econlife - A Global Look at the Rule of Law by Elaine Schwartz

During the 1790s. Alexander Hamilton told us that our economy needed to recognize the sanctity of a contract. At the time, Revolutionary War bonds had been sold to speculators by the investors who had supported the War. When the bonds appreciated in value, those speculators benefited–not the patriots who initially purchased them. Hamilton told us that legal transfer of ownership had to be respected. Our economic future depended on contractual rights being preserved.

He was right.

Still today, a rule of law that includes contractual rights exists as the foundation of a viable economy. Let’s see where.

The Rule of Law

The World Bank says that its rule of law (ROL) indicator includes property rights and contract enforcement. It also extends to the police, the courts, and the likelihood of crime and violence. It involves the extent to which “agents have confidence in and abide by the rules of society.”

The brighter green countries are the most committed to a rule of law. They include New Zealand, Canada, Australia, Greenland, the Scandinavian countries, Denmark:

Again, for the control of corruption, using the above color scale, you see similar shading:

According to the World Bank, the United States ROL rank has sunk during the past several years:

Our Bottom Line: Incentives

In Why Nations Fail, economists Daron Acemoglu and James Robinson explain why the rule of law matters. Early in the book, they set the scene by comparing Nogales, Sonora and Nogales, Arizona. They tell us why the rule of law made Nogales, Sonora so much less affluent than its Arizona namesake. In Mexico, you can ascend economically by untangling red tape, paying for expensive licenses, and bribing politicians. In Mexico you have an amparo–the right to appeal that a law does not apply to you. On the World Bank map, you can see Mexico is a bright pink, placing it high on the corruption scale.

Somewhat similarly, we can think of China’s lack of intellectual property protection. We also can look at Poland and Hungary where independent judiciaries are in question. With a weaker rule of law, political influence rather than the market can dominate decision-making.

Returning to where we began, Alexander Hamilton’s sanctity of contracts takes us to economic development in the U.S., Mexico, China, and Eastern Europe. But here we have to add one word: incentive. When we have the rule of law, the incentives encourage financial investment, entrepreneurship, and business formation. They form a foundation of legal guarantees that we need for economic development.

My sources and more: Although it is a bit complex to navigate, the World Bank is a superb source of governance data. I also recommend the insight offered by a Harvard scholar in this Marketplace podcast and a BBC lecture from Niall Ferguson. But, if you have lots of time, do read Why Nations Fail and The Narrow Corridor by Daron Acemoglu and James A. Robinson.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - How Garlic Relates to Coronavirus by Elaine Schwartz

If you’ve traveled to China during the two weeks before boarding, a cruise ship will send you home. For a similar reason, Apple’s revenue will be less than projected and Hong Kong’s restaurant traffic is down.

But garlic?

The Coronavirus Impact on Garlic

It is likely that the two pounds of garlic you ate this year were from China. The source of as much as 80 percent of the world’s garlic supply, China provides much of our garlic. It is also possible that when you visited Gilroy, California, you smelled garlic, an aroma said “to engulf” the city. As garlic growers, China and Gilroy have had a very different reaction to the U.S. China trade war and the coronavirus.

California’s garlic farmers were delighted when a 10 percent tariff on garlic went to 25 percent because of the trade war. Now, China’s response to the coronavirus has locked down transport arteries. Agricultural workers and processors have not been at work. The result has been a continued march upward of the price of garlic. During the first two weeks in February, it ascended by 13 percent.

We’ve been eating Chinese garlic for awhile. Below is a sign in a NY gourmet supermarket during 2013:

Our Bottom Line: Externalities

An externality refers to the impact of an activity or a contract or a decision on an uninvolved third party. Good and bad, externalities can be positive and negative. A vaccine is a typical example of a positive externality while water pollution creates the negative ripple.

You can see with garlic that the Chinese are experiencing negative externalities as are consumers who are paying more. Meanwhile, Gilroy’s garlic farmers are benefiting.

My sources and more: Thanks to Tracy for alerting me to the garlic update. That took me to the LA Times for the cruise ship ban and to CNBC for its Apple news. Unexpectedly, it also relates to the trade war now and in the past. And here are the USDA stats and facts about Gilroy, California, the garlic capital of the U.S.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Where People Prefer Non-Cash Transactions by Elaine Schwartz

Last week, Washington D.C. started pondering whether to prevent businesses from becoming cashless. Philadelphia, New Jersey, and San Francisco have already said that retailers need to accept cash payments. In New York City, a ban will soon go into effect.

After this photo was taken in San Francisco, the city said businesses could not refuse cash:

Countries That Like Cash Transactions

You can see that Sweden, at 20 percent, is close to the bottom of the list. In 2018, just 13 percent of the Swedes surveyed said they had used cash for a recent purchase. Businesses say non-cash transactions save time. The one group that gets short changed are those who have no credit cards nor bank accounts:

Non-Cash Transactions

Recently, Visa offered 50 small U.S. food service businesses a $10,000 award to assist a move toward cashless transactions.

As Visa hopes, a 2019 San Francisco Fed study indicates we could be moving in a cashless direction. Predictably, we are using cash for “small value” purchases, mostly those that are less than $25. It also depends on your age. Individuals 18 to 25 and over 65 have more of a tendency to pay with cash. But the trend is down from 30 percent of all transactions in 2017. For the three consecutive days during October covered by the study, participants used cash for 26 percent of all their transactions.

Represented by green, cash transactions are diminishing:

We use cash more typically for gifts and payments to friends, family, and others, but not our household expenses:

Our Bottom Line: Money

Cash is not the only kind of money. To be defined as money, a commodity needs three basic characteristics;

It should be..

• a medium of exchange (people accept it)
• a store of value (it retains it spending power)
• a measure of value (people know what it can buy)

As a result, demand deposits and the bank accounts accessed by a debit card are also money. So, even if a city permits businesses to ban cash, they still could be accepting money.

My sources and more: It’s always so nice to discover a synergy between articles. For that synergy, I suggest this NPR article and a San Francisco Fed report.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Where a Traffic Light Could Cut Noise Pollution by Elaine Schwartz

Habitual car horn honkers could have a problem in Mumbai. If they keep honking when a traffic signal is red and the decibel levels exceed 85, the signal will reset. Rather than turning green, the red remains. Cars will have to sit for double the time and maybe more.

Some suggest that the decibel punishment will diminish noise levels in the city. Others worry that it will only get better at the five signals where the lights get longer. Elsewhere, drivers will keep honking.

Where are we going? To the tragedy of the commons.

Noise Pollution

On April 7, 2008, Mumbai had a No Honking Day. Between January 2009 and September 2019, there were just 1293 honking offenses. Now, recognizing the danger of loud noise, the city is trying harder.

Below, you can see a decibel hierarchy:

Knowing that 85 dB or more is harmful, India’s noise pollution rules include (I suspect unrealistically) a maximum of 55 dB during the day and 45 dB at night for residential areas. After all, a nearby siren can be as loud as 120 to 140 dB. A bit lower but still harmful, power lawn mowers and subway trains can be in the 90 dB range. With higher decibel levels, the downside is high blood pressure, sleep problems, stress. Birds have displayed lower birth rates and caterpillars, accelerated heart rates.

In a report on noise pollution, the World Health Organization summarized how people could be affected:

Our Bottom Line: Tragedy of the Commons

We have a tragedy of the commons when a public resource is overused or abused. Because the land or water or street has no private owner to oversee its care, individuals harm it. The result is a loud city, an overfished ocean, polluted air.

Political scientist Elinor Ostrom (1933-2012) won the economics Nobel Prize for her approach to the tragedy of the commons. Calling it the problem of the commons, she said communities do voluntarily get together when they share the same goals. Her examples ranged from a pasture in Switzerland to the refrigerator at work.

Elinor Ostrom:

Meanwhile, British economist Arthur Pigou (1877-1959) proposed targeted fines that could be win win. If successful, they were supposed to create the incentive to pollute less at the same time that the fine would be used to benefit society. His key was cost. Someone had to elevate the cost of the behavior.

Arthur Pigou:

Yet another solution was offered by Nobel laureate Ronald Coase (1910-2013). He thought individuals could negotiate a mutually satisfactory solution. They just had to be aware of when each benefited.

Returning to that Mumbai traffic signal that gets longer when people raise the noise level. someone could have called it a Pigovian solution to noise pollution.

My sources and more: Thanks to Marginal Revolution for alerting me to Mumbai’s street noise problems. From there, The Times of India and the Hindustanitimes  had more of the story. Then for noise pollution facts National Geographic, WEF, and this WHO 2011 report were helpful. And finally, always ideal for economist bios, econlib had more on Ostrom, Pigou, and Coase.

Our featured image is from Pixabay.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - A Simple Look at the World’s Most Complex Economies by Elaine Schwartz

Harvard’s Atlas of Economic Complexity is very aware that toothpaste isn’t just toothpaste. It represents knowledge about sodium fluoride, the germs that create bad breath, and how to fill 180 tubes a minute:

The Atlas of Economic Complexity

At Harvard’s Growth Lab, a group of scholars developed the Atlas of Economic Complexity. Their goal was to display the “knowledge intensity” of a country’s exports. They were really just looking at land, labor, and capital. Asking if the nation’s goods and services came from factors of production that required lots of knowhow, they created a metric that compared 133 nations’ exports.

Their algorithm relates to complexity and connectedness. Calling an economy a “collection of capabilities,” they believed that complexity reflected the past innovation and the potential for future invention that fuels economic growth. But also they said you need “connectedness” so that one innovation leads to another one. Making computer components could lead to making computers. But mining could be a dead end.

The creators of the Atlas assumed that a country’s exports can be used to picture the level of that country’s knowhow. If you assemble an iPhone then you need one set of capabilities. But if you design it, you have different human and physical capital. And leaping to cotton exports, we would find a completely different network of capabilities.

Based on the trade patterns of 6,000 products, these are the top 10 in the Atlas’s complexity ranking. The U.S. is #12 while China has the #19 spot:

U.S. China Trade Talks

China has gotten an A+ in the Atlas’s algorithm. Evolving from textiles to electronics and machinery, China’s diversity facilitated its growth. Recently adding 54 new products, it has a platform for future growth that augments what its GDP says. While China’s GDP makes it the 55th richest nation in the world, its complexity index pushes it much higher.

A WSJ writer suggests that U.S. trade negotiators should have recognized China’s more complex exports. Instead of focusing on commodities, it’s the higher value of their goods that will shape (and threaten) our future trade relationship.

Our Bottom Line: Adam Smith

We could relate the complexity index back to Adam Smith’s description of a market system and his Wealth of Nations (1776). Whether looking back at 1776 or now, a factory’s division of labor is a crucial component of the market system because of what it procreates. Division of labor encourages expertise. When people concentrate on making one product they become better at it. They wind up with a springboard from which they invent new and better things. At the same time, the workers become increasingly affluent consumers with the incomes they receive. David Ricardo then added that the specialization we wind up with can lead to the benefits of comparative advantage. With comparative advantage, if nations make the items for which they have a lower opportunity cost, then everyone becomes more productive. And, it all began with division of labor.

For us it takes us to where we began. Even toothpaste can generate the knowhow that produces diversity and growth.

My sources and more: It’s wonderful how two seemingly separate stories can come together. Several days ago, I listened to an ABC Radio podcast on Australia’s export complexity. Then yesterday, WSJ connected the same complexity Atlas to U.S. China trade talks. Hoping to learn more about the Atlas, I went to the NY Times, and The Washington Post and the Harvard Gazette. But to have the most fun, do go to the Atlas and play with its interactive tools.

Our featured image is the Atlas’s graphic of U.S. exports in 2017. The largest square, ICT, refers to Information and Communication Technology.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.