Saturday, April 30, 2011

This Does Not Look Promising

World magazine reports on the "transitional" country of Turkey. It is a country with a strong secular tradition but currently with an Islamist government. It geographically straddles Asia and Europe, and would like to become more integrated with the European community. Yet, according to the article in the May 7, 2011 edition , "Dozens of journalists are currently in prison --- among the highest numbers of jailed journalists in the world, according to Freedom House....In March, Turkish police arrested 13 journalists on charges of conspiring to overthrow [the ruling party]."

I had no idea that Turkey had descended this far into autocracy. Just to be on the safe side, I decided to cross check these claims with the original sources. I found pretty much the same sad story here and here.

Doug and I recently completed a case study of the reform of corruption in the LAPD in the late 1940s and early 1950s. A free and competitive media was one of the institutions that clearly aided that successful drive against corruption. This does not look promising for the Turkish people.

Friday, April 29, 2011

Friday Links 4/29: Graduation Edition

This whole year has been a raucous roller coaster ride, twists and turns, ups and downs, thrills and throw-ups (too much information?). Congratulations to the Class of 2011! Life is also about to dramatically change for me as I enter into the PhD program, taking on the form of a lowly student. In this edition of Friday Links I thought I would focus on education in general:

A Connecticut woman named Tanya McDowell has recently been in the news for committing larceny. She and her son were homeless at the time her son was enrolled in a local elementary school. The enrollment into a school was not the beef; rather, officials had a problem with which school. See the full story here. Why did Ms. McDowell need to send her child to a specific school? School choice anyone?

There were two interesting articles on the Freakonomics Blog (here and here). Dan Hungerman has new research that suggests that increased education leads to lower religiosity. Dan is able to control for the selection effect (that people who select into more years of education are different people than those who do not) because of Canada's compulsory schooling laws. I've emailed Dan about the results, because, I have a question about whether it is not just education but the type of education and those supplying the education. In the other blog post Dubner posts the conversation between him and Leavitt about whether college really matters. Leavitt responds,

Of all the topics that economists have studied, I would say one we are most certain about are the returns to education. And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8 percent increase in earnings over your lifetime. So someone who graduated from college will earn about 30 percent more on average than someone who only graduated from high school. And if anything, the returns to education have gotten larger over time. They’re as big as they have ever been.
Although there are questions about whether there are returns for PhDs of certain kinds. See Economist article "Doctoral Degrees: The Disposable Academic"

Similar to the argument made about the "type of education" is this recent article by Dan Klein called "In Praise of Ideological Openness". Klein notes that ideology is definitely going to color the lectures of even the most attentive speakers and social scientists are especially prone to these kinds of bias. Thus, why not openly admit your bias? One of my favorite lines:

Two professors can each teach a course in labor economics and make all of their statements reasonably true, by our lights. But the two courses may nonetheless be very different in ideological flavor. We may object strongly to one of the courses, not for its errors of commission, but its errors of omission.

Hats off to the graduates!

Thursday, April 28, 2011

A Plethora of Rankings in Lake Nogebow

I've lived in six states and the District of Columbia, and for some reason it took me years to notice the following pattern. Everywhere I lived there was, at some point, a debate in the public sphere that went something like this: "I don't know how we can expect people to want to move to ____ when everyone knows we rank [45th, 46th, ....51st] in Ranking X in quality of education." The thing is, I heard the same thing from people who lived in other states which were supposed superior to my state. One curious thing was that it was never a single, comprehensive criterion: it varied from state to state: per pupil spending for education, teacher salaries, spending on education as a percentage of personal income, class size, graduation rates, SAT scores, etc. etc.

So, a while ago I decided to try a little investigation of this phenomenon on the internet. I went onto search engines, and typed in, in Alphabetical order, "State A ranks 45th in education", State A ranks 46th in education"; etc . It was eye opening. Primarily in regional and local newspaper reports, editorials, and letters to the editor, I realized that the United States as a collective was a giant educational Lake Nogebow --a reverse Lake Wobegon where almost everyone is below average in education according to some ranking. I have a small map on my wall. Send me a comment if you want me to tell you how bad your underachieving state really is (I think I found that somewhere around 40 of the states ranked 41st - 51st in some category; unfortunately I didn't keep track of all of the categories by state).

The political economy of this rankings game is obvious. Create enough rankings and almost every state will fail in some category X, much to the delight of whatever lobbying group wants more taxpayer funding for X. The job of the education economist is to make some sense about which of these rankings actually matter. The whole class-size debate is ongoing and most of what I have seen is not encouraging to the idea that lowering class size is a cost-effective way of improving student performance, at least not in higher grades. Some of the rankings are undoubtedly in conflict: higher drop-out rates could correlate with higher SAT scores. It is well known that some of these rankings are completely perverse. Probably the best example is to report average SAT scores without taking account of what proportion of high school students actually sit for the SAT exams. For example, in a state in which in-state schools rely on the ACT, the SAT may be taken primarily by students who already know that they are qualified and/or have the resources to go to a private school out of state. That's an incredibly self-selected sample compared to a state that encourages every student to take the SAT.

Galt's Gulch, South Carolina

Readers of this blog will recognize that I am not a fan of Ayn Rand. Therefore, it's somewhat distressing to read news reports that move me to say "Here's a case where Ayn Rand was prescient." I'm referring to the attempts by the National Labor Relations Board to tell the Boeing Corporation it cannot manufacture its airplanes in South Carolina. This is outrageous. The NLRB ought to be added to the list of federal agencies (EPA, FCC) where the power of the purse of Congress should be used to reign in abuses of federal power over economic activity. To go further, I suggest a sweeping re-examination of all of the Progressive Frankenbureaus who believe that they can order Americans around outside of the originally-understood concepts of separation of powers.

Tuesday, April 26, 2011

The Seen and Unseen

Our training in economics sensitizes us to unseen effects.  For example, Thomas Sowell, the Sage of Palo Alto, writes in his Basic Economics textbook that the question for any policy is, "What happens next?" In other words, we raise the minimum wage and workers will be compensated more money. Ok, but, what happens next? Mark touched on this in his previous post "Truth or Consequences". And, this was the topic of my last review for the Economics of Compassion class.

Economics fundamentally comes down to the seen and unseen:

  1. What is seen in rent-controlled apartments? Lower prices. What is unseen? The underground market created for sub-leasing. The deterioration of property because landlords have no profit motive to improve the property. 
  2. What is seen with welfare payments? More resources for the poor. What is unseen? The high implicit marginal tax rates that reduces the incentive to work (sometimes for each additional dollar earned the poor lose more than one dollar in welfare receipts). 
  3. What is seen with subsidies to farmers? Farmers benefit from the receipt of money. What is unseen? This artificially lowers the price of the crop which makes it more difficult for developing nations to compete in agriculture.  

***Contribute your favorite seen versus unseen distinction to our comments section***

This is well put by French political economist Frederic Bastiat in his book "That Which is Seen, and That Which is not Seen": 
[The inability to think through beyond immediate effects] explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters - experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight. For this purpose I shall examine the consequences of certain economical phenomena, by placing in opposition to each other those which are seen, and those which are not seen.
  Moreover, I recently learned of 20th century American journalist Henry Hazlitt (influenced by Bastiat) from the APEE meeting. In the book Economics in One Lesson he writes,

The reason is that the demogogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desriable effects, or it could benefit one group only at the expense of all other groups.
To consider all the ramifications of any policy is wisdom ---at least from my "consequentalist" economic perspective. There is a Jewish aphorism that says (paraphrasing): A clever man can extricate himself from a difficult situation, but, a wise man never gets into such a situation in the first place. There will always be the messy business of trade-offs; however, a little foresight can go a long way to making trade-offs less painful.

Monday, April 25, 2011


This academic year at the FSU Wesley Foundation we had full-court coverage of the Bible. Beginning in the fall we learned about Act 1: The creative process and the declaration that God saw everything created as "good". Then, we learned about Act 2: The serpent spins a story that causes Adam and Eve to believe God is holding out on them. The Fall. Finally, we learned about Act 3: The longest of all the acts this is the story of redemption. Since The Fall we can see through the law and prophets how God worked to bring His people back to Him. On Sunday we celebrated the culmination of Act 3, the ressurection. The theme this year for Easter was HOPE. Not some wishy-washy, "Gee, I hope this turns out well." Not some "wishing upon a star". Not flimsy. The hope we have in Christ is sturdy and doesn't disappoint. Because He loved us and because His love can transform our hearts and minds we have hope. Let's hope for a better world.

***On a personal note I feel the need to tell more hopeful stories in my class. Reports of failure in compassionate activities abound and serve as warnings about what not to do. However, success is also instructive and far more hopeful. 

Friday, April 22, 2011

Good Friday

Last night at Maundy Thursday service, Pastor Bill Bess reminded us of the instructions in the Old Testament for the Passover supper to be held as though in haste for departure, so he organized a quickly moving service with sparse readings and words of institution. The topic of his homily was a contemplation on the grief of the disciples on Good Friday at losing a friend to a torturous murder.

And, I suspect I'm probably being repetitive from posts over the past couple of years, but if it is Good Friday it must be time for Jesus Christ, Superstar!

Thursday, April 21, 2011

Maundy Thursday

The Wesley Foundation is an odd and austere gray block building, students nicknamed the church, "the bomb shelter". It was built in the 1970s and designed for the very service we attended tonight: Maundy Thursday. On the exterior, the sides of the building are sloped to mimic the Cup of the Covenant. Meanwhile, the interior contains a focal stage perfectly sized for a long table with seating.

Each year our pastor delivers a message in the fellowship hall and we walk into the chapel, which is lit only by candles. The table is filled with half-eaten Passover food and represents where Jesus and his disciples had celebrated Passover. On this night the Jewish people remember the bitterness of slavery and the greatness of the God who brought them out of Egypt. We are invited to the table to reflect. Walking up and seeing the symbolic half-eaten food we remember the bondage of the Jewish people but also the spiritual bondage of sin.

Our mood is somber as we consider the weight of what happens next in the story. Jesus endured betrayal and Jesus knew his death was necessary to free us from sin, but, he suffered under the weight of that knowledge. (without the comfort of his friends). Then, tomorrow we will remember that Jesus loved us to the very end.

We inherit a great story. The story of God's redemption for everyone. I pray our hearts would be softened and prepared for Good Friday and Easter.

A broken heart
A fount of tears
Ask and it will not be denied
A broken heart love's cradle is
Jesus our Lord is crucified

Let us never allow this story to become hackneyed and stale but always stir our souls.

Wednesday, April 20, 2011

Wednesday Thoughts, Cont'd

Pastor Bill Bess departed from the lectionary this past Sunday to preach from the following passage, which I think is very appropriate for Holy Week:

"[Jesus] who, being in very nature God, did not consider equality with God something to be grasped, but made himself nothing, taking the very nature of a servant, being made in human likeness. And being found in appearance as a man, he humbled himslef, and became obedient to death --- even death on a cross." (Philippians 2:6-8 [NIV]).

Tuesday, April 19, 2011

TOMS Shoes

 Monday morning one of my students walked in, sat down, and confessed that the Economics of Compassion course is challenging her thoughts about charity. Then, she asked about my personal opinion of TOMS shoes. This is a brief description of the conversation. But, first let me explain what TOMS is. From their website under "Our Movement",
In 2006, American traveler Blake Mycoskie befriended children in Argentina and found they had no shoes to protect their feet. Wanting to help, he created TOMS Shoes, a company that would match every pair of shoes purchased with a pair of new shoes given to a child in need. One for One. Blake returned to Argentina with a group of family, friends and staff later that year with 10,000 pairs of shoes made possible by TOMS customers.

Why Shoes?

Many children in developing countries grow up barefoot. Whether at play, doing chores or going to school, these children are at risk:
•A leading cause of disease in developing countries is soil-transmitted diseases, which can penetrate the skin through bare feet. Wearing shoes can help prevent these diseases, and the long-term physical and cognitive harm they cause.
•Wearing shoes also prevents feet from getting cuts and sores. Not only are these injuries painful, they also are dangerous when wounds become infected.

•Many times children can't attend school barefoot because shoes are a required part of their uniform. If they don't have shoes, they don't go to school. If they don't receive an education, they don't have the opportunity to realize their potential.

Their goal is what is commonly called a "double bottom line": profit and charity.  And, they are doing quite well at both. Last year TOMS reached the 1 million pair sold plateau (which means they also gave away 1 million pairs of shoes). But, economics fundamentally boils down to what Bastiat called, "That which is seen and that which is not seen". What do people see with TOMS? First, they are fashionable and cool looking kicks but they also see photographs like the one pictured below. Is this a good thing? Maybe.

If that is what is seen then what is not seen? I'll argue that there are three things that may go unnoticed by most people: Opportunity Cost, Paternalism, and Unintended Consequences.

Opportunity cost is what we give up to get something else. The least expensive pair of TOMS shoes are $44 on their website. What else could $44 buy? My pair of sweet Nike's cost $30 on sale. If I wanted to give away $14 that could buy medicines, malaria nets, food, etc. through a variety of NGOs. Additionally, there are really inexpensive pairs of shoes that you could buy at Wal Mart for $14 but are more durable than TOMS. I wore the soles of my TOMS out in short order and my primary mode of transportation isn't my feet!

Paternalism is important because when buying TOMS we're determining what to supply rather than asking what is in demand. Perhaps giving the money to the people directly through a sponsorship program and allowing them to allocate their own resources is better. Do we really know their needs better than themselves? (Obviously Principal-Agent problems factor in when you just give people money, nevertheless, I think this is an important point)

Unintended Consequences are those positive or negative outcomes people did not anticipate. Vivek Nemana made two guest posts (here and here)on the Aid Watch Blog and notes that TOMS shoes actually can be harmful to local shoe markets. If TOMS targets people who would never have bought shoes this is a moot point; however, if TOMS is giving away free shoes to those people who would otherwise be customers in the local shoe market they are destroying demand. At this point you might be asking, "Why is this a bad thing? Now that person has extra money they can spend in alternative ways." That is true; however, what happens when TOMS become less fashionable and less shoes are being given away?

Certainly the work TOMS does in these developing countries has positive benefit. No doubt. Also, in our own country it has brought about awareness with campaigns such as the one on FSU campus a couple weeks ago called, "One Day Without Shoes". In the end my critique of TOMS comes down to the seen versus the unseen.

Truth or Consequences?

The Association for Private Enterprise Education annual meetings had a refreshing number of discussions about the variety of voluntary activities. To use one of my favorite overly simplistic lines, the opposite of government coercion is not the market; the opposite of government coercion includes all voluntary activity, of which market processes are only one example. Speakers such as Elinor Ostrom, Deirdre McCloskey, and George Ayittey spoke on variations on this point in plenary talks, and those discussion continued into several individual paper sessions.

On the other hamd, after returning from the conference, I picked up an article in First Things entitled "The Emancipation of Avarice" by Edward Skidelsky. Anyone who reads this blog would understand why I was attracted to such a title. The topic of the paper is one that I find exciting for Christian economists to debate. Unfortunately, I found the argument of the paper jumbled. About midway in his article, he critiques Mandeville and the Parable of the Bees. If you recall one of my earlier posts criticizing Mandeville, you can imagine I found common cause with his criticisms. But then he seems to draw a direct, if not actually straight, line from Mandeville through Adam Smith and into all of modern economics for what he calls its emphasis on consequentialism. I'm not sure I buy this. (Smith's recent biographer, Phillipson, puts much more distance between Mandeville and Smith, and Skidelsky goes right to the Wealth of Nations, without visiting The Theory of Moral Sentiments. ). But let's stick with the issue of morality, economics, and consequentialism here. Suppose the civic leaders of a nation take Skidelsky to heart to study the writings of Aristotle, Aquinas and "express an aspiration to mold people's characters, to make them less greedy, more generous, and so forth." Further suppose that, steeped in such high philosophical idealism, they enact rent controls, minimum wages, and raise the tax on capital gains to 80%. Is it morally deficient of the consequentialist economist to pound home the empirical reality that these efforts very likely help well-to-do teenagers at the expense of inner city minority workers (minimum wage), create an appropriable property right that benefits mobile jet setters who can sublet their apartments at market rates, all the while degrading the quality of housing serving the poor (rent controls) and end up with the wealthy paying fewer taxes (very high capital gains tax rates)? Doug and I have discussed at length the reverse question: what is the moral position of someone who looks only at their own intrinsic motivations and refuses to discuss the consequences of their actions?

If someone argues that Aristotle believes that enacting rent control creates a virtuous citizen in a virtuous society, then I would argue that either a ) Aristotle is wrong b ) the person who interpreted Aristotle is wrong, or c ) I have a very different concept of virtue. Does that mean that I must necessarily be a consequentialist? I don't know. I do know that Skidelsky seems to support government intervention "to erect safeguards against the powerful human tendency to rapacity." But he has no model of public choice, except where, earlier in the essay, he admits that "In complex, fractured societies, any attempt to rule through direct moral exhortation can lead only to tyranny."

Friday, April 15, 2011

Who Wants to be a Spillionaire?

For a variety of reasons (public relations, political pressure) BP approached the problem of damages along the Gulf Coast in a proactive way, that is, agreeing up front to pay damages through what were largely political rather than judicial processes. The investigative journalism group ProPublica has looked at the result, and it's not pretty. In fact, that title phrase "spillionaires" says a lot. It's the classic case a lot of money to be had through what are essentially political connections rather through competition in the market (or, in this case, rather than through a more measured, but slower, common law process). It's also a case study as to why economics students need to be repeatedly made aware of the "public choice" aspects of non-market decision making. Oftentimes, "market failures" are compared to some idealized non-market utopia. But nothing is going to cause human beings to discard the same human weaknesses that cause problems in the market just because they switch to some alternative resource allocation process, especially when there is so much money at stake, as in this case.

Thursday, April 14, 2011

Portfolios of the Poor: A Book Review

The World Bank introduced $1 poverty rates into our vernacular in 1990 with their World Development Report. However, little was known about how these people, classified as extremely poor, actually lived. Since then research such as that described in an earlier post titled "Economic Lives of the Poor" shed some light on this question. Carrying forward that research agenda is a 2009 publication from Princeton Press called Portfolios of the Poor. Four economists tell a fascinating story about the financial lives of the poor and how the world's poor live on such little money.

What is novel about Portfolios of the Poor is how it moves beyond the static story of year-to-year statistics and into a more dynamic realm. In other words, former studies were like pictures that represented snap-shots in time, this book is like the introduction of the motion picture. The authors are able to improve in this way because of their unique data. Throughout three countries Bangladesh, India, South Africa the authors employ financial diaries (which participants filled out fortnightly) as a vehicle to acquire information about how poor people make decision with their money.

What emerges from the diaries is a bounty of information about the daily grind. First, it was interesting to learn what kinds of occupations employed the poor. The occupations in their sample were varied from sheep intestine seller, rickshaw driver, construction labor, factory labor, small farmer, cab driver, cigarette roller, and many more. Secondly, it was a revelation to learn that their occupations and incomes were frequently irregular. Many of the households in their sample pieced work together from regular wages, casual work, and self employment (~65% in South Africa, nearly 70% in Bangladesh, and more than 85% in India. Moreover, the $1 or $2 per day measures used by the World Bank were averages over the course of the year. Put another way, they could earn $3 on Monday, $0 on Tuesday, $1 on Wednesday, $4.25 on Thursday and etc. The poor had to stitch together a livelihood from multiple sources.

At the most basic level the poor are in a particular bind because they suffer from what the authors call "The Triple Whammy": low incomes, irregularity, and a lack of financial instruments. These open the door to a myriad of questions: How do the poor handle negative and unpredictable shocks such as illness in the family?, How do the poor acquire enough savings with their low incomes to send their children to school, buy grains to store during the monsoon season, or host a special even such as weddings or funerals? The authors have distilled these kinds of questions into three categories of financial needs for the poor:

"1. Managing basics: cash-flow management to transform irregular income into a dependable resource to meet daily needs.
2. Coping with risk: dealing with the emergencies that can disrail families with little in reserve.
3. Raising lump sums: seizing opportunities and paying for big ticket expenses by accumulating large sums of money."

Currently the poor manage their money largely through informal channels. This is probably not surprising since there are a shortage of formal lending and borrowing institutions geared towards poor households. Moreover, microfinance institutions are often focused on helping the poor raise money for capital investments. There is nothing inherently wrong about that focus, but, the poor have immediate needs in addition to building up their long term prospects. In managing their money day-to-day the poor will rely on neighbors and/or family members who are marginally better off as lenders or "money guards". A money guard is simply a person who safely stores the money given to them by another person (sometimes for free but often for a fee). The rationale for this institution is simply a commitment to self-control. Seeking family for both lending and money guarding it is stressful for the poor for at least three reasons: unreliability, lack of privacy, and lack of transparency. For example, these informal loans are unreliable because the money guards might have spent the money (the money guards are still poor). A lack of privacy is important because people may not want to borrow because they feel ashamed and pay a big emotional toll. Moreover, if they borrow money they will later be expected to reciprocate. Finally, sometimes the transparency of the interest rate is questionable when lending through informal channels. All of this adds up to high risk in gathering substantial sums of money and a stressful situation for the poor.

Having access to some credit or savings is very important because the poor are rarely insured against a variety of events. For example, if a family member develops a sudden illness this acts as a large negative shock to their income. In rich countries we have various kinds of insurance to protect us against such risks; however, insurance is a difficult financial instrument to use amongst the poor. People have tried to provide so-called "micro insurance" with mixed results. In particular, in the authors' sample the results for insurance in Bangladesh and India were quite bad with poor management of funds that resulted in an inability to payoff the insured.

Alas, if the poor are uninsured they must have the ability to acquire a loan or dip into savings to absorb risk. Then, the question becomes, "How do the poor accumulate larger sums of money?". So far we've talked about informal loans which you can think of as "accelerators" but the poor will sometimes utilize different kinds of savings arrangements ---we'll call those "accumulators". The authors discuss a few accumulators such as savings clubs, rotating savings and credit associations (RoSCAs) and accumulating savings and credit associations (ASCAs). Savings clubs are simple commitment devices in which a large group of people save X dollars for Y months and then receive X*Y at the end. The purpose of joining a savings club is simply to encourage each other to stay committed. RoSCAs and ASCAs on the other hand are a little more complex because people take turns reaping the benefit of the savings. In RoSCAs each person puts in X dollars a month and every Y months it's your turn to receive all the money in the pot. Some RoSCAs are even more sophisticated where they auction the right to the money to people who haven't taken their turn (which essentially acts as an interest rate). Finally the ASCAs are like the RoSCAs but don't zero out the pot each time. Some money is left in the pot to act as loanable funds to increase the overall wealth of the membership.

Then, the authors discuss some of the most up-to-date innovations in microfinance and other commercial banks. With commercial banks the authors provide the example of "Kishan Credit Cards" which allow for small and marginal farmers to improve their cash flow. The farmers can use these credit cards anytime throughout the year and must pay them back by the end of the year to use the credit card in the subsequent year. This allows for farmers, whose incomes are seasonal, to smooth their consumption over the year. Another innovation that comes from microfinance is the concept of "top-up" for loans. Without top-up borrowers needed to pay the entire loan back before receiving more money; however, with top-up borrowers are able to refresh the loans to their original amount even when they haven't paid back the whole loan.    

These innovations are an excellent example of institutions. Institutions are the "rules of the game" and small changes in the rules of the game can have a significant impact on the ability for the poor to meet their daily needs. Finally, after discussing some of the innovations the authors are able to cull some additional insights from their research about the what characteristics of financial instruments are most important for the needs of the extremely poor. The authors identify four such characteristics: reliability, convenience, flexibility, and structure.

Reliability - The poor need a safe place to store their money with someone who is trustworthy and will not be tempted to spend their savings. Reliability is crucial in their financial instruments because so many other facets of their lives are irregular from earned income to schools and clinics to care for them.

Convenience - One of the primary reasons the poor in the authors' sample did not take advantage of microfinance institutions is that they were not convenient. The poor needed to travel long distances or attend regular meetings to obtain credit. The more accessible the financial instruments the more likely they are to be used. The authors provide the example of some microfinanciers who have begun daily visits to provide people with more opportunities to repay and take-up loans.

Flexibility -Because incomes are so irregular the poor need some flexibility in the payment schedules for the loans. The Kishan Credit Card is a good example of providing such flexibility. The main objective is for the loan to be paid in full, but, it allows the poor to supplement their less abundant months with credit while paying off the loan in the more abundant months.

Structure -Even with flexibility there needs to be some structure because it is difficult to maintain self-control when you're living on such a small income.

There were many other interesting facets of the book such as how interest is charged in the microfinance industry and how the interest rates are not as exorbitant as they may look at first blush because they are nominal rather than compounded. Also, the interest rates must be somewhat higher because of high default rates and because debts owed are cancelled upon death. To me the book comes down to this really central point from the authors:
"In the rich world, a household's portfolio of financial instruments is usually managed on the basis of risk and return. The portfolios of the poor households are instead managed to ensure money can be obtained in the desired amounts at the desired times."
The book was a joy to read and gave me a lot of insight into how the poor actually live and the struggles they face. Below is a video of well-known development economist Bill Easterly discussing the book.

Friday, April 8, 2011

The Economic Lives of the Poor

Today my Economics of Compassion class will be discussing two articles from Abhijit Banerjee and Esther Duflo. First, "The Economic Lives of the Poor" (2007) chronicles the living conditions and spending habits of people classified as living on $1 and $2 per day. Then, in a follow-up paper titled "What is Middle Class About Middle Classes Around the World?" (2008) Banerjee and Duflo investigate those people living on $2 to $4 and $6 to $10 per day. Both of these papers utilize the same World Bank Living Standard Measure Surveys and the RAND Family Life surveys which are considered high quality datasets. The authors also use data they have generated through field ". With these datasets the coverage of locales is a great feature of the articles. Countries from Mexico, Guatemala and Peru to South Africa, East Timor, and Tanzania, to India and Pakistan, and more were covered by these data. So, I thought the first thing I would start out with are 10 Facts about those living on $1 to $2 per day and 10 Facts about the middle class. Then, I will close with what I think are some interesting points I gleaned from the readings.

10 Facts from "Economic Lives of the Poor"
1. Those classified as extremely poor are often entrepreneurs, but, not in the glamorous way we think of entrepreneurs in the United States as inventing a new product and striking it rich. Often these entrepreneurs engage in activities such as rickshaw driving, selling sheep intestines, frying dosas (think Indian pancakes), or having a modest storefront operation. They engage in these activities in part because of the flexibility but often because they do not have other options for regular and steady work. In fact, the poor often work 2 to 3 jobs to try to cobble together income.

2. Rural households are more likely to engage in agricultural work but even rural households will work multiple jobs often migrating into city areas. The thought here is that the harvest season does not bring income all year. Also, many poor work multiple jobs to spread out risk. Because many times their jobs are temporary having multiple jobs is a benefit because it reduces risk.

3. In urban areas the extremely poor spend 56% to 74% (56% to 78% in rural areas) of their income on food. Moreover, when they spend this money they do not spend the money to maximize calories. Instead, the poor buy seasonings and sugar in addition to staple grains.

4. Households are often crowded with a median of 7 to 8 people per household. Access to electricity and sanitation varies enormously from country to country.

5. The extremely poor are "frequently sick or weak". For example, Banerjee and Duflo report data from Udaipur citing that 65% of men and 40% of women had a BMI below 18.5 which is the cut off for being underweight. Moreover, in Udaipur they have survey data that 72% of respondents had a disease and 46% report and illness that left them bed-ridden and unable to function. Moreover, only about 6% have health insurance. In theory this shouldn't so bad; however, many of the public health facilities available sometimes charge money when they're not supposed to and are often incompetent (give medical advice that harms rather than helps).

6. Banerjee and Duflo report that education expenditures "hover around 2 percent" for these extremely poor households. Even though the poor frequently attend public schools there is "mounting evidence . . . that public schools are dysfunctional".

7. The median household spent 10 percent of their income on festivals per year. They report the median because the Latin American countries spend substantially less on festivals each year.

8. Television ownership is all-over-the-map. In Udaipur almost nobody owns a TV; however, in Peru and South Africa there is 70% ownership

9. There are not many formal channels through which the poor can save and if they keep the money at home, "The money may be stolen or simply grabbed by your spouse or son. Perhaps equally important, if you have money at hand, you are constantly resisting the temptation to spend." This lack of saving really hampers critical investments in goods such as fertilizer or capital equipment such as a sewing machine.

10. Significant amounts of money are spent on alcohol and tobacco products about 4% to 8%. When asked what they believed they could trim in their budgets 44% of the poor viewed these consumption items as the things they would want to cut.

10 Facts from "What's Middle Class About . . . "
1. The middle class are far more likely to have steady salaried jobs. Banerjee and Duflo write, "The key distinction between the middle class and the poor is who they are working for and one what terms."

2. The middle class spend a much smaller share of their income on food. Where those living on $1 or $2 per day tended to spend upwards of 60% of their income on food the middle class tends to average around 50% of their income spent on food.

3.Fertility is difficult to measure because there is no consistent fertility histories in the survey. The authors try to figure out fertility by looking at the ratio of people aged under 18 to those above 18. It seems that the middle class are having less children.

4. The rural middle class spend approximately the same percentage of their budget on education as the rural poor; however, the urban middle class spend "a substantially larger fraction" of their income on education. (This is amplified when you consider that the absolute amount is higher and you consider Fact #3 that the middle class have less children). Moreover, in many urban areas parents spend money on tutors for their chidlren. Presumably these parents realize that the best way out of the middle class is through an education.

5. The middle class have significantly improved access to clean water. In rural areas over 30% compared to under 10% for those earning less than $4 per day. In urban areas the percentage gap is approximately the same though more of the extremely poor have access to clean water.

6. The middle class spend more money on health care (in countries where public health is not covered through government expenditures). The middle class are more likely to see a health care provider when they are sick. Moreover, when asked in a survey whether their parents are alive the middle class are far more likely to report their parents are still alive than the poor.

7. The middle class have better access to information through television ownership.

8. Better access to credit. These middle class people in poor countries are better able to obtain savings accounts and formal loans. They have collateral and are better credit risks because they have a steady job.

9. There is no clear pattern for what happens to alcohol and tobacco consumption as income goes up.

10. More entertainment. The poor spend more on festivals as their income increases.

These are really interesting stylized facts about the economic lives of the poor, but, causality is not specified in many of these facts. For example, are people poor because they have more children -or- are people who are in poverty having more children because children can earn more than they cost? Do people become poor because they became sick -or- are people who are poor more likely to be sick because they cannot afford good health care? There are a number of these questions where the arrow of causality is running amuck.  With both of these questions causality likely runs both ways. But, understanding causality is no mere trifle ---what I mean is, causality isn't important only to academic economists. Identifying causality is important because policies are often designed in hopes of tackling "root causes" of problems. My next post will be a review of a book I recently finished called "Portfolios of the Poor" that discusses some of the on the ground money management strategies of the poor and how different financial instruments could potentially help the poor manage their cash flows.

Some interesting things I found when reading the articles were how similar humans in different parts of the world behave. First, even when earning a paltry $1 or $2 per day people do maximize on caloric intake, rather, people like the way food tastes. When people become middle class they do not buy more food but they buy "better food". Second, people have a difficult time not spending money. The temptation of "this money is burning a hole in my pocket" is real for the poor the same way it is for us. Third, poor people spend a sizable chunk of their income on festivals or other important ceremonies because there is this deep-seated desire to engage in social activity. For me these facts draw me closer to their humanity because I am able to see these people as not so different from myself and others I know. But, these vignettes of the poor also are vitally important because if we want to help the poor we must first know the poor. This has been the great tragedy of compassionate activities that we try to help people when we lack knowledge about what would help them.

Thursday, April 7, 2011

Some Place Just Froze Over

Who would have thought that San Francisco would be home to a bi-partisan (Bush and Obama administration supported) experiment to use the price system to allocate parking spaces? As the article says, it is going to be fun watching. Will the technology work? Will the economic winners (people who don't have to circle for long periods of time to find a parking place) be able to respond to any anti-market "fairness" complaints?