Frank on the Invisible Hand stuff

Higher gas prices is good, irrespective of what Smith implied with the "invisible hand"!:

The production and consumption of many other goods, however, generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others. As before, market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.

The upshot is that gasoline consumption is inefficiently high. Suppose that pollution costs are $2 for the last gallon consumed, but that its $4 price at the pump is just enough to cover its direct production costs. Reducing production and consumption by a gallon would then cause consumers to lose fuel that they value at $4, which would be exactly offset by the $4 in reduced production costs. The $2 in reduced pollution costs would thus be a net gain for society.

That simple example captures the classic breakdown in the invisible hand when a product’s market price doesn’t reflect all its relevant social costs and benefits. In such cases, the simplest solution is to discourage consumption by taxing it.

Doing so would not only raise revenue to pay for public services; it would also make the allocation of society’s resources more efficient — hence economists’ almost universal dismay when Senators John McCain and Hillary Rodham Clinton recently proposed eliminating the federal tax on gasoline for the summer.

The stated aim of their proposal was to ease the financial burden of sharply higher gasoline prices. But adopting inefficient policies is never the best way to help people in financial distress.

Efficiency is important because any policy that enlarges the economic pie necessarily lets everyone have a bigger slice than before. Economists opposed suspending the gas tax because doing so would make the economic pie smaller.

Robert Frank explains more here.

Free and Shared Wireless

Free and shared wireless:

Three years ago, aiming to create a global wireless network, he founded FON, a company based in Madrid that wants to unlock the potential power of the social Internet. FON’s gamble is that Internet users will share a portion of their wireless connection with strangers in exchange for access to wireless hotspots controlled by others.

The swaps, in theory, would allow “Foneros” to have ubiquitous, global wireless access while traveling for business or pleasure. But despite $55.2 million in backing from such corporate heavyweights as Google and BT, the former British Telecom, as well as newer enterprises like Skype and a handful of venture capital firms, FON and Mr. Varsavsky are still missing a crucial ingredient: scale.

At the moment, there are just 830,000 registered Foneros around the world, and only 340,000 active Wi-Fi hotspots run FON software. Because it’s built upon the concept of sharing Wi-Fi access, FON works well only if there are Foneros everywhere.

More here.

Bad summer for job seekers!

This is not a good news:

As the forces of economic downturn ripple widely across the United States, the job market of 2008 is shaping up as the weakest in more than half a century for teenagers looking for summer work, according to labor economists, government data and companies that hire young people.

This deterioration is jeopardizing what many experts consider a crucial beginning stage of working life, one that gives young people experience and confidence along with pocket money.

More here ( "Toughest Summer Job This Year Is Finding One")

Japan opens borders to Nepali workers

Good news for Nepali labor force:

...Japanese officials have agreed to accept Nepali semi-skilled and skilled trainee workers for employment with different business enterprises in Japan, said a top Nepali official.

...Japan is expected to absorb Nepali workers mainly in the industrial and agriculture sectors.

... workers having knowledge of Japanese language and culture, good work experience and the skills that can be capitalized by the home country in future will be favored while selecting them for jobs.

...Under the understanding, the trainee workers will get two years of training and one year of internship at work places in Japan, with handsome pay. He said during their trainee period the workers can earn between Rs 80,000 and Rs100,000 per month as allowance, excluding overtime, depending on the status of the employing companies.

More here.

Links of Interest

How to Think About the World's Problems (by Bjorn Lomborg)

Getting Governance Right is Good for Economic Growth (by Dani Rodrik)

Douglass North's talk on The Natural State (HT: The Bayesian Hersey)

Answering the Critics: Why Large American Gains from Globalization are Plausible ( by Gary Clyde Hufbauer)

Rising Food Prices: Drivers and Implications for Development

Falling Short: Aid Effectiveness in Afghanistan

WB has huge confidence in Nepali people

Implications of fiscal disparities for federal Nepal

Seven Questions: The Child Laborer Who Became President

India lifts ban on cement export to Nepal

Three NYU Professors named intellectuals

CGD's The Growth Report 2008

The Commission on Growth & Development (CGD) has released The Growth Report: Strategies for Sustained Growth and Inclusive Development, arguing that developing countries can achieve fast, sustained, equitable growth if they engage with the global economy and have committed leaders.

Key findings:

--Fast, sustained growth is not a miracle – it is possible for developing countries, as long as their leaders are committed to achieving it and take advantage of the opportunities provided by the global economy.

--Developing countries also need to know the levels of incentives and public investments that are needed for private investment to take off in a manner that leads to the long term diversification of the economy and integration into the global economy.

--Spence argues: “The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth. Growth can spare people en masse from poverty and drudgery. And with India needing to grow at a fast pace for another 13-15 years to catch up to where China is today, and China having another 600 million people in agriculture yet to move into more productive employment in urban areas, growth will lift many more people out of poverty in the coming decades.”

--Actions recommended by the Report to combat food price rises (once the current emergency situation is dealt with) include an end to export bans; more effective safety nets and redistribution mechanisms to protect people vulnerable from sudden shifts in prices; and a revitalization of infrastructure investment for agriculture. The Report also urges that policies that favor bio fuels over food be reviewed and, if necessary, reversed and that reserves and inventories be accumulated to relieve temporary shortages.

--The Report calls for establishing a mechanism to coordinate the policies of the growing number of influential countries and to safeguard the stability of the global financial system. Given the increasing economic importance of new global players, the document argues for a rebalancing of global responsibilities and representation.

--Just as the current credit crunch is affecting advanced economies, the Report also stresses the importance of a strong financial system in developing countries and argues for careful supervision of the banking sector to prevent banks expanding credit too far, and the removal of capital controls only in step with the financial market’s maturity.

--That growth is a crucial part of poverty reduction and the improvement of people’s lives. It is impossible for poor countries to lift large populations out of poverty without growth. Equality of opportunity and a focus on individuals and families, gender inequalities, and economic security, however, is critical to maintaining the support for growth oriented policies.

-- That growth is a long-term challenge that requires leadership, persistence, stamina, pragmatism, transparency and the support of the population.

-- That growth requires engagement with the global economy to import knowledge and technology, to access markets, and to generate a strong export sector – critical in the early stages of growth.

-- That growth must be inclusive. The Report highlights the importance of sharing the benefits of globalization, providing access to the underserved, and dealing with issues of gender inclusiveness. It notes the importance of infant and childhood nutrition to avoid long-term impairment in acquiring cognitive and non-cognitive skills, ensuring that they derive greater benefit from the education system and become more effective in the workplace.

-- That resources, especially labor, must be mobile. The Report also recommends a bridging of the divide between the formal and informal labor sectors by allowing export-oriented industries to recruit workers on easier terms than prevail in the formal sector but with the same essential worker protection in the areas of health and safety, working hours and child labor. It highlights the need to better manage the migration challenge and the results of changing demographics.

-- That growth requires high rates of investment, with the Report suggesting that overall public and private sector investment rates of 25 percent of GDP or above are needed.

-- That investment in education and health are particularly important. The Commission also calls for greater research into the measurement of students’ abilities in literacy and numeracy, and increased opportunities for women in the education system.

-- That money spent subsidizing energy consumption in developing countries is often misspent. Better to invest the resources in education and infrastructure. In addition subsidies bias the capital investment in long-lived assets away from energy efficiency and may negatively bias the structural evolution of the economy, the Report says.

Recommendations:

-- That industrialized countries finance the expansion of Africa’s tertiary education to make up for Africa’s brain drain. The report also recommends that industrialized economies implement promptly the time-bound trade preferences granted to manufactured exports from African countries to help them overcome the disadvantages of being late starters.

-- In small states, the Growth Report recommends greater regional economic integration, and a spreading of the burden of public services, through partial union, helping reduce the high per capita costs of effective government. Good governance is also an important foundation on which regional cooperation and multinational integration can build, the Report says.

-- Better governance in resource-rich countries, and more balance and transparency between the returns to the entities exploiting the resources and the governments in resource-rich countries.

-- And increased investment in higher education and innovation as economies transition from middle income to high income status.

Links of Interest

Re-uniting development economics (Paper here)

Dollar a day revisited

Is Austrian Economics Heterodox Economics?

The Economic Cost of Failing to Educate Girls

Economic Growth and Education

Education Quality and Economic Growth

Preserving the open economy at times of stress