Dani Rodrik compares the relationship between currency undervaluation and growth of economies in Asia and Africa: “In Asia, growth is typically engineered by increasing the profitability in manufacturing and other tradables. But in Africa the typical growth spurt is preceded by aid inflows and other transfers, which appreciate the exchange rate, and render future growth less sustainable. This is the so-called Dutch disease.” An IMF magazine advises Africa on how to seize the opportunity for long-term economic growth through a continuing rise in the South-South exports. To grow sustainably, Africa will need to engage in greater value-added production and move away from the short-term benefits of a boom in exports of natural resources.
What really happens when you starve the beast http://www.economist.com/blogs/
Some academic luminaries, most prominent among them Gary Becker, Robert Barro, and the late Milton Friedman, have advanced the notion that the best way to beat back the federal Leviathan is to curtail the amount of revenue the government collects by cutting taxes. This strategy is known to its aficionados, and many of its enemies, as “starving the best.” The creature crash diet was at least some of the animating spirit behind the series of tax cuts enacted by the Bush administration in the early part of the decade.
The fact that government spending has grown at practically bacterial rates since then has done more than a little to discredit the idea among moderate conservatives. But that could be an anomaly, caused by some odd political circumstances or the War on Terror. Now a new working paper by the husband and wife team of David and Christina Romer, both of the University of California-Berkeley, tests the Becker and Barro premises with a fresh look at the data, and discovers that the beast continues to eat quite well in the wake of tax cuts.
In this careful (and data-packed) study, the Romers take a look at federal tax and budget trends since 1947. In doing so, they noticed that not all tax changes or spending hikes were good candidates for a strong statistical test of the starve-the-beast premise. Some tax increases over this period —like the creation of the federal fuel tax to pay for the interstate highway system—were positively correlated to increases in spending.
In this sort of case, the tax changes are driven by the spending decisions, not vice versa. In fact, keeping them in the analysis skews the results. So, argue the Romers, these sorts of tax actions need to be tossed out of the dataset to give the starve-the-beast theory the best chance of success. Yet, even after doing this and adding a lag-effect variable, the Romers found no statistically significant drop in total government spending after taxes were cut. In fact, what they found instead was a slight (but statistically insignificant) rise in spending relative to the trend.
This is just one of a few major insights in a study that the authors admit is merely a first and perhaps imprecise step in testing the hypothesis. But the general results seem to depict statistically what many budget wonks in Washington have reported anecdotally for decades: over time, spending decisions of the Appropriations Committee are usually unrelated to the tax decisions of the Ways and Means Committee.
Why might this be so? The study doesn’t answer that question. My preferred answer is the obvious one: politicians like to give goodies to their constituents; and deficit spending gives them the ability to send to the bill for this largesse to future generations, who don’t get to vote.
This is a crackerjack recipe for just the sort of entitlements crisis that America(and the rest of the developed world)will face over the next few decades.
The percentage of America’s federal budget devoted to entitlement spending, mainly Social Security and Medicare, has grown from around 30% in 1970 to about 55% today.
This spending is mandated, which is to say it grows by a set of rules rather than the will of Congress.