Saturday, September 20, 2008

Hoover versus McCain

Thank you, Paul Krugman, for pointing out an interesting coincidence.

Herbert Hoover, Oct. 25, 1929: "The fundamental of business is sound."

John McCain, September 16, 2008: "The fundamentals of our economy are strong."

Time to pay for deregulation. We'll just blame Alan Greenspan for this one, just like all the other flaws of an economy. After all, being Fed chairman gives you sole power of the immediate and long-run health of the economy. Right? Excuse my sarcasm, but I hate scapegoating. Particularly if it is Alan Greenspan, a man I give much respect to.

President Bush announced with Treasury Secretary Henry Paulson, a proposal to buy up highly leveraged investment banks, hoping to add liquidity to the markets. Unfortunately, this seems to me like putting a bandaid on the problem and offering incentives for banks to increase risk in the future. Not to mention the bad money that is being created to buy these banks, probably at a cost that is above what they are worth, placing the burden on taxpayers. we'll see what happens, but I have a bad feeling about the prospects of government taking over bad assets with taxpayer money.

Tuesday, September 9, 2008

Abusurdity in the World of Aid

Though my faith in international aid organizations was weak at best to begin with, I think it has reached a new low. The International Monetary Fund and what would become the World Bank never intended to be lasting institutions. They were created for the sole purpose of establishing order in the international financial world that had been in chaos because of the war. Power was vested in the victors of the war, mainly the United States and to a smaller extent England. Countries who lost the war were given much lesser power, and those without any financial clout were ignored entirely. These were temporary organizations. And temporary organizations, particularly when created for the sake of security, allow those in control to act above what is normally acceptable. In times of war and fear of war, this is also very prevalent.

My concern isn't entirely with the foundations of these organizations. My concern is the way that they are handled today. As the gap between the world's poor and rich thickens, it becomes easier to distance oneself from the deprivation of the third world, living in a relatively excessively rich country as the United States. And it is easy to say that we are doing all we can--that it is up to the governments to respond-- perhaps, according to a quasi-racist remark in a university classroom-- it is simply their culture, assuming that they are happily starving and dying of disease because they hold onto a particular ancestry. I find that difficult to believe. It reminds me of a dehumanization process that people allow themselves to undergo when they are at war, or they want to justify the murder or oppression of large groups of people. It is also difficult for me to believe that, for example, Africans' culture has made their poverty, and not the blundering, raping, and divisiveness of European colonization.

In any case, as an economics student, I have been conditioned to believe that people are selfish. And I do agree with this. I believe that any benevolent act-- regardless of its positive effect or perceived kindness, has a selfish intention. Even if this is to make a person feel better about their own soul, whatever it may be, people have little to offer others besides their self-interest. And this can be managed! That's the best part. Adam Smith, though preceded by similar thinkers, was the loudest voice of the utilization of self-interest to the betterment of society. And this is possible, (why not?) on a global scale the same as it applies to closed economies. In fact, I believe it would be even more effective. The important point to keep in mind is that a global organization must align people's incentives with goals of world development and growth, particularly for third and second world countries. The IMF and the World Bank have the power to do this. But instead, they arbitrarily give loans to countries who cannot pay them back. And these organizations indirectly make sure that they will never pay back these loans by allowing recipient country's governments to have a constant and perpetual cushion of aid.

William Easterly's point in The Elusive Quest for Growth--which I highly recommend-- is that the appearance of helping developing countries is far more important than the actual benefit given to these countries. This could explain why there is little emphasis put on asking the poor what they need. The not-so-underlying assumption is that we know better than they do, while our half-hearted efforts to help have unquestionably failed. Before I get too carried away, I want to say that a large part of this failure is also failed economic theories of growth. The World Bank and the IMF still cling to the theory that investment will automatically trigger growth--that there is a so-called financing gap between the savings potential of a country and the investment potential of a country. This is an attractive theory. It must have been, for those in international aid organizations to cling with such undying fervor. That's a beautiful thing, when the theory hasn't been proven wrong over and over throughout the past century.

The key to growth, according to Robert Solow (read Growth Theory: An Exposition) is technology. Investment is only about a third of the causation behind growth. The problem is, that aid organizations dump funds, theoretically, for investment-- though most or all of it goes to immediate consumption-- and this leads to zero growth. Even with high investment, countries cannot grow because they are missing 2/3 of their growth recipe. This 2/3, according to Solow, is contributed to technology. Unfortunately, access to technological change is not available in many countries with already slow or even negative growth rates.

It's a shame that the IMF and World Bank do not acknowledge a different theory of growth besides outdated and evidently wrong theories. Although it is very easy to continue business as usual, particularly when it looks so good. Treatment of AIDS, for example, looks much more admirable than prevention. Prevention involves birth control and family planning-- which have most definitely been pushed aside by the Bush administration, if not the rest of the world. Unfortunately, what we are dealing with is not numbers and data and theories. It is the lives and suffering of people who do NOT have what you have, and do NOT know what it is like to always have food and always have a safe place to go to sleep at night. It may sound clicheed, but it shouldn't. It should give you chills. It should make you want to do something, to be outraged. At the very least, be the most grateful you can possibly be if your situation is better than most of the world's, and you never have to worry about your children starving in front of you.