14 May 2010

Development and Institutions

In yesterday's post -- We're Not #1 -- many commentators appeared to dispute the importance of statistics that do not put America in first place.

I say this because of the nit-picking aspect of the comments. I should have put up something that said we ARE #1 to see if those same comments were made.

Anyway, I want to address these comments in a new post, because I think that some people miss the point of the measures (life expectancy, healthcare, education, etc.)

First, income -- or gdp per capita -- is not on that list. Even if it was, the US would hold 9/12/10th place (three sets of 2009 data). Using the more appropriate PPP measure (adjusting for the cost of living), the US is in 4/6/8th place. Even so, money certainly isn't everything, and it's definitely NOT what we want. We want what money can BUY (goodies, health, happiness), not little piles of paper. Unfortunately, GDP per capita fails to consider the distribution of wealth. If the rich get richer and the poor get poorer, then it sucks to be poor -- like most of us who do not work on Wall Street. Income inequality -- measured by the Gini coefficient -- indicates that the US is about as unequal as China, where the rise of the super-rich and urban elites have left most of the poor folk behind to fend for themselves. This matters, because inequality affects social cohesion and a society that is not cooperative is one that gets into lots of disputes (Washington DC, tea party, Two Americas, blue and red, and so on...) To see the relation between GDP/capita and Gini over time, click here.

Second, institutions. One comment was "Iceland is near the top in lots of categories, has a very small GDP, a tiny homogeneous population, very little industry, and is almost bankrupt" -- so what's that mean? Does Iceland have an "unfair advantage" What about Maldives and Belize? They have the same population, but not nearly Iceland's success. Iceland has done a good job at delivering human development (education, health, happiness) and they should be lauded for it. Their bankruptcy, btw, was the result of over-powerful banks. We can identify with that, but I'd prefer to identify with good schools and long lives. Iceland's banks will be gone, but its educated people will still be there, living a good life.

Third, another commentator pointed out that potable water is an excellent indicator of doing well. I agree. We have got a lot of good water (with the exception of Boston's schools, apparently), and other places have done a bad job. You will be interested to know that I drank out of Iceland's rivers. A rare pleasure for an American.

Fourth, these rankings -- statistical quibbles aside -- give us something to strive towards. Why wouldn't we want to learn from others, to see if we can get more freedom of the press, longer life expectancy, and so on?

Bottom Line: It's not "my country, right or wrong," it's "what can I do for my country?"


  1. As a visitor, the American superiority complex never ceases to amaze. Those comments are hilarious!

    America, like other former super powers (Britain and the Roman Empire) will come to terms with its declining influence and status sooner or later.

    Commentators like Aguanomics are a rarity in a country that has a great deal of trouble accepting that some things are done better elsewhere.

  2. David,
    Please include in your comments the hours of work that it takes to earn various standard goods in various places. In comparing hours of work for specific items, an analysis by UBS found that the US was far cheaper than many other places.

    Also can you expand on a specific meaning for 'quality of life.' As far as I can tell this phrase has dramatically different meanings in different places. Often it means, as it seems to for the Greeks, continuing to do what we have always done. Also could you expand on cross country flows of goods. As far as I know, Icelandic long life times depend heavily on drugs and other things that were not invented in Iceland. Dependency relationships from one population to the next so that one population is better off from the inventions of other populations would be fascinating. This analysis would include raw materials from developing countries as well as jobs, food, devices, and medicines from developed countries to developing countries.

  3. @Eric -- hours worked makes the us look WORSE (http://en.wikipedia.org/wiki/File:Yearly_working_time_2004.jpg) -- with 1,777 hrs on average, compared to < 1,400 in many Euro countries with better quality of life. What's QoL mean? It's VERY subjective (we cannot stand the idea of B&W TV these days...), but I think that living long and healthy, without fear of bankruptcy from health problems, or our kids getting shot in school, are the kinds of issues that matter. Big screen TVs? Nah. Drinking water? Yes.

    I agree that trade makes us all better off, but it's not like Iceland is stealing drugs from the US. (And, no, I do NOT buy the "expensive drugs from the US help the world" argument. Most of these drugs are overpriced for the "value" they deliver. Even worse, they fail to make up for our bad food and unhealthy lifestyles. Pollan: http://www.nytimes.com/2009/09/10/opinion/10pollan.html

  4. RM emails: "Despite what some people consider as fact or think, we are not the oldest democracy and we do not have the best access to health care. We may have great health care technology, but no ability to provide access to those who need access to health care."

  5. Dr. Zetland:

    “Unfortunately, GDP per capita fails to consider the distribution of wealth. If the rich get richer and the poor get poorer, then it sucks to be poor -- like most of us who do not work on Wall Street. Income inequality -- measured by the Gini coefficient -- indicates that the US is about as unequal as China, where the rise of the super-rich and urban elites have left most of the poor folk behind to fend for themselves.”

    Maybe, maybe not. It really boils down to your point of view and what argument you want to make.

    First of all, you have inequality of income in all economies and social structures (communism, socialism, capitalism, fascism, oligarchy, monarchy, etc., etc.).

    Distribution of income can be coercive or naturally occurring. It can be due to prior achievement of a prior generation passed to a new generation or coercive and coercively passed from one generation to the next.

    Income inequality is a notion based in “fairness” and fairness means about whatever you want it to mean. Thomas Sowell likely defined fairness correctly when he wrote his essay The Fallacy of Fairness. Fairness is treating everyone equal according to Sowell. Ends right there with no further socio-economic implications.

    Sowell also quotes David Riesman in regards to the outcry that tests for college admission and employment were unfair to many individuals and groups: “The tests are not unfair. LIFE is unfair and the tests measure the results”.

    Sowell also points to the other side of the argument by referencing Dr. John Rawls call for a society which “arranges” end results rather than simply treating everyone the same and letting the chips fall where they may.

    The next question is the movement of total income upward. That is to say, since income inequality exists in all economies and social structures, if the total income curve moves upward, then all subsections of the unequal income strata move upward as well. For example, being poor in the 1950’s meant no electricity or running water, maybe one pair of shoes, very limited clothing, no telephone, etc. Today poor means several pair of shoes, many changes of clothes, running water and electricity, television, radio, cell phone in many cases, etc.. What is considered poor today would be middle class in the

    The inequality of income argument was summed up nicely by Milton Friedman: “Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another”

    Maybe the real argument is not “fairness” but freedom. If fairness is treating everyone equal, and people want to be free, then they must have the freedom to choose. Choose their course and the summation of those individually decided upon courses can be statistically dissected many ways, one being the distribution of income. That is, the inequality of income is merely the summation of free fairness to choose.

    Milton Friedman was onto something with his book “Free to Choose”.

  6. @We -- I have heard these arguments before. I am a great fan of Sowell and his clarity. US income is less unequal before redistribution than in, say Denmark. After redistribution, the US is more unequal. That indicates that the US system does better with inputs but not outputs, which people tend to care more about.

    Beside my typical comments on corruption and lobbying, I will note that social mobility in the US is WORSE than in many Euro countries. That's not the belief on the street, but it's an empirical fact. Thus you can see that the poor here are neither going to get richer in the future nor get taken care of now. That's a problem when those people are also ignorant -- see other post on education -- and support demagogues and populists (Dobbs, Palin, Beck) who then proceed to take OUR liberty so they feel better.

    BL: Our crony capitalism is screwing the middle class.

  7. Maybe, maybe not.

    Its an argument about predetermined vs. undetermined. About freedom to choose vs. predetermined choice. About perceived chaos vs. planned intervention.

    Lets apply positive economics to a momentary world, a sudden point in time, where we have exactly equal income. We create a world with everyone with equal incomes. Yet that merely becomes the race horse starting gate. Why? The result will become unequal due to different attitudes, desire, self determination, corruption, politics, etc.. The horses are going to race. The result is unequal outcomes or your unequal incomes.

    Your argument is that we take everybody back to equal income again. Yet you are merely interrupting the human horse race. Go ahead, take everybody back to the starting line. The horse race begins again and the same outcome of unequal incomes occurs.

    Lets stay in the world of positive economics and say we take the horses back to the starting line every 30 seconds. What happens to the horses? They get tired and stop as they can never imagine, get close to, nor reach the finish line.

    Now lets go visit Zetland Stables, the circle Z, the home of the World Water Sweepstakes. This particular stable wants to race. They have bothered to earn higher education, researched water topics, write papers about water, create a blog, etc., etc.. But the manager of Zetland Stables is faced with mundane information. The mundane information is that in order to race the prized horse, “Waterbeme“, it takes hard work and time. The manager of Zetland Stables has decided to exert the effort to make “Waterbeme” a winner.

    Zetland Stables has a near competitor. Yes, over at Not-so-Sure about Water Stables, the Semi Circle, the home of the We Really Don’t Have the Time for Water Sweepstakes. This stable is rather disinterested in water as other items are more important. Doing research or making a major effort is preempted by other items.

    On race day Zetland Stables leads out of the gate and is ahead going into the third turn. Yet the race is stopped as the Not-So-Sure people at the Semi Circle are not equal going into the third turn. We race again and again and start the race over again and again as we keeping getting the same result going into the third turn. No matter how we try, the result does not come out equal due to different attitudes, desire, self determination that exist between the circle Z and Semi Circle.

    Eventually Zetland Stables must be handicapped in such a way to create equal outcomes. Zetland Stable is not allowed to use a saddle, can only stay open four hours a day for training, etc. Eventually we have a very slow horse race with two very slow horses crossing the finish line at very, very average track times.

    We create a world of average not achievement. We create a world of disincentives not incentives. We reward mediocrity and achievement goes unrewarded.

  8. "Your argument is that we take everybody back to equal income again."

    No it's not.

  9. OK, I’ll bite, then what is your argument? My argument is Hayek, Friedman, William Graham Sumner, Sowell and Walter E. Williams.

  10. WEH, in his zeal to refute a presumed liberal, is arguing against a position DZ has not taken! It would be funny if it weren't so characteristic of the increasingly dangerous inability of Americans to communicate with one another. So many times I read comments on blog entries that seem to be carrying on an argument started somewhere else.

    BL: Ideology is crippling our discourse.

  11. albionwood:

    Wrong. Dr. Zetland and I are having a discussion of inequality of income. Presumed nothing of the sort. Albionwood, in your zeal, you have jumped to conclusions.

    For example, Dr. Zetland and I agree that markets fail and also agree governments fail. The latter being a concept that gets little press time.

    Not worried about liberals and conservatives, just interested in the theories that make people arrive at different conclusions of equality or inequality of income.

    albionwood said...

    WEH, in his zeal to refute a presumed liberal, is arguing against a position DZ has not taken!

  12. @WEH -- I am not sure if you agree that some taxes, transfers, and public goods are justified. If you do, then you agree with me that some government is good. We have FAR too much, and FAR too poor government in this country, delivering bad quality at high cost. I'd prefer the French or Dutch health systems to ours (or perhaps MSAs; see this too: http://aguanomics.com/2009/08/few-more-thoughts-on-health-care.html); I'd prefer a fully funded, individually attributed retirement system (IRAs) to PayGo.

    In short, I'd prefer less gov't, more choice BUT I also think that social transfers are justified...

  13. @abionwood. Good point, and point taken. I think that you're right, since I am hardly a fan of big govt...

  14. Dr. Zetland:

    We are on the same page. Size and scope of government is past its state of equilibrium. Further, if we make a transfer payment it can’t be an unfunded promise stretching into the future that becomes a hollow promise because of its unsustainable characteristics.


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