Tyler Cowen of Marginal Revolution is writing a new book on economics, and he provides the following excerpt in explaining his fundamental preference for politics that encourage sustained economic growth:

The importance of the growth rate increases, the further into the future we look. If a country grows at two percent, as opposed to growing at one percent, the difference in welfare in a single year is relatively small. But over time the difference becomes very large. For instance, had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990. At a growth rate of five percent per annum, it takes just over eighty years for a country to move from a per capita income of $500 to a per capita income of $25,000, defining both in terms of constant real dollars. At a growth rate of one percent, such an improvement takes 393 years.

Professor Cowen goes on to explain the cornerstone of his political views in the following manner:

If I had to explain, in one sentence, the reason I am not on the political left, I would cite the enormous long-run benefits of economic growth. Of course it still can be argued that various left-wing policies, properly understood, will contribute to long-term growth. But in my view, if you are not supporting growth-maximizing economic policies, you better had a pretty good reason in your pocket.

Amen.

Peter Gordon is a clever professor in the University of Southern California’s School of Policy, Planning and Development and in its Department of Economics and is director of USC’s Master of Real Estate Development program. Professor Gordon also runs a smart blog called Peter Gordon’s Blog, which explores “the intersection of economic thinking and urban planning/real estate development and related big-think themes.”
In this post, Professor Gordon addresses the L.A. City Council’s recent decision to require more impact studies of possible harm before large centers such as Wal-Mart are allowed to be built in Los Angeles. With brevity and razor sharp insight, Professor Gordon points out the unintended consequences of such governmental action:

I imagine that the 13 of 15 L.A. City Council members who voted for this measure also dream of requiring studies of the “possible harm” before anyone can legally file to compete with them at the polls.
For now, the professional harm detectors have a windfall. The influence of politicians and their acolytes is extended. Inefficient retailers get a pass. The poorest customers have to travel further for lower prices and more variety. Entry level jobs are foreclosed, etc., etc., etc.
Conventional measure of the size of government understate the harm that politicians do. The full consequences of this stuff are not so easily detected.

Steven Lansburg is an economist who writes a monthly column for Slate. In his most recent column, Professor Lansburg addresses the controversy over racial profiling of airline passengers and Annie Jacobsen’s recent article in WomensWallStreet about her harrowing experience on a Northwest flight from Detroit to Los Angeles in June.
Jacobsen’s fellow passengers included 14 Syrians, most of whom boarded separately. Once the plane was in the air, Ms. Jacobson contends that the men began gesturing to each other and congregating in large groups near the lavatories. Once there, the men took turns entering the lavatories, sometimes with packages. At one point, seven of the 14 men stood up in unison and all made for the lavatory simultaneously.
Ms. Jacobsen asserts that she, other passengers, and the flight attendants were alarmed by the bizarre behavior of this group. In fact, the men turned out to be a group of Syrian musicians en route to an engagement in San Diego. Nevertheless, U.S. government agencies have issued recent warnings about teams of terrorists conducting dry runs to determine whether they could build bombs in flight from components that they carry on separately.
Accordingly, Ms. Jacobsen asks the very reasonable question: “Since the [the Transportation Security Administration] issued a warning to the airline industry to be wary of groups of five men on a plane who might be trying to build bombs in the bathroom, shouldn’t a group of 14 Middle Eastern men be screened before boarding a flight?”
Professor Landsburg first takes stock of the typical responses:

The government frowns on ethnic profiling for airline passengers, but Jacobsen and the 12 bazillion bloggers who have linked to her story think the feds and the airlines should throw political correctness to the winds and adopt a policy of full-fledged ethnic profiling. Meanwhile, roughly another 12 bazillion bloggers have warned that profiling Arab men will seriously undermine civil liberties.

So, how would an economist resolve the problem? Professor Landsburg answers:

First, detaining 14 Middle Eastern men is neither more nor less an infringement of civil liberties than detaining 14 passengers chosen at random. Either way, 14 people have their liberty infringed.
Is it worth detaining 14 people (or an entire planeload of people) on every flight to see what’s in their McDonald’s bags or to question them closely about their reasons for traveling? I honestly don’t know. But this I’m sure of: If you’re going to detain 14 people, they should at least be the 14 people who are statistically most likely to be worth detaining.
Second, just because you detain particular people, it doesn’t follow that you’ve got to treat them unfairly. Being detained and questioned is a burden; it’s inconvenient and it’s demeaning. But there’s no reason that burden has to be borne entirely by the detainees. To spread the burden, all the airlines have to do is give each detainee a $100 bill for his trouble. If Northwest had had a policy like that on Annie Jacobsen’s flight, it would have paid out $1,400 to the 14 Syrians. Assuming there were another 200 passengers on that board, they could have covered that cost with a $7 hike in ticket prices.

Professor Landsburg then argues persuasively that the economics of such a policy are quite realistic:

I am guessing that Annie Jacobsen would have been thrilled to pay a $7 surcharge for the comfort of knowing that her Syrian co-passengers had been thoroughly vetted before takeoff. The Syrian musicians, in turn, would have picked up a hundred bucks apiece in exchange for, oh, 15 minutes or so of answering questions. How many musicians do you know who would turn down a gig at that hourly rate?

Professor Landsburg points out that his proposed system is similar to the one used in compensating passengers that are bumped from overbooked flights. However, it has zilch chance of ever being proposed politically, much less tried.
Hat tip to Professor Sauer over at the Sports Economist for the link to this article.

Professor Gordon places the recent Al Qaeda threats against eastern United States financial institutions into the proper perspective:

Primitives and Targets
The only silver lining in the War on Terror is that our enemies are primitives who believe that striking the NYSE or Citibank headquarters or even the IMF or the World Bank would have major economic consequences. We will win because they don’t get it. We are economically (and spatially) decentralized. More than they can grasp. Terrible as the loss of life and the psychological hit would be, the economic consequences would be minor.
The World Trade Center Towers were tall and auspicious because of New York politics. They had no economic rhyme or reason. Losing them was a terrible loss of life but had little economic consequence. In fact, no major natural disaster in U.S. history (not Hurricane Andrew, not the Northridge Earthquake, nor any other that I can think of) had significant economic impact.
The primitives don’t get it. Indeed, they cannot grasp the essence or the durability of decentralized systems. They are, after all, primitives.

Edward Lotterman is a Twin Cities-based economist who writes a column for the Twin Cities Pioneer. In this column, Mr. Lotterman points out that the original good intentions of governmental subsidies have, over the decades, generated obsolescence:

News about subsidies for airlines and the U.S. cotton industry illustrate how addictive unsustainable or indefensible flows of money turn out to be.
Once a company, group or economic sector becomes used to above-market income of some type, stopping the flow is traumatic. This is particularly true when such income is incorporated into the price of some fixed resource.

First, Mr. Lotterman addresses U.S. government subsidies for cotton farmers:

The U.S. government subsidizes cotton production to the tune of some $3 billion per year. Virtually all the subsidy flows to fewer than 30,000 cotton farmers. At some $100,000 per producer, cotton is the most heavily subsidized of the major U.S. agricultural commodities.

[C]otton farmers have become used to streams of income that apparently are unsustainable over the longer term. Ending the flow is financially and politically troublesome . . .

The goal of [cotton subsidies] was to improve incomes for small farmers. Cotton subsidies did little to accomplish this. In fact, they contributed to the concentration of cotton production into fewer and fewer hands. As Ricardo would have predicted, most of the subsidies flowed into higher prices for that farmland especially suited for growing cotton. After paying the high prevailing rental or purchase price for good land, a new cotton farmer would enjoy only moderate income even with the subsidy.
Our country should do away with cotton subsidies, not as a favor to producers on other continents, but because they are economically wasteful and unjust.

And, as Professor Ribstein has previously pointed out, Mr. Lotterman observes that governmental subsidies of airlines has had much the same effect:

Established airlines got quasi-monopolies when the government regulated routes and fares. Increases in costs such as fuel or salaries eventually got passed along to consumers in the form of higher ticket prices. Significantly fewer people flew then than now and those who did were either business and government travelers or higher income people. As economists would say, demand was inelastic. Higher fares did not reduce ticket sales greatly.
In this environment, pilot salaries grew inexorably compared to the levels that would have prevailed in a free-market situation. At the end of World War II, pilots did not earn substantially more than bus drivers or locomotive engineers. Twenty-five years later, many earned two to five times as much.
All this began to collapse when former President Jimmy Carter initiated deregulation of the airline industry by appointing economist Alfred Kahn to head the Civil Aeronautics Board. In the intervening quarter-century, the real cost of air travel has plummeted and the proportion of the population flying has grown tremendously. Many of the once-famous carriers ? Pan Am, Braniff, Eastern, TWA ? have bitten the dust while Northwest, United, Delta and others struggle financially.
Some analysts predict that eventually all of the “legacy” carriers that existed before 1978 will go under. Corporate names may survive, but all the shareholder equity and employee pension claims will turn to dust.

Mr. Lotterman concludes by predicting that the subsidies will eventually end and that the industries will eventually shake out, but then makes the following insightful observation:

Adjustment will come and it will be painful for pilots and for cotton farmers, especially those who purchased land in recent decades. The net effect will be to make our society more efficient and fair.
The whole process would be less traumatic, however, if we had not let cotton subsidies and airline salaries grow to the inordinate levels in the century just ended.

To which Arnold Kling (hat tip for the link) asks the following question:

Can you think of examples of industries that once were subsidized that now are thriving subsidy-free?

Arnold Kling provides this excellent TCS article in which he forcefully reminds us that the standard of living for the vast majority of Americans is far better now than it was 30 years ago. The entire article is a must read, and Mr. Kling concludes as follows:

The reality is that neither the rise in health care expenditures nor the standard of living of working Americans represents a problem. The false portrayal of these issues by the Left is more likely to provoke a crisis than to solve one.

Read the entire piece.

Marcus Noland is a senior fellow of the Institute of International Economics. Howard Pack is a professor of economics, business, public policy and management at the Wharton School. Messrs. Noland and Pack have collaborated on this interesting policy brief in which they examine the causes of the Middle East’s seemingly intractable economic stagnation. The entire article is outstanding, and here are a few tidbits:

The Middle East is a demographic time bomb. According to the United Nations Development Program?s (UNDP) Arab Human Development Report 2002, the population of the Arab region is expected to increase by around 25 percent between 2000 and 2010 and by 50 to 60 percent by 2020?or by perhaps 150 million people, a figure equivalent to more than two Egypts. Even under the UNDP?s more conservative scenario, Bahrain, Kuwait, Qatar, and the United Arab Emirates will be the only Arab countries in 2020 with median ages
above 30.
These figures suggest that the region as a whole will experience labor force growth of more than 3 percent for the next 15 years or so. On current trends, according to an Arab League report, unemployment in the region could rise from 15 million to 50 million over this period. Under plausible assumptions about the rate of productivity growth and required investment levels, the economies of the region will have to maintain investment rates on the order of 30 percent of GDP and income growth of 5 to 6 percent a year to absorb all this labor. This is a very tall order. And recent history is not reassuring.

The authors contend that pervasive negative attitudes toward foreigners is one of the primary barriers to investment of the foreign capital that the region desperately needs:

In the Zogby (2002) poll of Arab attitudes, Saudi males stand out as uniquely dissatisfied and pessimistic about their children?s future. Presumably these feelings are rooted in the reality of dwindling employment prospects, the 40 percent decline in per capita income from its peak in 1982, and the lack of political voice. Dissatisfaction and pessimism about the future are mildly correlated with age, education attainment, and internet access. The youngest, most advantaged sections of society have the bleakest appraisal of the future. It goes without saying that 15 of the 19 September 11 hijackers were Saudi males.

Less dramatic than terrorist attacks, though perhaps more important for economic development, are public attitudes toward foreigners and globalization.
The 2003 Pew Global Attitudes survey revealed a significant level of discomfort with globalization in the Middle East. . . the percentage responding that globalization is good in three Middle Eastern countries is considerably less than in other regions of the world surveyed . . . The regional pattern of responses to three issues?the necessity of closing large, inefficient factories; the need to protect their way of life against foreign influence; and the desirability of societal acceptance of homosexuality . . . Relative to most respondents in the rest of the world, the Arabs were less willing to close inefficient factories, more committed to protecting the local way of life, and less tolerant of homosexuality.
The picture that emerges from the pattern of responses to the full set of Pew survey questions is of local populations that are relatively averse to change, instead favoring the maintenance of existing economic and social arrangements ? especially if the forces of change are regarded as emanating from foreign or nontraditional sources.

And interestingly, Messrs. Noland and Pack view Islam as only part of a much larger problem:

[C]oncerns manifested through Islam may simply be one symptom of more complex social processes. Islam may matter?not in the simple sense that belief in Allah dooms one to a low personal saving rate or that Islamic banking systems handicap financial efficiency?but rather in a more subtle way. Today there are Muslim communities in the Middle East that are relatively discomfited by aspects of ongoing social change. To the extent that adherence to Islam is a significant component of personal and communal identity, Islamic teachings will be one prism through which these developments are evaluated. This pattern of apprehension may be reinforced if Islam itself is regarded as being part of this contested terrain.
Yet the centrality of religious belief in this formative process should not be overstated. As revealed in the Zogby poll, religious orientation is generally only a secondary or tertiary source of personal identity in most Arab countries in the Middle East?rather Arab ethnicity is the primary identifier. It is almost surely the case that feelings toward foreigners or homosexuals are derived from some admixture of religious teachings and prevailing cultural norms. Religious beliefs are but one input in a complex reaction to globalization.

Again, read the entire brief. Hat tip to Professor Drezner for the link to this informative article.

As noted in a post here several days ago, the 1986 Tax Bill was one of President Reagan’s enduring accomplishments, not as much for the tax rate reduction as for the bill’s bold move toward tax simplification. Using that bill as a standard, Steve Pearlstein in this Washington Post article analyzes this year’s tax legislation. The result is not promising:

One of Reagan’s greatest achievements was passage, with bipartisan support, of the 1986 Tax Reform Act. The goal of the landmark bill was to make the tax code simpler and fairer while boosting economic efficiency. Loopholes were closed, tax rates were reduced, and all sorts of distinctions were eliminated so that individuals and companies with the same income or profits were required to pay roughly the same tax.
Those principles, however, are violated on nearly every one of the 930 pages in the recently passed Senate tax bill and the 398-page draft released last week by the chairman of the House Ways and Means Committee, Bill Thomas (R-Calif.).
With a few exceptions, both bills are grab bags of special-interest provisions designed to reward the well-connected at everyone else’s expense. They reward companies that have played cynical tax games and open up new vistas for the tax shelter industry.

Mr. Pearlstein notes that tax legislation has again become the favorite tool for providing political favors:

Let’s begin with those provisions designed to favor particular companies or industries. In the Senate bill, these include cruise-ship operators, foreign gamblers, NASCAR track owners, insurers, timber companies, cattle ranchers, movie theater owners, and manufacturers of small planes, bow-and-arrow sets and fishing tackle boxes. And notwithstanding the fact that skyrocketing oil prices should provide all the incentive anyone would need to develop new energy sources, there’s a couple of billion dollars a year in new tax breaks for energy companies already well-endowed with them. In a final, gratuitous insult to the taxpayer, there’s even a provision for a blue-ribbon commission to study “comprehensive tax reform.”
The House would leave out the energy provisions but add tax breaks for bourbon distillers and wealthy taxpayers in places like Texas that, poor things, have no state income tax to deduct on their federal 1040. High-tech industry tucked in a provision that would ensure its employees pay no payroll taxes on all those stock options. And in a shameless vote-buying effort, Thomas’s draft would have the government pay $2 billion a year to tobacco farmers for the right NOT to pay them annual crop subsidies in the future, as if the quotas were some sort of property right.

Mr. Pearlstein closes by observing that this awful piece of legislation could be used by an able politician for the better good:

This may well be the worst piece of tax legislation to come along since 1986. If Sen. John F. Kerry (D-Mass.) wanted to steal the Reagan mantle, he would make plans now to return to Washington from the campaign trail and, Jimmy Stewart-like, lead a protracted Senate filibuster of the final bill. From his final resting place, the Gipper would be cheering him on.

Tax simplification is one of the many domestic issues on which the Bush Adminstration has abdicated its leadership position. Curiously, if President Bush loses in November, my sense is that it will be more a result of this type of political lethargy than anything that occurs in the Middle East.
Hat tip to Professor Sauer for the link to the WaPo article.

In this Tech Central Station op-ed, Arnold Kling places Ronald Reagan’s economic policies into the context of his presidency, and corrects several misconceptions regarding those policies. First, Mr. Kling puts the economic problems that confronted Reagen into the context from which they arose:

Richard Nixon, like Ronald Reagan, inherited an economy that needed a dose of tight money in order to bring inflation under control. However, Nixon took office at a time when liberal economists had been arguing for more than a decade that inflation could be contained without a recession by using “incomes policies,” a euphemism for government interference in wage and price setting. In the fall of 1971, over the objections of his conservative economic advisers, Nixon decided to give “incomes policies” a try. The result, over the next several years, was that the cure was worse than the disease: “incomes policies” made inflation and unemployment higher, not lower.
In addition, as part of his 1972 re-election campaign, President Nixon undertook a large expansion of Social Security. Along with wage-price controls, this enlargement of the welfare state makes Nixon’s economic policies worse than those of any subsequent President, . . .

Mr. Kling then points out the vagaries of attributing relative economic progress to a particular President when that success is primarily attibutable to policies that his predecessor implemented:

When Ronald Reagan defeated Carter’s re-election bid, “incomes policies” were a proven failure. . . . [B]y 1980 it took a lot less courage to stand by a monetary approach to disinflation than it did a decade earlier. I believe that Carter would also have stuck with Volcker through the recession, and if that is the case, then the behavior of the economy in the 1980s would have been about the same regardless of who had been President. Of course, I generally believe that the business cycle follows its own course, and that giving credit or blame to a President is an attribution error. Thus, Presidents who enjoy strong economic performance, like Clinton, are over-rated . . . , while Carter, who suffered from the policy errors of previous Administrations and had began to undo those errors, is under-rated on economics. (I have plenty of issues with Carter on foreign policy, but that is another subject.)
I believe that President Reagan made a positive difference for the economy. However, unlike most analysts, I do not focus on his tax cuts. Instead, I think that Reagan’s main contributions were on energy policy, tax reform, and resisting government expansion.

Mr. Kling concludes with an ominous observation regarding the Bush Administration’s economic policies:

Finally, the government’s size ultimately will depend not on the tax rates that we set today but on the role that we choose for government long term in education, health care, and retirement security. If we continue to give government a large role in these fast-growing sectors, then spending and taxes as a share of GDP will inevitably increase. I call this “The Great Race,” and so far under President Bush it is a race that we are losing.