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 - 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.

econlife - The Inventions That Mattered Most by Elaine Schwartz

We all know about the curb cut but probably never think about it. It’s just that slanted part of the sidewalk leading to the street:

The curb cut was invented for those of us who need a slope rather than a step. Fifty (or so) years ago, it first appeared in Berkeley, California where a group called the Rolling Quads wanted to navigate the streets independently in their wheel chairs. They convinced the Berkeley City Council to mandate curb cuts and the rest of the story is history.

One of millions, the curb cut was a part of our invention history.

Invention History

Looking back 180 years, researchers recently tried to make sense out of close to 10 million patents. They hoped to provide analytic order to some messy data.

You can see below that they were able to figure out the rhythm of innovation. It seems to have unfolded in waves. The second wave peaked during the depths of the Great Depression in 1932 when the unemployment rate was just below 25%:

They also wanted to extract the most influential inventions from the data. To arrive at some conclusions, their algorithm looked for inventions with patents that were different from any that preceded them. On the other side, it identified innovations on which many subsequent patents were based. All combined, because the database started in 1836, their algorithm grabbed patents between 1840 and 2010.

Among the 100 “breakthrough” innovations that were listed, these were the top 25:

Each breakthrough had a network like the following:

Our Bottom Line: Economic Growth

NYU economist Petra Moser said that “Innovation is the engine of growth.”

In 1998, a wave of innovations that relate to software and bioscience appear to have peaked. Now, the decline is evident. Knowing more about invention history can help us stimulate more in the future. We can try to accelerate a slowing rate of economic growth as measured by the increase in the GDP.

The bigger picture:

Where are we? Returning to where we started, yes, the curb cut was not among the most influential inventions. However, enabling us to get where we are going more easily, it and millions like it certainly added to the productivity that feeds economic growth.

My sources and more: The 99% Invisible story of the curb cut was the perfect complement to this The Washington Post invention history.  But if you want lots more detail, do look at the paper on which The Washington Post article was based. It is all phenomenal!

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 - Celebrating the Economic Independence That Alexander Hamilton Created by Elaine Schwartz

The United States declared independence from Great Britain on July 4, 1776 and won the American Revolutionary War. But still, we were not truly independent. Our agrarian economy depended on Great Britain. They had the banking system, they had the factories, they had the knowhow.

But we had Alexander Hamilton.

Alexander Hamilton’s Development Plan

As Secretary of the Treasury, Alexander Hamilton’s goal was to expand the U.S. banking system, our transportation infrastructure, and technological innovation. He wanted factories that would process what our farms and plantations grew. So, in Hamilton’s development plan, he explained to the Congress what they had to do.

1. Establish Public Credit

• Hamilton said a national debt is a blessing if it’s not too large. Borrowed money had helped the U.S. finance the Revolutionary War. Also, though, those lenders had to know we would pay them back. With European creditors, the U.S. had to pay back the money that was due them while domestic creditors needed to know we had a viable plan. Only then could Hamilton establish the good credit that was necessary for a government to borrow the money it needed.
• Since then, the U.S. has been borrowing money and paying it back. However, some of us are worried that the debt is becoming too large. Just like your own income determines the wise amount for you to borrow, so too does the GDP for our nation. Below you can see that recently the debt is an increasingly bigger proportion of the GDP. Almost equal to World War II highs, the debt is projected to balloon from 78% of GDP for this year to 92% in 2029:

2. Create a Banking System

• By establishing the First Bank of the United States, Alexander Hamilton generated the beginning of a banking system that pumped money around the U.S. economy. His goal was a network of financial intermediaries that connects savers to borrowers. He knew that banks loan money to business start-ups and help firms finance inventory. They expand and contract the money supply and purchase the bonds that nations sell to raise money.
• Now, while there are close to 4,600 banks in the U.S., the large ones predominate. Below, you can see how the system has consolidated:

Among the 10 largest U.S. banks, the four with the most assets are JP Morgan Chase, BOA, Citi, and Wells Fargo:

3. Encourage Economic Diversity

• Economic growth through diversity was the third leg of Alexander Hamilton’s plan for independence. Recognizing that the U.S. in 1790 was a farming economy, he sought tariffs and subsidies to protect a young manufacturing sector. He supported a system of tariffs to encourage innovation. Correct again, Hamilton knew that the combination of agriculture, manufacturing, and invention could form an economic foundation from which we could build.
• Looking back, we can say that Hamilton created our springboard. About a different kind of independence, Hamilton’s foundation facilitated the leap beyond our borders to globalization. It let us evolve from an agricultural economy to a productive behemoth that needs world markets and global supply chains to feed our growth.

The huge volume of goods and services that each U.S. state produces can be compared to these countries:

Shown above, the four largest state GDPs would equal the value of the goods and services produced by UK, Canada, Korea, and Mexico:

Our Bottom Line: Déjà Vu

Hamilton’s goals are timeless. We still need to manage sovereign debt wisely, support a vibrant banking system, and encourage economic growth.

My sources and more: This Fortune article sums up the Hamiltonian legacy ideally.


Please note that this post is an updated version of what we have published on past Independence Days.

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 - Celebrating Alexander Hamilton’s Economic Independence by Elaine Schwartz

The United States declared independence from Great Britain on July 4, 1776 and won the American Revolutionary War. But still, we were not truly independent. Our agrarian economy depended on Great Britain. They had the banking system, they had the factories, they had the knowhow.

But we had Alexander Hamilton.

Alexander Hamilton’s Development Plan

As Secretary of theTreasury, Alexander Hamilton’s goal was to expand the U.S. banking system, our transportation infrastructure, and technological innovation. He wanted factories that would process what our farms and plantations grew. So, he explained to the Congress what they had to do.

1. Establish Public Credit

• Hamilton said a national debt is a blessing if it’s not too large. Borrowed money had helped the U.S. finance the Revolutionary War. Also, though, those lenders had to know we would pay them back. With European creditors, the U.S. had to pay back the money that was due them while domestic creditors needed to know we had a viable plan. Only then could Hamilton establish the good credit that was necessary for a government to borrow the money it needed.
• Since then, the U.S. has been borrowing money and paying it back. However, some of us are worried that the debt is becoming too large. Just like your own income determines the wise amount for you to borrow, so too does the GDP for our nation. Below you can see that recently the debt is a bigger proportion of the GDP:

 

2. Create a Banking System

• Composed of financial intermediaries that connect savers to borrowers, a banking system “pumps” money around the economy. Banks loan money to business start-ups and help firms finance inventory. They expand and contract the money supply and purchase the bonds that nations sell to raise money. By establishing the First Bank of the United States, Hamilton generated the beginning of a banking system that pumped money around the U.S. economy.
• Now, while there are close to 5000 banks in the U.S., the large ones dominate. Below, you can see how the system has consolidated. The four with the most assets are Citi, JP Morgan Chase, BOA and Wells Fargo.

Consolidation of U.S. banks:



Declining number of U.S. commercial banks:

3. Encourage Economic Diversity

• Economic growth through diversity was the third leg of Alexander Hamilton’s plan for independence. Recognizing that the U.S. in 1790 was a farming economy, he sought tariffs and subsidies to protect a young manufacturing sector. He supported a system of tariffs to encourage innovation. Correct again, Hamilton knew that the combination of agriculture, manufacturing, and invention could form an economic foundation from which we could build.
• Looking back, we can say that Hamilton created our springboard. About a different kind of independence, Hamilton’s foundation facilitated the leap beyond our borders to globalization. It let us evolve from an agricultural economy to a productive behemoth that participates in the world markets and global supply chains that feed our growth.

You can see that the U.S. is very much a part of the world economy:

Exporters



Importers

Our Bottom Line: Déjà Vu

Hamilton’s goals are timeless. We still need to manage sovereign debt wisely, support a vibrant banking system, and encourage economic growth.

My sources and more: This Fortune article sums up the Hamiltonian legacy ideally.
Please note that this post is an updated version of what we have published on past Independence Days.


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 - Do We Really Have a Student Loan Crisis? by Elaine Schwartz

The Wall Street Journal recently introduced us to an orthodontist who had not yet repaid $1 million of his student debt…and probably never will.

You can see below that becoming a dentist is expensive:



Not quite typical, this orthodontist was one of 101 people whose outstanding federal student loan exceeds $1 million. At the $100,000 level, there are approximately 2.5 million individuals. As for the average, it is a more down-to-earth $17,000.

Should we be concerned?

These are some of the facts…

Where?

Based on four-year state institutions, the Midwest and Northeast have the most student debt. If you live in New Hampshire, Maine, or Pennsylvania it is likely that you owe more than someone who comes from New Mexico, California or Wyoming. But you probably owe more because tuition is higher.

Below, the darkest states have the highest proportion of student loans:

Who?

The AAUW (American Association of University Women) tells us that women hold two-thirds of all student debt. They point out that yes, there are more female students. But still, women’s average debt exceeds men’s. And the burden is compounded by the amount of interest women owe because they repay debt more slowly, .

You can see how the AAUW uses two graphs to connect the gender pay gap to the college loan problem:

How Many?

Fifty-three percent of all adults with a bachelor’s degree or more education have outstanding student debt. Furthermore, comparing 2011-2012 to 1989-1990, we’ve moved from half to two-thirds of all college seniors using loans for their education.

How Much?

Now at $1.3 trillion, the amount of student debt owed by U.S. households has tripled from 2001-2016. However, unlike other forms of household debt, delinquencies have been rising:




So, should we worry?

Our Bottom Line: Economic Growth

In their “Feds Notes,” the Federal Reserve does not sound very concerned. Attributing the surge in loans to higher college enrollment and rising tuition, they don’t believe the debt will constrain the consumption that is close to 70% of the GDP. Furthermore, because 90% of outstanding student loan debt is guaranteed by the federal government, financial institutions are not “highly exposed.”

They do express concern that household spending could be crowded out by debt service but then conclude a minimal drag on GDP growth. Similarly, they point out that at risk borrowers could jeopardize other credit markets but again conclude the risk is not considerable.

Instead, the Fed reminds us that the loans are adding to the human capital that fuels consumption. And that returns us to our orthodontist who owns a $400,000 house, drives a Tesla, and earns more than $255,000 a year.

My sources and more: Having just seen a WSJ  article about the largest loan careers, this Brookings commentary was especially relevant. From there, this CNN  student loan discussion provided a new perspective as did the AAUW report. But if you want more data, Pew, the Urban Institute, these “Fed’s Notes,” and a 2018 Federal Reserve Report have it.

Please note that the numbers I use from WSJ differ slightly from a 2018 Federal Reserve 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 - How to Measure Our Misery by Elaine Schwartz

An economist could say that three “lows” and one “high” bring happiness:

• low inflation
• low unemployment
• low interest rates
• high growth

Taking the flip side, they also let us identify misery.

The World’s Misery

Economist Arthur Okun (1928-1980), created the first Misery Index. By adding together the inflation rate and the unemployment rate, he had a measure of economic distress. I guess it makes sense that when purchasing power dips and joblessness climbs, there are fewer smiles.

Now though other economists have taken the idea a step further. Johns Hopkins Professor Steve Hanke tells us that we should add interest rates and growth to the equation. More precisely, he totals the unemployment, inflation, and bank lending rates. Then, from that number, he subtracts the percent change in per capita GDP growth. When the first three rise, they are the “bads.” But if the last one goes up, it is a “good.” You can see that high numbers are alarming.

From a list of 98 countries, these are Dr. Hanke’s most miserable five in 2017:

The States’ Misery

Returning to the Okun approach, we can use data from a 2016 paper to see the most  miserable states during the Great Recession. To get his numbers, an SMU economist added his inflation rate formula to the unemployment rate. (The NBER dates for the recession were December 2007 to June 2009.)

From a list of the 50 states, these were the five most unhappy:

U.S. Misery

Returning to the Okun approach, for the worst U.S. numbers, we can look back to the stagflation of the early 1980s when we had a stagnant economy and inflation. Now though, combining exceedingly low inflation and unemployment, our March misery index was 6.46:



However, even with such a low index number, the U.S. is not among the 10 least miserable countries:

Our Bottom Line: Misery Index Questions

Like all statistical yardsticks, a misery index can be a handy tool. However, we should also remain aware of its defects:

• With unemployment, we are looking at the tip of the iceberg. Although we can have too low a participation rate, too many discouraged workers who left the labor force and part timers who want full time jobs, still the unemployment rate can be attractively low.
• As for the inflation rate, the index assumes that low inflation numbers are good, even when they are too low.
• And thinking of unemployment and inflation together, equal weighting could sometimes be misleading. Unemployment can generate much more misery than inflation.

So, even with the U.S. Misery Index approaching its 60 year low, we might be sadder than we think.

My sources and more: The more you look, the more misery indexes you find and the more interesting it becomes. The Hanke list and some analysis were at Cato while this paper had the U.S. states numbers. Meanwhile, there were many possibilities at Bloomberg.

Please note that several sentences from today’s post were in a previous econlife.

This post was slightly edited after publication.

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.