How Haiti Stays Poor

Consistently one of the most-read posts on this blog is the one titled "Why Is Haiti So Poor?"  Although written about six months ago, lots of people keep finding it by searches on Google and other search engines.  Very appropriately, there is a lot of curiosity out there as to how it can be possible for this particular country to stay consistently so much poorer than all those around it.

Take the Dominican Republic for example.  It shares the same island with Haiti.  U.S. policy toward the two countries is not meaningfully different.  Haiti is not subject to any kind of special embargo like Cuba has been, and Haiti even gets some preferential trade treatment due to its extreme poverty and to the severe earthquake of 2010.  On the foreign aid front, Haiti gets a lot more per capita than the Dominican Republic.   But in the rankings put out by the World Bank, the IMF and the CIA, all three find that GDP per capita is in the range of 7 to 8 times higher in the Dominican Republic than in Haiti.   Haiti has far lower income than any of the other Caribbean island countries, and for that matter than any other country in the Western Hemisphere -- only some sub-Saharan kleptocracies rank lower.  In the CIA ranking, even North Korea ranks higher!  (The other two don't rank the Norks.)

Wasn't this all supposed to turn around with the outpouring of aid that followed the earthquake?  Leading the aid bandwagon were the Clintons, Bill and Hillary and their Clinton Foundation.  They came up with the idea of putting together an industrial park called Caracol in Haiti to attract private investors to create jobs.  On the web page of the Clinton Foundation you'll find a glowing write-up:

In collaboration with the Government of Haiti, the Inter-American Development Bank, and the U.S. State Department, the Clinton Foundation assisted with the development of the Caracol Industrial Park, which could ultimately create up 60,000 jobs and help to decentralize the Haitian economy. In October 2012, President Bill Clinton joined Secretary of State Hillary Rodham Clinton, President Martelly, Prime Minister Lamothe, and President Moreno of the Inter-American Development Bank (IDB) for the opening of Caracol Northern Industrial Park. Today, the Korean apparel manufacturer Sae-A is the anchor tenant and will create 20,000 jobs alone.         

They actually got one building built there and formally opened the place in 2012.  Here is Hillary at a photo op in connection with the opening.

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So where is this project today?  Mary Anastasia O'Grady of the Wall Street Journal traveled to Haiti and visited the site, and filed a report over the past weekend.  The answer to the question is that the project is inexplicably stalled.  Employing the 60,000 Haitians requires building some 40 simple factory buildings.  In the U.S., once you have a site, these things can be slapped together by private businesses in a few months.  In Haiti, four years after the project was announced, they have built all of three buildings.  The anchor tenant, South Korean garment manufacturer Sae-A Trading, says that it is willing to hire 20,000 people itself -- but to employ them it needs another dozen or so buildings, and so far it only has three.

So why in heavens name doesn't Sae-A just slap up the buildings and get on with things?  And now we come to the crux of the matter.  Sae-A doesn't control the building of buildings -- the Haitian government does.  Per O'Grady:

A Dec. 12 IDB [Inter-American Development Bank - a foreign aid agency] press release says the Haitian government is approved for a new $70 million grant to construct, among other things, three new production buildings by 2018 with a goal of providing space for 6,800 workers.

So we get to the issue that even O'Grady doesn't address directly, although it is strongly implied.  Why would the Haitian government insist on building the buildings itself with U.S. foreign aid money at a pace that will only get three more built in the next three years when forty are needed right now and private investors can do it right away?  And the answer of course is that the way it has been set up with the Haitian government in control of the land and the building, the $70 million must then flow through the Haitian government, where officials can skim a very nice part of it off for themselves.  And meanwhile while we all wait for that process to play out the people have no jobs and starve.

And the person who is the public front for this disastrous project is none other than frontrunner in the prospective race for Democratic nomination for President, Hillary Clinton.  It's not just that her foundation is in up to its neck and that she is the lead at the photo ops; she also got the U.S. commitment to the foreign aid when she was Secretary of State.  This project is her baby.  And she has no understanding of why this project is stalled or for that matter of what makes an economy work.  She should be screaming bloody murder about the corruption and obstructionism of the Haiti government, and instead her foundation web site brags about being in bed with them.  Her foreign aid is the very mechanism that the corrupt government of Haiti uses to enrich itself and keep the people in abject poverty.

Another Candidate For "Worst Possible Public Policy"?

Actually it's almost impossible to beat "affordable housing" in Manhattan as the worst possible public policy, but it looks like President Obama has a new contender for the title, namely his proposal announced late last week for universal "free" community college.

Do you think the idea is that a lot of low income people are currently precluded from going to community college by the prohibitive cost?  Impossible, and I can't even find any respectable commentator trying to justify the proposal on that ground.  According to the Washington Post here (reporting on Obama's proposal) the average cost of community college is about $3800 per year.  But low income students qualify for "Pell grants" of over $5000.  In other words, the low income students already get their tuition paid plus some, and the bulk of the financial benefit of this new entitlement will therefore be going not to the poor, but to those higher up the income ladder who don't "need" the money, at least as "need" is defined by the Pell grant criteria.

So what is the political calculation?  I can't think it's anything more than just transferring some money to a couple of core Obama/Democratic constituencies, namely young voters and academics, to buy their continued loyalty.   The program is highly unlikely to pass while the Republicans control Congress, but if somehow it gets enough Republican support with all Democrats and gets through, the Dems say "we got you this big handout"; and if as is likely it fails, they say "the mean Republicans kept you from getting the handouts you deserve."

But this is totally a losing game for the young people who are the main supposed beneficiaries.  Even after dramatic recent improvements, the government continues to run deficits around half a trillion dollars per year; and even some rapid economic growth is not going to keep that number from going up substantially as the baby boomers retire and start claiming Social Security and Medicare.  So the cost of this new entitlement will be borrowed.  Who is going to pay that back?  Any young person who has his act together enough to attend post-secondary education, even community college, is highly likely to come out behind when he gets stuck paying his share of the taxes down the road.  Are young people dumb enough to fall for the "free handout" line?  Well, it seems that plenty of them fell for it as to Obamacare.  As Jonathan Gruber so famously said, getting these things passed depends on the "stupidity of the American voter."  But I continue to think that the young voters are starting to catch on.

Is it even possible to come up with a respectable justification for this new handout?  Here is Richard Kahlenberg taking a stab at it in the Atlantic.  Kahlenberg admits that the poor already get grants from the government that exceed their community college tuition, so he justifies Obama's proposal on the basis that giving free community college tuition to middle class students will induce more of them to go to community college, where they will mingle with the poor, and that will cause the poor to get a better education.

While some argue that free tuition for upper- and middle-class students is a waste of resources, in fact it is in everyone’s interest to ensure that community colleges are socioeconomically integrated. We have known since Brown v. Board of Education that separate educational institutions for black and white—or for poor and rich—are rarely equal.

As with affordable housing in Manhattan, it requires believing in perpetual motion machines to think this makes any sense.  We'll transfer substantial resources to middle and upper-middle income people from a tax system that raises plenty of money from lower-middle income people, and as payoff we'll get some inchoate and unmeasurable benefits.  And I suppose if we try the "free tuition" gambit and still not many upper-middle income people choose to attend community college, then it would make sense to Kahlenberg to offer them cash grants until we buy enough of them to attend.  How about $10,000 per rich kid to go to community college?  They still won't go?  Make it $20,000!

UPDATE, January 14, 2014:  Tom Hanks, of all people, weighs in on this issue with an op-ed in today's New York Times.   It seems that Tom attended a community college in California called Chabot, and most of the article consists of his praise for the courses and education he received, as well as for the low price (it was free).  But of course all that has existed for decades without the need for $60 billion per year in federal largesse.  Only in the next-to-last paragraph does Hanks get around to trying to come up with a reason why his experience supposedly justifies support for President Obama's proposal:

I’m guessing the new Congress will squawk at the $60 billion price tag, but I hope the idea sticks, because more veterans, from Iraq and Afghanistan this time, as well as another generation of mothers, single parents and workers who have been out of the job market, need lower obstacles between now and the next chapter of their lives. High school graduates without the finances for a higher education can postpone taking on big loans and maybe luck into the class that will redefine their life’s work. Many lives will be changed.

But Tom, community college is already free to the low income, either because the states and localities make it that way, or via Pell grants.  What are the currently-existing "obstacles" you are talking about -- the struggle to fill out the Pell grant application?  And if you can't name any such obstacles, what is the possible justification for spending another $60 billion a year that will not go to the low income?  Kahlenberg at least tries to address that issue, however lamely.   Really, Tom, you should stick to acting. 

Greece Again!

It was a couple of years ago, around the end of 2012, that Greece was seemingly on the edge of default every day and finally got bailed out by its EU brethren in return for promises of "austerity."  After a round of half-hearted small spending cuts and big tax increases, plus some debt "restructuring" and loans from other EU countries, Greece proceeded to stumble on for two years and now is more or less right where it was back in 2012.

Today Greece has an election coming up (on January 25) and the guy leading in the polls is Alexis Tsipras of the left-wing populist Syriza party.  He's promising an end to the "austerity" and repudiation of some or all of the sovereign debt.  To no one's surprise, Greek sovereign debt has spiked to interest rates over 10%.  Credit default swaps are indicating a chance of default of 20% in one year and over 50% in five years.  Talk in the air is that there will either be another bailout or that Greece will exit the euro.

Well, as I said just a few days ago, a good way of looking at capitalism is that the whole idea is to force hard economic choices to be made.  Greece is caught up in vast wasteful overspending by the government and desperately needs the shock of some economic discipline to force it to stop.  The rest of Europe has also gone into seemingly permanent stagnation from overspending, although not to the level of the crisis of Greece.  Yet when I look around for some kind of sensible economic voice, all I can find are advocates for some kind of continuation of the status quo to avoid the "pain" or "suffering" or "disruption" that would come from a Greek default or exit from the euro.

Do you think the Economist is sensible?  Forget it.  In the most recent issue they are urging "caution" and yet more "monetary and fiscal stimulus."  Let's see if we can hide the problem with yet more government spending while things fester for a few more years!

That stagnation points to the deeper reason for caution. The continuing dismal economic performance of the euro zone now poses a big political risk to the single currency. In the short run, so long as creditor countries (and that means principally Germany) insist only on budgetary rectitude and reject all proposals for further monetary and fiscal stimulus, that performance seems unlikely to improve.

The Economist asserts that the Greek economy has shrunk by 20% since 2010.  All that means is that they are taking fake government numbers -- that count all government spending at 100 cents on the dollar in GDP -- at face value.  Although honest numbers do not exist, it is likely that getting rid of some of the government waste was one of the best things that could happen to the Greek economy.  Yes, it is undoubtedly hard on those who were employed at the make-work to have to re-deploy into productive enterprises; but postponing necessary adjustments only means that the adjustments will be even more disruptive and difficult when they finally come.

All kinds of people can come up with all kinds of inchoate fears to justify continuation with the unsustainable status quo.  Here is Megan McArdle at Bloomberg on January 5:

[A Greek] exit [from the euro] will be a disaster. The mechanics of a Grexit are beyond daunting. The financial system will have to be frozen in order to keep people from immediately withdrawing all their euros and attempting to find them safe harbor abroad. And what do people use for money? In the long run, Greece may be better off, but in the short term, there will be immense suffering. And the contagion may well spread beyond Greece; Ireland seems to have escaped the trap, but Italy, Portugal, and Spain all remain vulnerable.

"Immense suffering."  Really -- on what basis?

Or here is Tim Worstall in Forbes on January 4 predicting yet a different form of disaster:

Greece leaves the euro, the banks fail (likely, if not entirely certain) and then? Sure, the first 12 months will be pretty hairy but our standard solution then predicts that we would see significant and sustained growth in the Greek economy. It wouldn’t be a surprise to see several years of growth in the 5-10% of GDP sort of range.  Then what happens? Does Italy, already in the beginnings of a terminal debt spiral, then say, well, we’ll go for that internal deflation route? Or do they start polishing the lira printing presses and leave the euro? What about France that is getting close to such problems? Belgium which is already over the hill and well into this area?

There is really no alternative to some kind of major economic disruption to jolt Greece out of its mess.  The only question is, take it now or postpone it and hope it goes away.  It will not go away.  If postponed, when it comes it will be worse.  Time for a little bravery! 

Non-Insider "Insider Trading": Time For A Civics Lesson For Journalists

Several weeks ago I wrote two articles (here and here) trying to do my small part to educate the world about the law, or lack thereof, regarding non-insider insider trading.  The one-line version is that prosecutors for years have been systematically charging and imprisoning dozens of people for a crime that doesn't exist.  Thankfully, the Second Circuit has finally intervened (after many years of gross prosecutorial abuse) in the case of Newman and Chiasson to impose a small degree of lawfulness on our government, although in my view the court did not go nearly far enough.

Meanwhile, of course, nobody pays any attention to my efforts to educate them and the level of ignorance on the subject among those who should know better is truly appalling.  Many examples could be cited, and I don't mean to pick specifically on Bloomberg News, but an editorial there today attributed to "The Editors" is a particularly egregious example of the genre.  The editorial is titled "Insider Trading: There Oughta Be A Law."

The editorial starts from the most fundamental misconception of the very nature of our criminal law.  Check this out:

[T]he best way to clear away the confusion and mistrust this [Newman/Chiasson] decision has created is through legislation. Ideally, Congress would pass a law that defines and bans insider trading. More realistically, the Securities and Exchange Commission could clarify its rules on the subject.  The SEC issued rules long ago to prohibit trading on the basis of material nonpublic information revealed in violation of a fiduciary duty. Its authority is based on one provision in the Securities Exchange Act of 1934, which broadly bans frauds on the market.

Where do these people possibly get the idea that something that has not been made a crime by Congress can be made a crime through a process of an administrative agency, the SEC, "clarifying" its rules?  This is not something you need to be a fancy lawyer to understand.  Did anybody around here go to high school?  When I was in high school (admittedly a long time ago), they went through multiple times teaching us "how a bill becomes a law" (actually, I think the first time was in junior high school), and on the subject of crimes they definitely put in there that it's not a crime unless a duly passed statute says it is.  Could it be that they don't even teach this kind of basic civics in high school any more?  And how about that line in the Bloomberg editorial that the "SEC issued rules long ago to prohibit trading on the basis of material nonpublic information"?  Don't they even think to ask the question, how could the SEC assert a right to do such a thing when Congress has not passed such a statute?

To be fair to Bloomberg, they do advocate here that the preferred solution would be for Congress to pass a statute.  But they leave out what they think such a statute should say, other than this whopper:

What the U.S. needs is a proper statute -- one that doesn't shift shape depending on who is heading the SEC or who is the U.S. attorney for Manhattan. It must reach conduct that strikes the average investor as wrong and feeds the impression that the markets are rigged.

If they gave the subject even ten minutes thought, they would realize that no such statute can be formulated without making a huge swath of legitimate stock market activity prosecutable, including lots of trading by Aunt Millie and Cousin Betty.  Not just Wall Street professionals, but all kinds of people, regularly buy and sell stocks based on some combination of public information plus various amounts of rumor, unsourced information, misinformation, speculation, educated guesses, idle or semi-idle talk, and the like, often with no way of knowing where the information came from or how good it is.  Allowing humans to make judgments on all this very imperfect information and then to trade on those judgments is what makes our stock market relatively efficient, and it is highly important that the process continue to be legal.  Some people who participate in this process will make a lot of money, maybe through skill, maybe through luck, and maybe through schmoozing information out of a corporate insider that the insider should not have given away.  Why is that bad?

The thing that "strikes the average investor as wrong and feeds the impression that the markets are rigged" is generally that someone made too much money too quickly -- a terrible basis for making a statute.  This is about nothing more than jealousy.  Trading by stock market tippees does not impose losses on other stock market investors in the aggregate.  If somebody gets inside information and buys the stock, perhaps that drives the price up a little; but as to other investors in the market who don't have the information, for every one who was buying and could have bought a little cheaper without the leak (therefore suffered a theoretical loss), there is someone else who was selling and was able to sell for a little more as a result of it (therefore had an offsetting gain).  If you are a non-professional investor and invest for the long term, getting no tips and buying and selling at random times, then for every time insider trading allegedly "hurt" you, there will be another time when it benefited you.  I myself invest in the market (generally through mutual funds) and I am not offended at all that others get tips and sometimes make money off them.  The fact is that I incur no loss, and I am benefited by having a more efficient market.

And besides, stock market trading by non-insiders on the basis of tips cannot be effectively prohibited in a free society.  Congress should not waste its time chasing the hopeless ideal of equal information on both sides of all securities trades.   Down that road lies nothing but less efficient securities markets and hundreds of thousands if not millions of unwitting "criminals." 

A New Year's Thought: Let's Focus On What's Important

Happy New Year to all from the Manhattan Contrarian!

And for the new year, I'm going to rededicate myself to focusing on what is important in the world and therefore on identifying the side issues for what they are.   Somehow in America we have become so successful at solving some of our major problems that we have lost track of our great accomplishments and are even putting the big accomplishments at risk as we turn our focus to much less important issues.

For example, what is the single most important problem that the world faces?  I nominate the problem of human violence and warfare.  The history of the world is a history of endless warfare, with people forming themselves into groups on tribal, ethnic, language, ideological or religious lines, and having aggressive young males form armies to kill as many members of the other groups as possible and seize their lands.  What is called "history" going back more than a couple of hundred years is about literally nothing but such warfare; and even in recent decades plenty of it remains.  The European countries continued their endless wars to take territory from and kill their neighbors right up to 1945.  In most recent memory, think of inter-tribal violence in places like Nigeria, Liberia, Rwanda, and the Congo; of the ongoing tribal/religious fighting in Iraq and Afghanistan; and of the recent government overthrowings in Arab countries like Egypt and Libya.  

What conditions enable people to live in peace without the endless violence and warfare that have plagued humanity throughout history?  Actually, here in what is sometimes called the "first world," we seem to have the problem substantially licked.  The solution is capitalism.  Sometimes that system goes by the name of "private property and the rule of law." Under a capitalist system the aggressive young males have an alternative to forming armies and killing enemies, namely, they can go into the rough-and-tumble world of business and take out their aggressions by seeking to have more success and make more money than their rivals.  (For these purposes, professional sports are an example of business.)  Meanwhile, wealth is created and most people rise out of poverty in a way never previously possible.  The reduction of warfare and increase of wealth creation are tremendous triumphs of capitalism, most of this occurring in the past few hundred years at most. 

Look at the places where organized violence persists on a large scale and you will see that what they lack is the opportunity for young men to go into business and succeed.   Many sub-Saharan African countries have little functioning capitalist economy.  Same for Afghanistan.  Iraq?  The state controls all the oil and most other business, and 20% or more of the young men are unemployed with no real opportunity to form a business that can succeed.  So let's form ISIS and see if we can seize some oil and kill some enemies!  Investigate the other unstable Arab countries that have gone through recent revolutions and you find the same thing again and again: the state controls business, and there are no career opportunities for many young men, who then have lots of time on their hands to go out and commit violence.  Check out this Cato Institute study of the degree to which the state controls business in the Arab world.

But even as organized violence continues wherever capitalism has not taken hold, the trendy view is now that peace and order and wealth are the natural state of things and the important problem is "income inequality."  Certainly this is the perspective of our President, and in New York of our Mayor, not to mention of most of academia and the media.  Can you actually take a functioning capitalist system, impose on it sufficient redistribution by state force to substantially reduce income inequality, make it so that the most ambitious and aggressive young men cannot get meaningfully ahead in life, and yet not undermine the mechanism that brought about the peace, order and wealth in the first place?  Among those advocating "income inequality" as the "defining challenge of our time," I don't notice any recognition or discussion of this issue.

The European countries are often held up as examples of how to achieve lower levels of income inequality than we have here in the U.S.  Take France, for example, which has large communities of immigrants, mostly Muslim, living on state handouts with high levels of unemployment for the young men.  Any problem with that?  Riots among unemployed young men in France have not gotten much play in U.S. press since the big ones in the Paris suburbs in 2007; but there have been plenty more of same, for example in the city of Amiens in 2012, and even more recently in Marseille.   Similar riots have even hit places as seemingly tranquil as Sweden in the past year.

And that's just one example.  Many times potential goals are in conflict and we have to pick one over the other.  As another example, which is more important, that the average world temperature might go up by one degree, or that a billion or so people lack electricity and the cheapest way to provide it is by burning fossil fuels?  Somehow our leaders seem to have lost their way in identifying the important, but I promise to work on that in the coming year. 

Fallacious Keynesianism: Alive Or Dead?

An anecdote that dramatically illustrates the fallacy of fake Keynesianism is sometimes attributed to the great economist Milton Friedman.  Quote investigator has its doubts about whether Friedman is the original source of the anecdote, so I'll use the letters MF to designate the protagonist.  The anecdote goes like this:  MF was visiting China during the Maoist era, and was taken by his hosts to observe the construction site of a huge new dam.  There MF saw thousands of workers toiling away using picks and shovels to move the massive amounts of earth needed for the project.  MF asked, "Instead of having thousands of workers toiling with picks and shovels, why not use modern tools like bulldozers and other mechanized equipment?"  His hosts answered, "This is a jobs project.  We want to employ as many people as possible."  MF responded, "Then why not give them spoons instead of shovels?"

Keep this anecdote in mind if you find yourself somehow going along with the idea that the answer to some slack in the economy is more government spending, no matter how wasteful.   Anybody who observes the world economy can see that the governments that watch every nickel of spending carefully have the most successful economies (Singapore, Switzerland), that those that engage in wildly uncontrolled blowout spending are the least successful (Venezuela, Greece), that uncareful spenders that let wasteful government spending grow too much languish (Europe) while somewhat more careful spenders are able to maintain growth, if somewhat impaired (United States).  And these correlations can be clearly observed despite the unsupportable convention of counting government spending at 100 cents on the dollar in GDP even when it is intentionally wasted. 

In an op-ed in the Wall Street Journal last week headlined "An Autopsy for the Keynesians," John Cochrane of the University of Chicago is ready to declare the most recent post-financial-crisis burst of Keynesianism dead. 

This year the tide changed in the economy. Growth seems finally to be returning. The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy.

Cochrane gets to the point of ridicule in listing some of the fallacies you have to believe if you buy into the fundamental Keynesian proposition that more government spending "stimulates" an economy:

Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. . . .  In Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume.

And thus Cochrane concludes that Keynesianism has thoroughly disproved itself and isn't coming back.  Well, one can hope.  But look around and the evidence is that this is an idea that needs to be killed at least a thousand times.  Take for example the cover story in Business Week on October 30, "John Maynard Keynes Is The Economist The World Needs Now," by Peter Coy.

Is there a doctor in the house? The global economy is failing to thrive, and its caretakers are fumbling. . . .  There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium.

Coy goes on to advocate for blowout government spending as the cure to current slow economic growth, although he does grudgingly concede that government spending that goes to real projects is at least preferable to pure waste.  Well, Peter, how about hiring workers to build a dam with spoons?

And how about the case of Japan?  If there is any example that conclusively disproves the Keynesian hypothesis that fiscal "stimulus" spending can get an economy moving, it has to be Japan.  Since its economy went into stagnation in approximately 1990, Japan has had one Keynesian "stimulus" program after another, the result being the 25 years of stagnation plus bonded debt exceeding 200% of GDP.  But the stagnation continues, so over the weekend Prime Minister Abe announced the latest government program to get the economy moving again.  Yes, it is another round of so-called "stimulus":

Japanese Prime Minister Shinzo Abe on Saturday approved a $29.17 billion stimulus package meant to boost consumer spending and regional economic activity, seeking to revive an economy in recession. The spending package focuses on small businesses, rural communities and post-disaster reconstruction.

Well, Mr. Abe, if you believe the Keynesian hypothesis that the "stimulus" of more government spending gets an economy going, instead of the $29 billion why not make it $1 trillion, or for that matter $10 trillion?