suggest that the top 20% of taxpayers kept more money after taxes under Clinton than they did under Bush. This would refute the common canard that the Bush tax cuts only benefitted that amorphous class referred to as “the rich”.

There is more to the facts than Engram presents; but there’s always more to it than meets the eye. One salient factor lost among all the talk of class struggle is the very real question of socioeconomic mobility. The membership of the top 20% isn’t always the same; neither is the membership of the bottom 20%. As we approach the margins, of course, the membership tends to solidify; but even so, such economic classes are far less unchanging, and far more fluid, in the United States than in most other places.

Although it’s pretty easy to pay lip service to class warfare, my gut instinct is that American voters intuitively understand this fluidity. Our general national aspiration toward “moving up and out” saves us from the worst parts of Marxist struggle.

Be sure to read the article for the charts, and the interesting notes in the comments. By the way, Engram is a registered Democrat.

(via Instapundit)