Capitalism is dead; long live capitalism

Financial Times
Editorial
December 27, 2011

The market economy is the most successful mechanism for creating prosperity humanity knows. Allied to modern science, it has done more than transform the world economy; it has transformed the world. For the first time in history, the world’s principal states rely on the market economy to develop their economies. Almost as important, they rely on a global market economy. Contemporary states are destined to co-operate with one another if they are to prosper.

Yet the market economy is not as unchangeable as the laws of the Medes and the Persians in the book of Daniel. It is successful not because it stays the same, but because it does not. The driving force is the desire of all human beings to work for the betterment of themselves and their families. The mechanism is the equally natural search for a better deal. But institutional settings and relationships with political institutions have always been open to change. This very adaptability has ensured the survival of market economies.

Two centuries ago there was no limited liability, no personal bankruptcy, little central banking, no environmental regulation and no unemployment insurance. All these changes occurred in response to economic or political pressures. All brought with them new solutions and new challenges. At a time of ongoing financial shocks, this need for adaptation has not ended. On the contrary, it is as important as ever.

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Larry Ribstein (1946-2011)

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Italy Tries Raising the Social Stigma on Tax Evaders

New York Times
December 24, 2011

On a recent morning, Maurizio Compagnone, an employee of Italy’s internal revenue service, stood before a classroom of middle school students in a leafy neighborhood here, preaching the virtues of paying taxes.

“You may think, ‘I’m 13, why should I care about taxes?’ ” he said with earnest enthusiasm as the students looked on, slightly bored. “But you can take a step in the right direction. You can change the behavior of the people around you, your parents and friends.”

Mr. Compagnone is one soldier in a battle — often uphill — to persuade Italy’s famously tax-evading citizens to pay up. Such efforts, along with a new blitz of public service announcements trying to raise the social stigma on tax evasion, have become crucial as Italy struggles to reduce its $2.5 trillion public debt and fend off speculative attacks.

The tax authorities say Italy loses an estimated $150 billion a year in undeclared revenues, while the national statistics authority places the underground economy to be about 17.5 percent of gross domestic product — the third highest in Western Europe after Malta and Greece but before Spain. Other experts place the percentage much higher.

To tackle the issue, Prime Minister Mario Monti’s new $40 billion austerity package, which received final approval on Thursday in the Senate, includes tougher measures that will allow tax officials to peer into Italians’ bank accounts to check declared income against bank deposits — not to mention yacht, car and home ownership — under a new cross-referencing initiative.

The measures also prohibit cash transactions above $1,300 — common in Italy, where low credit-card use keeps private debt low but evasion high — and lower the threshold for which tax evasion becomes a criminal offense. The government has also set an additional 1.5 percent tax on assets repatriated under an earlier tax amnesty, raising the levy for those requesting anonymity.

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12 Μύθοι για την Αγορά

του Αριστείδη Χατζή

Παραπολιτική
24 Δεκεμβρίου 2011

Στο δημόσιο διάλογο ακούει και διαβάζει κανείς πολλές ανοησίες. Μερικές από τις χειρότερες όμως αφορούν τις διαβόητες «Αγορές». Στο συλλογικό φαντασιακό έχουν αναλάβει τον ρόλο του μπαμπούλα που τρομοκρατεί τους πολίτες, τις κυβερνήσεις ακόμα και τους διεθνείς οργανισμούς. Η εικόνα που κυριαρχεί είναι ότι οι Αγορές είναι σαν τα Τρολς, τα μυθικά τέρατα της σκανδιναβικής μυθολογίας: πανίσχυρες, ανορθολογικές, ασύδοτες, κινούνται ανεξέλεγκτα και απρόβλεπτα με ένα μόνο σκοπό, να καταστρέψουν τα πάντα στο πέρασμά τους. Για τους λίγο πιο εύπιστους είναι απαραίτητο και ένα ανθρωπομορφικό στοιχείο - πίσω από τις Αγορές υπάρχουν συγκεκριμένοι άνθρωποι και οργανώσεις που κινούν τα νήματα: η λέσχη Bilderberg, η Τριμερής, οι τραπεζίτες, οι Εβραίοι, οι Αμερικάνοι - τώρα και οι Γερμανοί.

Πάντα οι άνθρωποι προσπαθούσαν να εξηγήσουν φαινόμενα που αδυνατούσαν να κατανοήσουν καταφεύγοντας στη μεταφυσική. Η πολυπλοκότητα ενός κοινωνικού φαινομένου όπως η Αγορά, η άγνοια βασικών οικονομικών εννοιών, η δυσκολία αποδοχής του τυχαίου και η ευκολία αποδοχής απλοϊκών μύθων, η τάση για συνωμοσιολογία και, γιατί να το κρύψουμε άλλωστε, η ευήθεια, οδηγούν αναπόφευκτα σε μεταφυσικού τύπου κατασκευές με κυρίαρχο το ανθρωπομορφικό στοιχείο. Όσο δύσκολο είναι να κατανοήσει ο απλός άνθρωπος το μηχανισμό της Εξέλιξης άλλο τόσο είναι δύσκολο να κατανοήσει τους μηχανισμούς της Αγοράς.

Στο υπόλοιπο αυτού του κειμένου θα προσπαθήσουμε να καταρρίψουμε εν συντομία 12 μύθους για την Αγορά και να απαξιώσουμε τις αντίστοιχες λανθασμένες κυρίαρχες αντιλήψεις.

Μύθος 1: Η Αγορά είναι ένα μυθικό τέρας που μπορεί και να σας φάει ζωντανούς.

Ναι, μη σας φαίνεται υπερβολικό. Για πολλούς ανθρώπους η Αγορά είναι ένα από τα πολλά τέρατα που δεν τους αφήνουν να κοιμηθούν. Φαντάζομαι ότι αν ποτέ κατανοήσουν τι πραγματικά είναι η Αγορά, θα σοκαριστούν: η Αγορά είμαστε εμείς. Εσείς, εγώ, οι φίλοι σας, οι γονείς σας, τα αδέλφια σας, οι συνάδελφοί σας, το αφεντικό σας, ακόμα και οι εχθροί σας. Άτομα, νοικοκυριά, επιχειρήσεις μικρές, μεσαίες και μεγάλες. Οι τράπεζες, οι πολυεθνικές επιχειρήσεις, ο Bill Gates, ο George Soros, ο Νίκος Αλέφαντος, ο Αρχιεπίσκοπος Ιερώνυμος, η Έλενα Παπαρίζου, η κομμώτριά σας, ο μανάβης σας αλλά και ο μπατζανάκης σας. Oι αγορές και οι πωλήσεις, η παραγωγή προϊόντων, η παροχή υπηρεσιών, η κατανάλωση, η ζήτηση και η προσφορά, οι επιθυμίες και οι προτιμήσεις, οι προσδοκίες μας, το ρίσκο, η αβεβαιότητα, οι ζημιές, τα κέρδη, οι ευκαιρίες, οι ιδέες, τα λάθη. Όλες οι αποφάσεις μας, όλες μας οι συνήθειες, το σύνολο σχεδόν της δραστηριότητάς μας αποτελεί μέρος αυτής της Αγοράς.

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Snakes and Ladders

by Amartya Sen

Financial Times
December 23, 2011

Like all good boys and girls, the readers of beyondbrics deserve their Christmas presents. So here for our loyal followers – and for those dipping into the site for the first time - is a seasonal gift from Nobel prize-winning economist Amartya Sen.

For those taking a break, it is something to savour over the holidays. For those tied to their desks, it is something for a quiet moment. Best wishes from all at beyondbrics.

Like many board games that were developed in India, of which chess is perhaps the most important and famous, the game of “snakes and ladders” too emerged in this country a long time ago. With its balancing of snakes that pull you down and ladders that take you up, this game has been used again and again as a metaphor for life, telling us about our fortunes and misfortunes, and going further, about the consequences of good deeds and bad actions. Good decisions yield handsome rewards – taking us rapidly up a ladder – and bad moves yield severe penalties – making us suffer a precipitate decline through the mouth of a long snake, all the way down to its distant tail.

Britain too found in this board game from their colony a good way of expressing their traditional ethical tales, illustrating, for example, the simple moralistic world of what was called “Virtue Rewarded and Vice Punished” – a game that became very popular in early 19th century. The English version used the graphic illustrations of the snakes and ladders to depict traditional English moral tales that made this old Indian game popular first in England and then in the British-dominated global world of the nineteenth century. The Indian names – from Sanskrit, Hindi, Urdu and other subcontinental languages – for the qualities that respectively yielded rewards and punishment were replaced in the English version into the names of classical English virtues such as penitence, pity, obedience and self-denial yielding ascent up the ladders, while time-honoured vices of depravity, cruelty, dandyness made one slip rapidly down through the body of a snake.

The diagnosis of virtues and vices is, of course, adaptable, and the richness of the analogy of snakes and ladders can be put to use today in discussing modern problems as well – even the contemporary challenges of economic and social policies. We can well ask: what are the nasty snakes we face today in thinking about economic policies in our troubled world, and what helpful ladders we should try to climb up in moving an economy and society forward – in a world full of opportunities as well as serious dangers. The distinctions are quite important for the emerging economies which are trying to decide where to emerge. We do not want to emanate from the bottom end of snakes, and would rather emerge at the top of elevating ladders. How can we do this?

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Socioeconomic differences in the impact of smoking tobacco and alcohol prices on smoking in India

by Frank J Chaloupka, Emmanuel Guindon, Prabhat Jha and Arindam Nandi

Vox
December 23, 2011

In India, 1 in 5 of all adult male deaths and 1 in 20 of all adult female deaths at ages 30-69 are due to smoking. This column estimates that raising the price of cigarettes by 1% would decrease smoking by about 1.1% and even more so for poorer households.

“Sugar, rum, and tobacco, are commodities which are no where necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation”

—Adam Smith, The Wealth of Nations, 1776

Tobacco smoking and chewing are both common in India (Government of India 2010, Rani et al 2003), but the individual risks from smoking are markedly greater (Gajalakshmi et al 2003, Jha et al 2008). A large, nationally-representative study of mortality in over 1.1 million homes indicates that already 1 in 5 of all adult male deaths and 1 in 20 of all adult female deaths at ages 30-69 are due to smoking and India will soon have a million smoking deaths a year (Jha et al 2008). The study also suggests that the relative risk of death from any medical cause does not depend on educational level, but does depend on whether bidis or cigarettes were smoked, and the amount smoked (Figure 1). The risk ratio for a given number of bidis or cigarettes smoked was greater for cigarettes than for bidis. For example, compared to non-smokers, the risk of dying as a result of smoking 1-7 bidis per day was 30% higher compared to an increase in risk of 80% from smoking the same number of cigarettes per day.

Figure 1. Relative risk of death by amount and type of smoking, men aged 30-69

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The Darwin economy

Robert H. Frank interviewed by Romesh Vaitilingam

Vox
December 23, 2011

Robert Frank of Cornell University talks to Romesh Vaitilingam about his book, "The Darwin Economy: Liberty, Competition and the Common Good." He argues that Charles Darwin's understanding of competition – in which individual and group interests often diverge sharply – describes economic reality far more accurately than Adam Smith's. They discuss the implications of this view for current debates about inequality, taxation, and policies to get out of economic stagnation. The interview was recorded in London in November 2011.

Listen to the Interview

Europe's Single Market Isn't a Free Market

by Philip Booth

Wall Street Journal
December 23, 2011

Twenty-five years ago, the Conservative establishment in Britain welcomed proposals for the European Union's single market as a step forward for free enterprise in Europe. The single market had many Tory opponents, but most in the party used the terms "free market" and "single market" interchangeably. Former Prime Minister Ted Heath pointed out this error in a parliamentary debate 20 years ago, suggesting, perhaps with a note of triumphalism, that the single market was not a free market.

Heath's prediction seems to have borne out. In many sectors of the economy, the single market has undoubtedly promoted free trade and, at the very least, made markets freer in those countries that were the most dirigiste. The guiding principle in these industries has been "mutual recognition," or regulatory competition. EU directives required some minimal harmonization of EU law but also banned restrictive regulation in some countries. This meant, for example, that a U.K. insurance company could do business anywhere in the EU while still regulated by the U.K. insurance regulator. The U.K. had to regulate a little more, but other countries had to deregulate hugely. This was how the British Tory establishment envisaged the single market developing.

But more recently, advancing the single market has taken the form of imposing uniform regulation across member states. In insurance, a huge superstructure of regulation is being created through the Solvency II program, which replicates, to a large degree, the failures of the Basel banking accords. For example, Solvency II will require very similar regulation across all member states and determine very precisely how much capital insurance companies should hold to deal with known risks. In other areas of financial regulation, the EU is now using the powers it gained under the Single European Act to increase regulation. This compounds the errors of the various financial-markets directives such as MiFID and the Prospectus Directive.

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Is Fear of Divorce Keeping People from Getting Married?

by Belinda Luscombe

Time
December 22, 2011

Marriage, it is sometimes argued, is a feminist institution, put in place to offer legal protection to women from being abandoned by men who wish to sow their seed in ever greener pastures. It’s a slightly antique (and misandrist) view, formulated at a time when home and hearth were a woman’s horizons. Plus, as a new study suggests, it is often women, rather than men, who view marriage as a trap.

In a survey of 61 cohabiting couples ages 18 to 36 in Columbus, Ohio, researchers from Cornell and the University of Central Oklahoma found that women, particularly lower-income women, were concerned about being trapped in marriage and having no way out if things went awry. The survey respondents also revealed that they had serious concerns about divorce: about 67% said they were worried about the potential social, emotional and economic fallout of splitting up. The researchers suggest that this is one of the reasons the couples had chosen to live together without getting married. While that sounds a little bit like choosing to stick with the shrimp appetizers for fear that the main dish will give you food poisoning, these young couples tended to think the legal and financial upheaval caused by a divorce wasn’t worth the risk.

The study, which was published in the December issue of Journal of Family Relations, is one of several in recent weeks to examine the diminishing rate of marriage in the U.S. According to a Pew Research Center analysis last week, just over half of adult Americans are married, the lowest rate in decades. Some of the rollback is because people are getting married later, and some of it is because cohabitation rates are rising. The new study suggests that divorce is also a very real presence in couple’s minds.

Divorce is not an equal-opportunity specter, however. Middle-class couples were less spooked by it — and by marriage — than low-income couples. For poorer women who tended to feel that marriage was a trap, many reported fearing that a legal union would lead to extra work and responsibilities on their part, without any additional benefits. “Middle-class respondents disproportionately asserted that marriage meant commitment, something they viewed as a positive feature of the institution,” the authors write. “When working-class women referenced commitment, on the other hand, they did not view it in a particularly positive light.”

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Reframing the Debate Over Using Phones Behind the Wheel

New York Times
December 17, 2011

For years, policy makers trying to curb distracted driving have compared the problem to drunken driving. The analogy seemed fitting, with drivers weaving down roads and rationalizing behavior that they knew could be deadly.

But on Tuesday, in an emotional call for states to ban all phone use by drivers, the head of a federal agency introduced a new comparison: distracted driving is like smoking.

The shift in language, in comments by Deborah Hersman, the chairwoman of the National Transportation Safety Board, opened a new front in a continuing national conversation about a deadly habit that safety advocates are trying desperately, and with a growing sense of futility, to stop.

Her new tack also echoes a growing consensus among scientists that using phones and computers can be compulsive, both emotionally and physically, which helps explain why drivers may have trouble turning off their devices even if they want to. In effect, they are saying that the running joke about BlackBerrys as “CrackBerrys” is more serious than people think.

“Addiction to these devices is a very good way to think about it,” Ms. Hersman said in an interview. “It’s not unlike smoking. We have to get to a place where it’s not in vogue anymore, where people recognize it’s harmful and there’s a risk and it’s not worth it.”

She added: “If you can’t control your impulses, you need to lock your phone in the trunk.”

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Regulation for Dummies

Wall Street Journal
Editorial
December 14, 2011

The White House is on the political offensive, and one of its chief claims is that it isn't the overregulator of business and Republican lore. This line has been picked up by impressionable columnists, so it's a good time to consider the evidence in some detail.

Jan Eberly, an Assistant Treasury Secretary, kicked off the Administration campaign with a white paper in October that purported to debunk the "misconceptions" that "uncertainty is holding back business investment and hiring and that the overall burden of existing regulations is so high that firms have reduced their hiring." Then the Administration mobilized some of the worst offenders, such as Kathleen Sebelius of HHS ("There has been no explosion of new rules") and Lisa Jackson of the EPA (her opponents are "using the economy as cover").

To answer the most basic question—has regulation increased?—we'll focus on what the government defines as "economically significant" regulations. Those are rules that impose more than $100 million in annual costs on the economy, though there are hundreds if not thousands of new rules every year that fall well short of that.

According to an analysis of the Federal Register by George Mason University's Mercatus Center, the Cabinet departments and agencies finalized 84 such regulations annually on average in President Obama's first two years. The annual average under President Bush was 62 and under President Clinton 56.

Cass Sunstein, the director of the White House Office of Information and Regulatory Affairs, has been shopping around lower numbers that selectively compare Mr. Obama's first two years favorably with Mr. Bush's last two. Administrations are typically most active on the way out, and in any case the Bush regulatory record is nothing to crow about. But Mr. Sunstein's numbers are even more misleading because they only include the rules that his office reviews while excluding the prolific "independent" agencies such as the Federal Communications Commission.

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Supply & Demand: A Thug Story

This song was created by George Mason University students to enter the Supply and Demand Video Contest sponsored by Fayetteville State University's Hackley Endowment.

The Effect of Succession Taxes on Family Firm Investment: Evidence from a Natural Experiment

by Margarita Tsoutsoura

University of Chicago Booth School of Business
Chicago Booth Research Paper No. 12-15
December 11, 2011

This paper exploits a natural experiment to study the effect of succession taxes on firm succession and investment decisions. The experiment is made possible by the Greek government’s decision to abolish its high tax on intra-family transfers of businesses in 2002. This change in tax policy is used to identify the effect on investment using two methodologies: 1) A difference-in-difference-in-differences (DDD) methodology, and 2) an instrumental variables (IV) approach, which exploits the gender of the first-born child of the departing entrepreneur as an instrument for family successions. Both the DDD and the IV estimates show that in the presence of high succession taxes firms undergoing an intra-family transfer of ownership experience a more than 40% drop in investment around succession. High succession taxes are also associated with lower propensity for intra-family succession, slow total asset growth and a depletion of cash reserves (presumably used to pay taxes) for firms experiencing family successions. To identify the mechanism through which taxes affect investment, I collect data on the income of the entrepreneurs from sources other than the firm undergoing succession. I find that the investment effects are much stronger for family firms owned by entrepreneurs with relatively low income from other sources. This suggests that the observed effect of the succession tax on investment is driven by financial constraints.

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Debit-Fee Cap Has Nasty Side Effect

Wall Street Journal
December 8, 2011

Jason Scherr had a lot on his mind the day after he opened his fifth Think Coffee shop in Manhattan last week. The fan was blowing too hard, the classical music was playing a little too loudly—and he was trying to figure out how to get more customers to pay with cash.

A new law that was supposed to reduce costs for merchants that accept debit cards has instead sent Mr. Scherr's monthly processing bills much higher and forced him to reassess the way he does business.

"My choice is to raise prices, discount for cash or get an ATM," says Mr. Scherr, a lawyer who has been in the coffee-shop business for more than a decade.

Just two months after one of the most controversial parts of the Dodd-Frank financial-overhaul law was enacted, some merchants and consumers are starting to pay the price.

Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10.

That is because credit-card companies used to give merchants discounts on debit-card fees they pay on small transactions. But the Dodd-Frank Act placed an overall cap on the fees, and the banking industry has responded by eliminating the discounts.

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See also

Consumers Are Paying for New Debit-Card Law

Wall Street Journal
December 7, 2011

A new debit-card law that was supposed to reduce costs for merchants is taking a bite out of consumer wallets instead. Robin Sidel has details on The News Hub.

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See also

The long and winding road to cannabis legalisation

by Jan van Ours

Vox
December 6, 2011

In many Western countries, between one quarter and one third of the population admit to having used cannabis at least once in their lives – according to the official statistics. This column provides an in-depth review of existing economic, social, and media evidence for and against legalisation. It concludes that although there is of course uncertainty surrounding the long-term implications, prohibition is not working and it is time to legalise.

Although some countries have quasi-legalised cannabis use (the Netherlands), made cannabis available for medical purposes (California), or allowed the growing of a small number of cannabis plants for personal use (Australia), in most countries – the Netherlands included – cannabis supply, distribution, and use is prohibited (Reuter 2010). Nevertheless, in 2009, between 2.8% and 4.5% of the world population aged 15-64, corresponding to between 125 million and 203 million people had used cannabis at least once in the past year (United Nations Office on Drugs and Crime 2011).

Table 1 presents cannabis use statistics for a number of countries, distinguishing between lifetime use (ever), recent use (last year) and current use (last month). The range in lifetime use is substantial from a low 21% in Sweden to a high 42% in the United States. The range in recent cannabis use is also substantial from a low 1% in Sweden to a high 14% in Italy. Finally, current use ranges from 1% in Sweden to 7% in Spain and the United States. What is also striking is the big difference between lifetime use and recent use. In the Netherlands for example 25% of the population aged 15 to 64 has ever used cannabis but only 7% has done so in the last year. Apparently, for a substantial part of the users, cannabis is not very addictive (see also Van Ours 2006 for details).

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Boosting growth in high-debt times: The role of service deregulation

by Guglielmo Barone and Federico Cingano

Vox
December 6, 2011

Many European countries face the challenge of credibly reducing their debt-to-GDP ratios. Boosting output growth is therefore an urgent and key political and economic priority. This column argues that increasing competition in the market for key upstream service activities – in particular, energy and professional services – could have sizeable effects on growth by improving the performance of downstream manufacturing industries.

Many European countries face the challenge of credibly reducing their debt-to-GDP ratios. Boosting output growth is therefore an urgent and key political and economic priority. Given the existing constraints to demand-side measures, most observers see structural (supply-side) reforms as the main policy tool such countries have at their disposal to “grow out” of their debt problems (e.g. Ivanova et al. 2011, Fernandez-Villaverde and Rubio-Ramirez 2011, Amato et al. 2010). The specific measure they should focus on and the gains to be expected from such reforms are, however, less clear.

Based on recent research on OECD data, this column argues that increasing competition in the market for key upstream service activities – in particular, energy and professional services – could have sizeable effects on growth by improving the performance of downstream manufacturing industries.

In many countries, key inputs such as professional services, energy, transportation, and telecommunication services are not only scarcely traded internationally, but also sheltered from domestic competition by substantial administrative restrictions, including:

• monetary and non-monetary barriers to market entry;
• the integration of a priori competitive activities with natural monopolies (as in the case of energy); or
• the existence of restrictions to market conduct (as in professional services).

Such restrictions have negative effects on growth in services, in particular because they reduce investments (Alesina et al. 2005). This direct negative effect is only part of the story, however. Combining service-regulation indexes with data on growth in manufacturing industries for a sample of OECD countries, we have shown that there are also sizeable indirect effects, from service regulation to the performance of downstream activities (Barone and Cingano 2011). Interestingly, similar findings are obtained by other works investigating the same issue with different approaches (see Bourlès et al. 2010, Arnold et al. 2011).

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Corrosive corruption

Economist
December 2, 2011

The use of public office for private gain benefits a powerful few while imposing costs on large swathes of society. Transparency International's annual Corruption Perceptions Index, published on December 1st, measures the perceived levels of public-sector graft by aggregating independent surveys from across the globe. Just five non-OECD countries make the top 25: Singapore, Hong Kong, Barbados, Bahamas and Qatar. The bottom is formed mainly of failed states, poor African countries and nations that either were once communist (Turkmenistan) or are still run along similar lines (Venezuela, Cuba). Comparing the corruption index with the UN's Human Development Index (a measure combining health, wealth and education), demonstrates an interesting connection. When the corruption index is between approximately 2.0 and 4.0 there appears to be little relationship with the human development index, but as it rises beyond 4.0 a stronger connection can be seen. Outliers include small but well-run poorer countries such as Bhutan and Cape Verde, while Greece and Italy stand out among the richer countries.

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The price of children and fertility responses: Evidence from the Israeli Kibbutz

by Avraham Ebenstein, Moshe Hazan and Avi Simhon

Vox
December 2, 2011

For years, policymakers trying to influence the decisions of would-be parents have tried to change the ‘price’ of having children. In France they have made it cheaper; in China more expensive. This column looks at whether such policies are likely to have their desired effect. It examines unique evidence of a shock to the cost of having a child in Israeli communities between 1990 and 2000.

To what extent does economics affect fertility decisions? Ever since Gary Becker’s seminal work on the economics of the family in the 1960s (Becker 1960), economists have argued that money weighs heavily on the minds of would-be parents, and policymakers throughout the world have been heavily influenced by such research. For instance, French policymakers looking to combat an ageing population have not only implemented generous maternity-leave benefits at almost full pay, they have also provided special support for women who have a third child and reduced mortgage payments on larger apartments. China, meanwhile, has tried to push fertility in the opposite direction. In a bid to stem its growing population, China’s One Child Policy has imposed heavy costs on parents who have unsanctioned births, with fines often representing several years of household income for parents who have a second or third child. For policymakers, the relationship between fertility and financial incentives has tremendous relevance.

In recent research (Ebenstein et al. 2011), we try to test the effectiveness of such policies. To conduct a reliable study, we would require data on a large population who experienced a dramatic and sudden change (‘an exogenous shock’) to the cost of raising children. To a large extent, this is precisely what occurred in many collective communities (kibbutzim) in Israel during the 1990s and 2000s, as a result of a wave of “privatisation” where kibbutzim began to require members to bear the costs of children privately. Traditionally, in kibbutzim the cost of raising children was borne fully by the collective, with all costs of daily life shared equally among members. The collective funded food, medical care, day care, clothing, and education. Parents with more children were allocated larger housing units by the kibbutz, insulating parents from virtually any (financial) marginal cost of having an additional child. Beginning in 1996, however, kibbutzim began to change their economic organisation by paying differential wages and charging their members the full price for services that had previously been provided at no cost to the member. Privatisation transferred the costs of food, day care, clothing, and housing from the collective to the individual parents. Between 1996 and 2005, 166 of the 237 kibbutzim were privatised. For economists, this provides an ideal opportunity to examine how changes in the cost of childbearing affect fertility.

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The Spirit of Enterprise

by David Brooks

New York Times
December 1, 2011

Why are nations like Germany and the U.S. rich? It’s not primarily because they possess natural resources — many nations have those. It’s primarily because of habits, values and social capital.

It’s because many people in these countries, as Arthur Brooks of the American Enterprise Institute has noted, believe in a simple moral formula: effort should lead to reward as often as possible.

People who work hard and play by the rules should have a fair shot at prosperity. Money should go to people on the basis of merit and enterprise. Self-control should be rewarded while laziness and self-indulgence should not. Community institutions should nurture responsibility and fairness.

This ethos is not an immutable genetic property, which can blithely be taken for granted. It’s a precious social construct, which can be undermined and degraded.

Right now, this ethos is being undermined from all directions. People see lobbyists diverting money on the basis of connections; they see traders making millions off of short-term manipulations; they see governments stealing money from future generations to reward current voters.

The result is a crisis of legitimacy. The game is rigged. Social trust shrivels. Effort is no longer worth it. The prosperity machine winds down.

Yet the assault on these values continues, especially in Europe.

Over the past few decades, several European nations, like Germany and the Netherlands, have played by the rules and practiced good governance. They have lived within their means, undertaken painful reforms, enhanced their competitiveness and reinforced good values. Now they are being brutally browbeaten for not wanting to bail out nations like Greece, Italy and Spain, which did not do these things, which instead borrowed huge amounts of money that they are choosing not to repay.

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Italy, Greece Among Worst Euro Nations in Corruption Ranks; N.Z. Cleanest

Bloomberg
December 1, 2011

Italy and Greece scored the lowest among euro-area countries in a global corruption ranking as their inability to tackle graft and tax evasion exacerbated the debt crisis, watchdog group Transparency International said.

Italy came in 69th and Greece placed 80th, down from 67th and 78th respectively in the 2010 ranking, the Berlin-based group’s Corruption Perceptions Index showed today. Ireland dropped five places to 19th, earning a score of 7.5 out of 10, a drop from 8 points in last year’s ranking, Transparency said.

“Euro-zone countries suffering debt crises, partly because of public authorities’ failure to tackle the bribery and tax evasion that are key drivers of debt crisis, are among the lowest-scoring EU countries,” the group said in the report.

Europe’s engulfment in the sovereign-debt crisis has exposed the failure of indebted governments to raise revenue and tackle reforms, prompting crowds of protesters to fill the streets to demand their ouster. Italy’s Silvio Berlusconi resigned as prime minister last month, two days after his Greek counterpart, George Papandreou, was forced out.

New Zealand maintained its top position in the ranking, alongside Denmark and Finland. North Korea debuted on the list with a score of 1, ranking last with Somalia, a rung lower than Afghanistan and Myanmar, according to Transparency.

The U.S. dropped two spots to 24, though the world’s biggest economy retained its 7.1 score. The index, which measures the perception of corruption in the public sector, showed that two-thirds of the 183 nations reviewed scored below five on a 0-to-10 scale, with 10 indicating the least corrupt, Transparency said.

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