Failed States Index

Foreign Policy Magazine has released its 2009 Failed States Index. The Index takes into account a dozen different potential vulnerabilities a country faces from demographics to economics, security to human rights. While the rankings are obviously partially subjective, the methodology is very well done.

The top ten failed states remain almost unchanged from last year with only a few states swapping places with each other. The top five are all African states with Somalia (thank you pirates, parallel governments, and Islamic militants!), once again claiming the top spot. Note also, this is not an index about which states are potentially the most dangerous to global stability (as such North Korea is 17 and Iran is 38, rather than both being in the top five). Nevertheless, it is worth noting that Pakistan's failures (it's ranked 10th), in the areas measured by the Index have in turn greatly helped to push the country towards the destabilization Islamabad is now trying to deal with. And, in this case, Pakistan's constant chaos politically, economically, socially, and militarily, does sincerely threaten global stability, arguably more so than any other country in the world.


http://www.foreignpolicy.com/articles/2009/06/22/2009_failed_states_index_interactive_map_and_rankings

Where can we find the money?

Here's a terrific Letter to the Editor from today's New York Times, courtesy of an economist from the US Air Force Academy:

To the Editor:

Re "Lettuce From the Garden, With Worms" (column, June 21):

Nicholas D. Kristof makes a compelling case for the link between how our food is produced and our health. He doesn't mention that agricultural subsidies (on sugar and corn, for instance) are one reason Twinkies are cheaper than broccoli. Here's a suggestion for how to pay for health care reform: Eliminate all agricultural subsidies.

Kate Silz-Carson
Colorado Springs, June 22, 2009

I couldn't have said it better myself.

Potential Good in a Sad Fraud

Why an Ahmadinejad Victory is a Net Positive for U.S. Foreign Policy

As the Guardian Council agrees to recount votes (thanks to a partial about face from Iranian leader Ayatollah Ali Khamanei), the question begs to be asked in greater depth than it has been, whether the U.S. is actually better off if Mir Hossein Mousavi manages to somehow find a way to emerge victorious over Mahmoud Ahmadinejad?

At first glance it is easy to see why support of Mousavi would seem to be in the interest of the United States. Mousavi is more willing to engage in the broader international community, he has the experience to deal with the economic woes currently plaguing Iran, and domestically he is without doubt more likely to push to increase freedoms of speech and press, access to universities, and advocate reforms for women.

However, in the theocracy that is Iran, the domestic values and freedoms Mousavi supports are unlikely to be translated from campaign rhetoric into laws granting increased liberties to the Iranian people. By 2004, the middle of President Khatami’s second term, many of his early reforms were rolled back, and new one’s were not even proposed in the Majlis (the Iranian Parliament), due to a certainty of rejection. Today, the Majlis is even more conservative, thanks in large part to the dismissal of thousands of so called reformist candidates from the ballots in 2008. Even if Mousavi was able to entice the Majlis to pass the domestic reforms he desired, they would have to then be approved by the Guardian Council and ultimately accepted by Khamanei, reducing their chance of coming to fruition even more.

And so, what would likely be left of a Mousavi victory in the years to come would be a failed domestic agenda, and stagnation on the international front, a positive for Iran but not for the U.S. A Mousavi victory would be a tremendous boon for Iranian nuclear development allowing Tehran to use negotiations to buy time to continue advancing their program, with virtually no potential for obtaining an agreement from Mousavi to cease it. In fact, Mousavi stated explicitly throughout the campaign that he will reject any proposal to halt Iranian nuclear development for peaceful energy purposes. While he says the issue of weaponizing is negotiable, the reality is that Iran’s so called peaceful nuclear program is at best a dual program to achieve weaponization and at worst simply a cover for it.

On this issue, one need only look at Mousavi’s domestic political situation to believe he means what he says. The Iranian people have consistently supported nuclear development for energy purposes and even the pro-Mousavi under thirty-five crowd, are resentful over what they see as international hypocrisy in not allowing Iran access to nuclear programs. Any varying by Mousavi on this issue as President (especially after being unlikely to deliver on promised domestic reforms), and he would permanently and irreparably damage his reputation in Iran, almost certainly precluding his re-election in 2013.

And yet, there is no doubt that with a Mousavi win, the U.S., backed by the EU, will be forced to spend at least one to three years negotiating with Iran over its nuclear program. Even if the U.S. reaches the point after a year or so, of declaring negotiations to have failed and desiring to take the next logical step of economic sanctions, it may find such a step extremely difficult if not impossible to achieve. Mousavi acting publicly as a “moderate” has a can’t lose prospect, by being able to then ask for further negotiations even after months or years of failed ones. In such a case, Russia, which has signed multiple deals with Iran on nuclear development, would be likely if not definite to veto any economic sanctions proposed at the UN Security Council. Regardless of what China did, European desire to find a negotiated settlement is so over whelming, that the bigger fear in such a situation is seeing France give cover to Russia by vetoing as well. Further, even if the U.S. managed to convince Russia, China, France, etc. to support or abstain and economic sanctions were passed, it would likely result in a painful long term ramification. Mousavi’s base of support, the moderate city dwellers and youth, would likely blame the U.S. for worsening, through sanctions, Iranian economic conditions, regardless of their actual impact.

An Ahmadinejad victory however, produces the opposite result. For one thing, negotiations are much less likely to last nearly as long as they would under a Mousavi Presidency, given Ahmadinejad’s horrible international reputation, viewed by most of the West as a less than serious partner for negotiations. In turn, economic sanctions are much more likely come to fruition sooner. The French would be very unlikely to veto, with the Russians (and to a lesser extent the Chinese), probably requiring some sort of trade with the U.S. for their vote or abstention. But any deal would inevitably come at a much lower price than if Mousavi were President given Ahmadinejad’s lack of global credibility. In contrast to a Mousavi Presidency, the moderates and under thirty-five populace, while partially blaming the U.S. and EU for worsening economic conditions resulting from sanctions, would likely place greater blame on Ahmadinejad, seeing sanctions as a penalty further incurred as a result of his embarrassing, unnecessary, and counter productive behavior on the international stage.

In the end, it is important to remember that it is Khamanei, not the President who will ultimately decide what happens with regard to any negotiations over Iran’s nuclear development. But as it stands now, an Ahmadinejad second term might just be more beneficial for U.S. foreign policy than a Mousavi first term, for one main reason: timing. A Mousavi victory increases the likelihood of Iranian nuclear weapons coming to fruition under the cloak of negotiations due to the almost certain longevity of such negotiations. Thus, if President Obama truly meant it when he said during the campaign that, “Iran's development of a nuclear weapon, I believe, is unacceptable…,” then it is better to have Ahmadinejad back in office. For a second term by the current Iranian President will result in either President Obama’s gifted team being able to somehow manage a break through or having to determine that the next step of economic sanctions is necessary. But one way or the other at least there will be some sort of clarity and completion before Iran’s nuclear weapons are fully developed and operational.

I champion and cherish free and fair elections as much as anyone and I sincerely hope that the truth somehow manages to emerge. If the result is a run off or a Mousavi victory then I will be extremely heartened to see democratic ideals winning out over theocratic desires. But anyone believing that a Mousavi presidency will be a dream come true for U.S. and general Western interests is likely misguided. Rather, a Mousavi presidency might just end up being our worst nightmare.

Poverty and income inequality over time

Justin Wolfers posted this graph at Freakonomics, showing income growth by quintile since the 1970s:

His analysis was that economic growth has done little for the poor, accruing mostly (almost entirely) to the upper incomes.

Russ Roberts, however, takes issue with this analysis. In two separate posts (here and here), he criticizes Wolfers' interpretation:

"This alas, is a meaningless chart. It tells you nothing about who got the gains of the last 35 years. Why? Because they're not the same people in the quintiles. Starting in 1973, and it's not a coincidence, the divorce rate in the United States began to rise. The number of families increased dramatically simply because of divorce. There was also an increase in the number of families headed by single women with children. The quintile breaks-points changed, not because the economy was growing or shrinking but simply because of changes in the types of families."

In a sense, Roberts is not wrong. Looking at static graphs of quintiles does not account for differences in composition. If people move up the income ladder, then we will mistake static income growth among the groups for static income growth among individuals. The key here is the degree of social mobility. Basically, what are the odds that a person who is poor today will be poor next year, or in ten years?

Emmanuel Saez, the most recent winner of the John Bates Clark Medal, looks at this question in depth. Using Social Security data, Seaz tracked individuals over time to assess income growth and social mobility in the US over time. He concludes:

"We found that changes in short-term mobility have not substantially affected the evolution of inequality, so that annual snapshots of the distribution provide a good approximation of the evolution of the longer term measures of inequality. In particular, we find that increases in annual earnings inequality are driven almost entirely by increases in permanent earnings inequality with much more modest changes in the variability of transitory earnings. However, our key finding is that while the overall measures of mobility are fairly stable, they hide heterogeneity by gender groups. Inequality and mobility among male workers has worsened along almost any dimension since the 1950s: our series display sharp increases in annual earnings inequality, slight reductions in short-term mobility, large increases in long-term inequality with slight reduction or stability of long-term mobility.

Against those developments stand the very large earning gains achieved by women since the 1950s, due to increases in labor force attachment as well as increases in earnings conditional on working. Those gains have been so great that they have substantially reduced long-term inequality in recent decades among all workers, and actually almost exactly compensate for the increase in inequality for males."

Certainly, some longitudinal studies have found larger amounts of social mobility, but the bulk of the literature has not found the degree of mobility that Roberts implies.

So while the graph posted by Wolfers is static, there is evidence that it is a good approximation of reality. Income growth has accrued largely to wealthier individuals and families over the past 30 years, and it has not been sufficiently counterbalanced by social mobility.

Curiously, Roberts says that liberals lack a causal mechanism for changes in inequality and stagnant incomes among the poor. However, Wolfers was explicitly citing one of the most powerful arguments for this phenomenon, namely "skill-biased technological change". As Harvard's Larry Katz and Claudia Goldin explain, technological change has raised the productivity of skilled workers relative to less skilled workers, causing changes in relative incomes. In manufacturing, for example, advanced machinery has decreased demand for assembly line workers, but increased demand for engineers and mechnical operators. At the same time, the supply of educated workers has not kept up, resulting in large income gains in the upper half of the income distribution and much lower gains at the bottom.

Roberts is correct, however, in asserting that there is a difference between income inequality and absolute well-being. A rising tide can lift all boats, even while it lifts some faster than others. But it's important not to minimize slow income growth among lower income Americans; they may be better off than they were 30 years ago, but they are still struggling.

In a follow-up post, I'll delve more into the measurement, economics and politics of inequality.

Time to fix the answer key

A lot of unusual things have happened in our economy over the past year, and sometimes it feels like the old rules don't apply anymore. The people who write the questions for the Foreign Service Exam, however, haven't seemed to notice (via NPR's Planet Money):

I recently bought the foreign service exam study guide since I am taking the test this Friday. The test consists of, among other things, basic economics questions. I was so amused by one of the sample questions that I just had to share:
All of the following are examples of United States products that would typically fail to be produced to optimal output without government intervention EXCEPT:
A. national defense products.
B. light provided by lighthouses.
C. new automobiles.
D. new highways.

And in the answer section:

C. This is the correct answer. Automobiles are not a public good. Optimal production of automobiles is related to the demand for them by individual consumers.

We've been spending for a long time

David Leonhardt has a great piece in today's Times about where our tremendous deficit came from (here's the article and here's the accompanying Economix post). As he shows, the $1.22 trillion deficit for 2009 has many components:

"...we were [sic] able to construct a time series, showing how budget estimates for 2009-12 have changed over time. Because the C.B.O. attributes the changes in its estimates to specific causes — namely, changes in the economy and new legislation — we were then able to create four different categories to explain how the $846 billion annual surpluses that were forecast in 2001 for 2009-12 have turned into $1.22 trillion annual estimated deficits. Those four categories are: economic changes, which I refer to as the business cycle in my column; Bush administration legislation; Bush-era policies that are scheduled to expire but that Mr. Obama is extending; and new Obama administration policies."

While many are apoplectic about our current fiscal situation, it's important to distinguish between long-term and short-term deficits. Many, if not most, economists agree that it's a good idea to run short-term deficits during recessions. These deficits stem from a decline in tax revenue and from expansionary policy (eg the stimulus). Amazingly, the stimulus plan accounts for only 7% of our current deficit.

On the other hand, longer term deficit policies are a bigger concern. While the economy will recover and the stimulus will expire, spending on upper-income tax cuts (if made permanent) and long-horizon wars may haunt the government for years to come.

Governments run deficits all the time, so why worry now? The chief concern is that our creditors (countries like China and other foreign investors) may come to question our ability or willingness to pay them back. This could lead to sharply increased interest rates (which will hamper the economy) or necessitate the Fed to print money (which will cause a significant rise in inflation). UC Berkeley economist Alan Auerbach cites recent increases in interest rates on 5-year Treasury bills (a sign that investors worry about getting their money back) as evidence that this is already starting.

Like most American's, the US government will have to start tightening its belt sooner or later. What spending gets cut will likely be contentious. Some spending, such as universal healthcare, may be popular enough to maintain traction. Others, like extending the Bush tax cuts or some proposed Obama programs may not. It will be interesting to see our political system if it finally acknowledges we can't have it all.