Partha Dasgupta Makes a Mistake in His Critique of the Stern Review
Partha Dasgupta makes a mistake. This is a rare, rare, rare event. Dasgupta writes, criticizing the Stern Review:
http://www.econ.cam.ac.uk/faculty/dasgupta/Stern.pdf: To give you an example of what I mean, suppose, following the Review, we set delta equal to 0.1% per year and eta equal to 1 in a deterministic economy where the social rate of return on investment is, say, 4% a year. It is an easy calculation to show that the current generation in that model economy ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. A 97.5% saving rate is so patently absurd that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to starve itself so that future generations are able to enjoy ever increasing consumption levels...
In the "deterministic economy where the social rate of return on investment is, say, 4% a year" model that Dasgupta is using, the concept of "output" Y is Haig-Simons output--what you could consume and still leave the economy next year with the same productive capacity as it has this year. With that definition of output Y, with consumption level C, and with social rate of return on investment r, it is indeed the case that the growth rate g(Y) of a zero-population-growth economy is:
g(Y) = r(1 - C/Y)
Take the expression for the rate of growth of consumption g(C) as a function of the parameters δ and η:
g(C) = (r - δ)/η
And see that the assumed values for r, δ, and η give us a 3.9% per year growth rate of consumption. If you impose the steady-state requirement that the growth rates of consumption and output be the same, you do indeed get a 97.5% savings rate--that consumption is 2.5% of Haig-Simons output:
C/Y = .025
because with r=4% per year that is the only way to get g(Y)=3.9%
But suppose that you use a different concept of output--GDP--and say that productive capacity increases not just because you save some of GDP but also because of improvements in knowledge and technology g(A), so that:
g(Y) = r(1 - C/Y) + g(A)
with worldwide g(A) equal, say, to 3% per year. Then our g(C) equation still gives us a 3.9% per year total economic growth rate, but our g(Y) equation is then:
3.9% = g(Y) = r(1 - C/Y) + g(A) = 4%(1 - C/Y) + 3%
which gives us a savings rate not of 97.5% of Haig-Simons output but rather of 22.5% of GDP, leaving 77.5% of GDP for consumption.
A consumption-to-output ratio of 77.5% is far from absurd, and so Dasgupta's critique of Stern fails. His mistake is in failing to remember that in his model Haig-Simons output is very, very different indeed from standard reported GDP.
That being said, I agree with most of Dasgupta's major point: the action here is in the choice of the parameter η. I think it's appropriate to consider different ηs in the range from 1 to 5, and think the Stern Review should have done so.
(I'm also enough of a utilitarian fundamentalist to believe that the right value for δ is zero, and that Nordhaus's δ of 3% per year is unconscionable--it means that somebody born in 1960 "counts" for twice as much as somebody born in 1995, who in turn "counts" for twice as much as somebody born in 2020; somebody born in 1960 "counts" for 256 times as much as somebody born in 2160. That's not utilitarianism.)
Communist revolution is necessary and inevitable because...
The Technology Marx: ...capital is not a complement to but a substitute for labor, and so technological progress and capital accumulation that raise average labor productivity also lower the working-class wage. Hence the market system cannot and will be seen to be unable to deliver the good society we all deserve, and it will be overthrown.
The Market Extent Marx: ...businessmen continually extend the domain of captalism, and competition from poor workers in newly-incorporated peripheral regions puts a lid on the wages of labor. Hence inequality grows in the core, and triggers revolution.
The Unveiling Marx: ...previous systems of hierarchy and domination maintained control by hypnotizing the poor into believing that the rich in some sense "deserved" their high seats in the temple of civilization. Capitalism unveils all--replaces masked exploitation by naked exploitation--and without its ideological legitimation, unequal class society cannot survive.
The Ideology Marx: ...although the ruling class could appease the working class by sharing the fruits of economic growth, they will not. They are trapped by their own ideological legitimation--they really do believe that it is in some sense "unjust" for a factor of production to earn more than its marginal product. Hence social democracy will inevitably collapse before an ideologically-based right-wing assault, income inequality will rise, and the system will be overthrown.
The Solidarity Marx: ...factory work--lots of people living in cities living alongside each other working alongside each other develop a sense of their common interest and of class solidarity, hence they will be able to organize, and revolt.
Who is the real Marx? Ah, grasshopper, not until you have learned not to ask that question will you be able to snatch the pebble from my hand...
Total Installed Steam Horsepower in Britain:
In 1800: the equivalent of seven SUVs
In 1870: the equivalent of the motor vehicles registered in Berkeley today...
We Are Live at Salon, with an Obituary for Milton Friedman
J. Bradford DeLong (2006), "A Man Who Hated Government," Salon (November 16, 2006) http://www.salon.com/news/feature/2006/11/17/milton_friedman/
Also see:
Sam Brittan at the Financial Times: Salon (November 16, 2006) http://www.salon.com/news/feature/2006/11/17/milton_friedman/
Greg Ip at the Wall Street Journal: http://online.wsj.com/article/SB116369744597625238.html?mod=hps_us_at_glance_most_pop
Steven Pearlstein at the Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/11/16/AR2006111601779_pf.html
J. Bradford DeLong (2006), "A Man Who Hated Government," Salon (November 16, 2006) http://www.salon.com/news/feature/2006/11/17/milton_friedman/
"Lord, enlighten thou our enemies," prayed nineteenth-century British economist and moral philosopher John Stuart Mill in his Essay on Coleridge http://olldownload.libertyfund.org/Texts/MillJS0172/Works/Vol10/PDFs/Mill_1277.pdf. "Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength."
For every left-of-center American economist in the second half of the twentieth century, Milton Friedman (1912-2006) was the incarnate answer to John Stuart Mill's prayer. His wits were smart, his perceptions acute, his arguments strong, his reasoning powers clear, coherent, and terrifyingly quick. You tangled with him at your peril. And you left not necessarily convinced, but well aware of the weak points in your own argument.
General William Westmoreland, testifying before President Nixon's Commission on an All-Volunteer [Military] Force, denounced the idea, saying that he did not want to command an army of mercenaries. Milton Friedman interrupted him: "General, would you rather command an army of slaves?" Westmoreland got angry: "I don't like to hear our patriotic draftees referred to as slaves." And Friedman got rolling: "I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general." And he did not stop: "We are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher" http://www.davidrhenderson.com/articles/0199_thankyou.html. As George Shultz likes to say: "Everybody loves to argue with Milton, particularly when he isn't there."
Thinking as hard as he could until he got to the root of the issues was his most powerful skill. "Even at 94," Chicago economist and Freakonomics http://www.amazon.com/exec/obidos/ASIN/006073132x/ author Steve Levitt wrote on his website yesterday, "he would teach me something about economics whenever we talked" http://www.freakonomics.com/blog/2006/11/16/sad-news-milton-friedman-has-died/. In this morning's New York Times http://www.nytimes.com/2006/11/17/business/17milton.html?ex=1321419600&en=a0db578046e72e19&ei=5088&partner=rssnyt&emc=rss, Chicago economist Austen Goolsbee quotes from Milton Friedman's Nobel autobiography:
Friedman said that when he arrived [at the University of Chicago] in the 1930s, he encountered a "vibrant intellectual atmosphere of a kind that I had never dreamed existed."
"I have never recovered."
His world-view began with a bedrock faith in people, in their ability to make judgments for themselves, and thus an imperative to maximize individual freedom. On top of that was layered a deep faith and conviction that free markets were almost always the best and most magical way of coordinating every conceivable task. On top of that was layered a powerful conviction that a look at the empirical facts--a marking-to-market of your beliefs to reality--would generate the right conclusions. And on top of that was layered a fear and suspicion of government as an easily-captured tool for the enrichment of cynical and selfish interests that sought to grab whatever they could. Suffusing all was a faith in the power of argument and the utility of reason. He was an optimist: people could be taught the truths of economics, and if they were properly taught then institutions could be built to protect all against the corruption and overreach of the government.
And he did fear the government. He hated government's and society's sticking their nose into people's private business. And he interpreted "people's private business" extremely widely. He hated the War on Drugs, which he saw as a cruel and destructive breeder of crime and violence. He scorned government licensing of professions--especially doctors, who heard over and over again about how their incomes were boosted by restrictions on the number of doctors that made Americans sicker. He feared deficit spending: cynical politicians could pretend that the costs of government were less than they were by pushing the raising of taxes to pay for spending off into the future. He sought to innoculate citizens against such political games of three-card-monte: "Remember," he would say, "to spend is to tax."
This did not mean that government had no role to play. Enforcement of property rights, adjudication of contract disputes--the standard powerful rule-of-law underpinnings of the market--plus a host of other government interventions when empirical circumstances made them appropriate: Mayor Ken Livingstone's congestion tax on cars in central London is Milton Friedman's. Friedman's negative income tax is one of the parents of what is now America's largest anti-poverty program: the Earned Income Tax Credit. And, most important, government had a very powerful and necessary role to play in keeping the monetary system working smoothly through proper control of the money stock. If there was always sufficient liquidity in the economy--enough but not too much--then you could trust the market system to do its job. If not, you got the Great Depression, or hyperinflation.
In his belief that the government was required to undertake relatively narrow but crucially important strategic interventions in order to stabilize the macroeconomy--keep production, employment, and prices on an even keel--Milton Friedman was in the same chapter if not on the same page as John Maynard Keynes, the economic giant of the previous generation whose doctrines and influence Friedman worked tirelessly to supplant and minimize. The Great Depression had convinced Keynes that central bankers alone could not rescue and stabilize the market economy. In Keynes's view, stronger and more drastic strategic interventions were needed to boost or curb demand directly. Friedman and his coauthor Anna J. Schwartz argued in their Monetary History of the United States that this was a misreading of the lessons of the Great Depression, which in Friedman's view was caused by monetary mismanagement or perhaps could have been rapidly alleviated by skillful monetary management alone. Over the course of forty years, Friedman's position carried the day. Federal Reserve Chair Ben Bernanke right now holds Milton Friedman's view, not John Maynard Keynes's, of what kind of strategic interventions in the economy are necessary to provide for maximum production, employment, and purchasing power, and stable prices.
Milton Friedman's thought is, I believe, best seen as the fusion of two strongly American currents: libertarianism and pragmatism. Friedman was a pragmatic libertarian. He believed that--as an empirical matter--giving individuals freedom and letting them coordinate their actions by buying and selling on markets would produce the best results. It was not that he thought this was natural law--that markets always worked best. It was, rather, that he believed that places where markets failed were atypical; that where markets did fail there were almost always enormous profit opportunities from entrepreneurial redesign of institutions; that the market system would create now opportunities for trade that would route around market failures; and that government failure was pervasive--that any expansion of government beyond the classical liberal state would be highly likely to cause more trouble than it could solve.
For right-of-center American libertarian economists, Milton Friedman was a powerful leader. For left-of-center American liberal economists, Milton Friedman was an enlightened adversary. We are all the stronger for his work. We will miss him.
At night in the suburbs of San Francisco, some of us awake as the hills echo and re-echo with the howls of the coyotes that have fed well on Glenn Rudebusch's chickens. We then lie awake, worrying. We worry why the Great Moderation in the U.S. business cycle on the real side that we have seen since the mid-1980s has not carried a big reduction in financial-side variability with it. We toss and turn, worrying that the real-side volatility decline has been part good transitory luck and part statistical illusion, all because people in financial markets putting their money where their mouths were do not project the continuation of the Great Moderation into the future.
Christina Wang's paper lets us sleep more easily, even if the coyotes continue to prey upon the chickens of Federal Reserve Bank Vice Presidents. It teaches us an important and valuable lesson: a financial system that is doing a better job will be highly likely to have both higher financial and lower real volatility.
When a firm goes bankrupt and defaults on its debt, it may be because it has had bad luck, it may be because it was badly managed, or it may be because it suffered from moral hazard--took account of the fact that in the lower tail the losses are eaten not by the firm but by the bank that loaned it the money. Banks that have a hard time distinguishing between these possibilities will be averse to lending--charge a high interest rate premium on loans--to firms seen as having a high degree of undifferentiated idiosyncratic risk. Improvements in data collection and analysis that allow firms to differentiate will cause banks to fear undifferentiated firm-level idiosyncratic risk less, and charge lower interest rate premiums for such lending. Other things being equal, firms will smooth production more, and smooth cash-borrowing requirements less, seeking to squeeze out more productive efficiencies by taking on more financial risk. To the extent that improvements in data collection and analysis reduce banks' fixed costs of monitoring loans, other things being equal banks will do more to diversify away firm-level idiosyncratic risk.
When a bank goes bankrupt and defaults on its debt, it may be because it has had bad luck, it may be because it was badly managed, or it may be because it suffered from moral hazard--took account of the fact that in the lower tail the losses are eaten not by the banks' shareholders but by those who hold or guarantee its liabilities. Improvements in data collection and analysis by those to whom banks owe their liabilities will allow them to better classify banks, and so the cost to banks of portfolios with bank-level idiosyncratic risk will fall. Other things being equal, banks will be willing to take on more bank-level idiosyncratic risk.
Of course this function that Christina Wang identifies is the primary job--one of the primary jobs--of financial markets: to diversify away idiosyncratic risk, as was ably explicated by that notable predecessor of Lintner and Markowitz, William Shakespeare. As Shakespeare writes, Antonio, the Merchant of Venice, does not fear that the lower tail of his portfolio return distribution extends far enough down to the state in which his heart is cut out with a knife. Antonio he has a properly-diversified portfolio. The banker lending him the money uses the highest information technology of that day: wandering down to Venice's Grand Canal, loitering on the High Bridge, and gossiping. The banker concludes that Antonio has:
an argosy bound to Tripolis, another to the Indies; I understand moreover, upon the Rialto, he hath a third at Mexico, a fourth for England, and other ventures...
Here the analogy breaks down. Negative transitory systematic news does indeed provoke a crisis in Antonio's affairs, but he is rescued not by a competent, technocratic lender of last resort but by his bride disguised as a teenage judge.
Christina Wang hopes that starting sometime in the mid-1980s we took a jump toward the ideal financial world in which one of CAPM's cousins holds, in which idiosyncratic risk is not priced because it is properly diversified away, and in which as a result the real economy can grab for all the production-smoothing efficiency benefits without worrying about firm- or bank-level costs of default or illiquidity. This shift could drive a reduction in real-side volatility coupled with an increase or no change in financial-side volatility.
She has a nice theoretical costly-state-verification model of the effects of improved data collection and analysis technologies. She has a very interesting theoretical Dixit-Stiglitz-based three-period model of the joint determination of real and financial volatility. The key insight is a very good one: that production-smoothing has not just manufacturing-side and labor-side efficiency benefits but financial-side efficiency costs: only if banks are confident in their ability to monitor firms and large depositors confident in their ability to monitor banks will firms be able to easily and cheaply borrow the money they need in recession to enable a production-smoothing corporate strategy. The fact that times of recession are times when a firm's free cash is likely to be uniquely valuable and not to be best invested in building up inventories is a potentially powerful explanation of why we have, historically, seen the reverse of production-smoothing in the American economy. She has interesting empirical results that suggest that banks and firms have reacted to a likely information-driven fall in the cost of idiosyncratic financial risk to take on more of it. The theory is sound and convincing. The micro empirics are interesting and suggestive.
But how much can this channel add up to on the macro level? How, exactly, does ICT help bankers? Working for the original J.P. Morgan, Charlie Coster was on the boards of 88 railroads at the turn of the last century and died of overwork--Morgan is reputed to have recruited Coster's successor while they were together carrying Coster's coffin to its grave. What would today's ICT have done to increase Coster's contribution to Morgan's bottom line, exactly?
And how much of the Great Moderation in real-side economic volatility can this channel account for? Recall the size of the Great Moderation: a 40% fall in the standard deviation of the cyclical component of GDP, more or less the same however you choose to measure it. A fall in spite of the fact that technology and cost shocks have in all likelihood been quantitatively greater in the past ten years than in any other post-WWII decade save possibly the 1970s.
As Christina Wang says, her paper as written can't do the job. It can only do about a third of the job--although Doug Elmendorf said half last hour. The model as extended quite possibly could.
In this literature, the game that is being hunted is the positive correlation between production and inventory investment that we saw in the past. In a standard production-smoothing model inventory investment should be relatively high when production is relatively low, and sales are very low. Instead--back before 1985--inventory investment was high when production was high. This shift could be possibly traced to Christina Wang's mechanisms. But it can account, in my back-of-the-envelope guess, for not a 40% but a 15% decline in the standard deviation of the cyclical component, whatever that is.
The big game for this model--as Chistina Wang says in her conclusion--will, I think, come from applications of models like this to the household sector. It's not just firms that have benefitted from the application of information technology to credit screening. I have gotten three offers of VISA cards and two offers of what were described as "guaranteed low interest" home-equity loans so far this week. Plus the people behind the counter at my most local Starbucks have started asking me if I'm interested in a no-annual-fee Starbucks VISA that will come with $25 of free caffeinated drinks. I don't know whether they are doing this to everybody or whether there is something special in my file. The smoothing-out of household durables purchases will, I think, be an important part of the Great Moderation when we finally nail it down. And I think that's where the high returns from Christina Wang's model will come.
Last, the smoothing out of residential construction--if it indeed stays smoothed-out--may well turn out to be the heart of the matter. One branch of the conventional wisdom is that the smoothing-out of residential construction is a result of good luck that is about to end: that America's banks have been offered too much rice wine by the People's Bank of China, and have responded by lending like drunken bankers: $600,000 zero-down floating-rate loans to single-earner middle-class families buying three-bedroom houses in Vallejo, CA: and we will be sorry.
Christina Wang's paper suggests a second possible explanation. That recent residential investment financed by so-called "non standard" mortgage loans is a result at least in part not of the inebriation of the banking sector but of the ability to more finely calculate risk and return than was possible in the days when your mortgage had to be 30-year-fixed, 20% down, with amortization plus real estate taxes amounting to no more than 33% of last year's household income. That was an inadequate screen. What, really, are the current screens? How good are they? The application of models like this to residential financing may be the real big game here.
Look: Six years ago, every Republican I talked to who would let his or her hair down agreed that George W. Bush was incompetent to be president. It did not matter, they said, that we were electing somebody unqualified for the job. George W. Bush was smart enough, they said, to know that he was a good face man--a good head-of-state--and a bad head of government. He would take advice. Paul O'Neill would contruct a reality-based economic policy, and Bush would approve it. Condi Rice and Colin Powell would contruct a reality-based foreign policy, and Bush would approve it. Rumsfeld would corral the Pentagon and get good money for our defense dollars. Cheney and Card would make sure the trains ran on time, that the policy process was orderly and fair, and that George W. Bush was persuaded by the various consensuses reached by his NSC, NEC, and other policy-forming bodies. That's what they said would happen.
Needless to say, it did not work out that way.
For more than six years, John Harris, Mark Halperin, and their peers have known that George W. Bush was not competent to be president. For six years, John Harris, Mark Halperin, and their peers have dined out in private on stories about the incompetence, malevolence, disconnection from reality, and mendacity of George W. Bush and his administration. But in public--ah, in public things have been different.
Thus for more than six years John Harris, Mark Halperin, and their peers have been two-faced: the stories they have been telling each other are different from the bland "opinions on shape of earth differ" that they have been telling their readers and their viewers.
They simply have not done their jobs.
And they do not care that they have not done their jobs.
Here they are writing to each other in Slate:
Mark Halperin: What most amazes—-and discourages—-me right now is that the mood of both the politicians and the electorate seems so angry. Sure, there is a lot to be unhappy about in a country at war, and that has a lot of people feeling like the nation is on the wrong track, but this level of vitriol seems excessive and a bit scary.
I don't really mind negative ads or messages—in part because there is nothing that the press can do about them, in part because they often have useful information in them, and in part because if voters want to be swayed by them, they will get the government they deserve.
What I don't like is false negative messages. Those, I think, are just bad for the electoral process....
[P]eople who live in Bethesda, Chevy Chase, and Manhattan should understand that in much of red America, [Karl] Rove is beloved and respected....
John F. Harris: I agree that it is arbitrary to make public a week-long fragment of our regular correspondence, most of which will not be open to scholars before 2025. But as long as we are reasonably alert, we should be able to promote our book and stay out of trouble in these days before the election. (I'm way too busy already to read or answer hundreds of flaming e-mails, or to sit through a long interrogation by the ombudsman.)...
[Y]our instinct for inflaming people on both the left and right into paroxysms of (publicity-producing) anger is, I suppose, a bankable asset for us....
It is our job as journalists to play referee, and I agree that at times, our efforts to call out falsehoods are pretty feeble compared to the volume....
The big journalistic failure of recent years is one also shared by numerous other people and institutions. That was the media's failure--with some prominent exceptions, including several at the Post--to challenge and illuminate the administration's premises for the Iraq war before the invasion. That is not an ideological statement, or even a criticism of the war. It's just a statement of fact....
For what it's worth, I think our failures in campaign and government coverage usually have less to do with ideology and more to do with journalistic conventions. We follow noise, as witnessed by the coverage of the Kerry-Iraq uproar in recent days. (Though please note that this classic freak-show story ran inside the Post today, not on the front page.) And our professional habits and stylebook rules sometimes inhibit us from telling the truth--and from saying that someone is lying--in plain, conversational language. We let it become a matter of controversy whether it is sunny or rainy, when sometimes it's a matter of fact. This is one area of the liberal critique of Old Media that often is pretty compelling...
In my view, John Harris's and his peers' failures have next to nothing to do with journalistic conventions. They have something to do with ideology. They have something more to do with material interest. But what they mostly have to do with is cowardice.
Has Neo-Liberalism Failed Mexico?
J. Bradford DeLong
Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. Next year, Mexico’s real exports will be five times what they were in 1990.
It is here – in the rapid development of export industries and the dramatic rise in export volumes – that NAFTA made the difference. NAFTA guarantees Mexican producers tariff and quota-free access to the US market, the largest consumer market in the world.
Without this guarantee, fewer would have invested in the capacity to satisfy the US market. Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.
Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation, which should have accompanied the guarantee that no future wave of protectionism in the US would shut factories in Mexico.
The key word here is “should.” Today’s 100 million Mexicans have real incomes – at purchasing power parity – of roughly $10,000 per year, a quarter of the current US level. They are investing perhaps a fifth of GDP in gross fixed capital formation – a healthy amount – and have greatly expanded their integration into the world (i.e., the North American) economy since NAFTA.
But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. (Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.)
Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.
Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.
To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they?
Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.
We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far wose off today without NAFTA and its effects weighing in on the positive side of the scale.
That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.
