US Aid to Africa

Policy in Africa. It's complicated, and so I'm going to try a quick cut at it. Let's start with some theory of political power. In order for a leader to gain and keep political power, she must assemble a winning coalition. This is a group of people who, together, have enough power to exclude rival coalitions. What does it take to form a winning coalition? How many people are needed to form a winning coalition? That depends on the political and social institutions in the society. For simplicity, consider democracy, vs dictatorship. In a true democracy, a winning coalition is formed by voters who get behind a leader. Depending on the specific rules (rules are one kind of institution) a winning coalition might need to be more than 50% of voters, or it just might need to be more voters than the next rival. In order to form a dictatorial winning coalition, the leader must attract a group of elites who can control armed forces and trade -- again, enough to be able to defeat rival coalitions.

Once a leader has formed a winning coalition and taken control of the commanding heights, then she must concern herself with maintaining the power she has won. Essentially, she must maintain her coalition, and prevent rival coalitions from gaining enough power to unseat her. Under democratic political institutions this means enacting policies that voters desire. Under dictatorial political institutions this means dispensing patronage to the group of elites who form the winning coalition. 

So right there, you can see already that political institutions matter, because those institutions will profoundly affect what kind of policy will be enacted by a successful leader. Even a good-hearted leader who rules under dictatorial political institutions must run a corrupt regime (using taxes to buy the continued support of coalition members), or face ouster as her coalition disintegrates with members fleeing to rival coalitions that promise more generous patronage. Conversely, even an evil-hearted and venal leader must embark on broad-based social welfare spending in order to maintain the support of large numbers of voters.

Now, assuming that you more or less accept the arguments I've made so far, consider the goals and impacts of western foreign aid in Africa. 

First the goals. From the point of view of the leader, the goal of ANY policy is the maintenance of political power. (There are exceptions, but I'm trying to be brief, so accept the simplification.) So, why should, for example, the American Congress choose to send foreign aid to nations in sub-Saharan Africa? How does giving away my money to aid people in Africa make me want to vote for you? Maybe because I'm altruistic. But even if I am, I don't need my Congress person sending my tax dollars to Africa for me. I can donate directly myself. So what's the real reason? The reason is that foreign aid is used to get African leaders to enact policies that are favorable to Americans. I'll vote for you because you made things better for me, and one of the ways you did that was by bribing foreign leaders so that they would, for example, open up trade with the U.S., or allow us to fly military planes over their country. 

Now, you have to remember that many sub-Saharan nations have dictatorial political institutions. That's important, because it tells us what strategies the leaders of those nations are using to maintain power. They are paying off the group of powerful elites who are their winning coalition. Foreign aid that enters the country doesn't just get dumped out on the street for the people to come pick up. It has to be distributed by someone, and it's usually distributed by agents of the government. So, some of the aid gets skimmed off to directly pay the members of the winning coalition. Some goes into the war chest of the leader. Some gets spent on military and police, in order to further strengthen the leader's power. And some does actually get distributed to the people -- but strategically in order to maintain the power of the winning coalition and to weaken rival coalitions.

Long story short, our government uses foreign aid to buy favorable policies from foreign nations. And those favors have to be bought because they are unpopular policies among the people in the nation where they will be enacted. The leaders of these foreign nations are willing to enact unpopular policies because they need the money to prop up their winning coalition. 

So, it should be fairly obvious why over the past 60 years foreign aid has failed to produce economic growth in sub-Saharan Africa. That aid has gone toward propping up dictatorial and kleptocratic regimes, not toward building a brighter future for average Africans. 

An Appeal

Maragret Lavinia Anderson.

Can you make your lectures available again? Free is nice, but I'll pay for them if I have to.

And yes, I am reading Practicing Democracy.

Right and wrong

The following is from an email exchange between Robert and I regarding this article:

She's right to promote individual identity over stereotypes (whether or not the stereotypes apply statistically - individuals deserve to be treated as such). 

Her primary failure is in the assumption that women are not or have not been drivers of the culture to the same extent that men have. She assumes that men have been giving it to women and women have been taking it since...well forever. The truth is that women are powerful shapers of culture, much more so than the feminist movement has ever acknowledged. Only in severely dysfunctional societies (and I mean societies that quickly disintegrate because they are genuinely not functional) have women altogether been subjugated in the way that the feminist movement has described. In all societies that function, and persist, women inevitably wield powerful influence. And they do so for the obvious reasons that they compose half the population and have a monopoly on certain highly prized abilities - that is, they have something valuable that the other half of the population wants badly.

I'm not an expert, but I think that you will find that even in cultures that are outwardly repressive of women it won't take more than an up close glance to see how women are exercising influence throughout the society.

The other side to the coin is that women are clever about their own interests. Clever enough to fool men and even to fool Gloria Steinem. Consequently, a great many repressive practices against women are actually enforced BY women. Look at genital mutilation in sub-Saharan Africa. I hear that this practice is perpetuated by mothers and grandmothers, not by men at all. Why is this the case? Well, it's obvious really. And it's the same for practices that are aimed at repressing men and are enforced by men (e.g. rules about when a man is allowed to marry). These practices safeguard the interests of those who enforce them. So, it's not MEN repressing WOMEN. Instead it's one group of people (say, matriarchs) repressing another, competing group (say, young women who are approaching sexual maturity).

So, to sum up: Gloria Steinem should take her own advice about lumping people into static groups. There are many kinds of men and many kinds of women in the world. They should be protected as individuals, with individual protections that don't vary according to what groups we might wish to lump them into. From that perspective feminism IS (or ought to be) dead, because it doesn't - can't - give protection to individuals when it assumes that men repress and women submit.

More on Saving and Investment

This article is a much better exposition of some of the ideas I was trying to get at in my post titled Bad Investment.

Here's a related post by Eric Falkenstein that discusses how people and businesses behave when their performance on fundamental measures is not well correlated to their earnings.

Technology

From the point of view of society, technology is the reason for doing science.

Bad Investment

I kind of understand the reasons behind the dot-com bubble. The emergence of new, paradigm-shifting technology suggested that untold fortunes might be made by the fearless who got in on the ground floor. The real estate bubble is more mysterious.

Who really thought that housing prices were accurately reflecting a balance between the number of available units (supply) and the ability of consumers to pay (demand), circa January 2006? Or even a year earlier, for that matter. Even casual attention to the loan-making process during this time would suggest a problem with the direction of the investments that were being made. Hindsight is 20/20, but at the time I did decline to take on such a loan myself because it just all seemed so ridiculous (though I should have taken it, had I been a more rational actor). 

I'm clearly no economist, but I think that the bubbles during the last halves of the last two decades must have a common cause. In both cases enormous investment was made on a basis of careless speculation bordering on willful self-injury. Why?

Some people talk about interest rates being artificially low and blame Greenspan and Bernanke. I'm no expert on that one, but I do wonder whether interest rates were low only because of the actions of the Fed. My suspicion is that low interest rates alone didn't cause all that bad investment, but that both the low interest rates and the bad investment were caused by a third factor.

I'm not quite sure how to phrase it, but doesn't it seem like there was an awful lot of capital that needed someplace to go during both of these booms? I've heard the phrase global savings glut bandied about, but I'm not sure exactly how to evaluate that. One thing seems sure: typical due diligence prior to investing was not being practiced in 1996 or in 2006. Is it simply that there were not enough quality investment opportunities available during these periods? Too much money chasing too few opportunities? That story seems to fit the facts, but I can't quite make sense of it.

Under what circumstance is there too much money ready to be invested? It's not the kind of thing I've heard debated, but I can imagine a world where saving is happening at a higher rate than is consumption. In that world, each saved dollar 'wishes' to be put to use producing, but most production is giving slim returns because demand is weak (e.g. most needs are already satisfied, so there's not a strong incentive to buy more). That doesn't sound like the USA we know and love, and whose savings rate has been negative in very recent memory. But it might be a description of the world when evaluated on net. 

Don't look at me like I have data to support that argument, because I don't. But imagine how a world like the one I've described might behave. Because many, many people are choosing to postpone spending until a later date, there are many dollars available for investment. But they can't be profitably put to work building factories to make gadgets to sell to people, because people are saving instead of buying gadgets. So investment dollars are available cheap, chasing every opportunity to earn some kind of return. Consequently, interest rates fall (with or without Bernanke's say so). In such an environment risky investments that pay well look much more attractive than they usually do because investors are desperate. Investment schemes based on the promise of unproven new technology or the faulty hope of perennially rising home values almost make sense. Eventually this kind of bad investment gains a certain amount of respectability and even becomes an indispensable part of every portfolio, because no one wants to be left earning pennies on securities that give Treasury Bill-like returns while the stupid money (other banks, municipalities, and private investors) make relatively good returns and don't seem to be blowing up.

This story is so simple that it must be wrong. Please tell me how it's wrong.

But if we assume that it's right, what policy can fix it? Or should it be fixed?

What if the solution is for governments to tax and spend in order to forcibly lower the savings rate?

What if we believe that taxing and spending is the solution, but it turns out that taxing and spending in the US doesn't fix the problem because we don't save much anyway, and that the real savers are in China and India?

Discouraging Effort and Success

Why do we tax labor? We know that any tax on an activity discourages people from engaging in that activity by reducing the rewards for doing it. So why do we tax hard work, production, and wise investment? Do we really want less of those things?

We need to fund our government (some claim), so we need to tax something. Why not tax behaviors that we want less of? Wouldn't that be killing two birds with one stone?

What would happen if we ditched all income taxes (including capital gains, and corporate income taxes) in favor of taxation levied exclusively against consumption? How would our society change?

I imagine a system wherein my income is not monitored by the government, but the total amount of my consumptive spending is instead. It's easy enough to do - just give up cash and require banks to report the amount of spending. As long as my consumptive spending total for the tax period stays below a legally established minimum, I pay no tax. But when my total rises above that level, I begin to pay tax out of each additional dollar spent. So if I don't spend much beyond the limit, the taxation I experience will be very low.

There are many advantages to such a system. For one, we'd stop punishing smart and hardworking people for being so productive. Every dollar they earn would be theirs to keep. This would include dollars earned for good investments (capital gains). Similarly, we'd stop punishing businesses for competence in producing and selling products and services to people who need them. When a highly successful business has to pay a large amount of income tax while its less successful competitor pays no tax (due to writing off business losses) the playing field is being unfairly tipped to reward poor performance! Not only that, but why tax production at all when production is what gives us the things we need and desire?

Also very important is the fact that taxing consumption, instead of labor, production, and investment, allows individuals to adjust their tax liability to fit their circumstances and desires. If I don't want to pay so much in taxes this year, I can reduce my consumption and pay less. And, I bear no penalty for working extra hard to earn additional money to fund my future, or my children's future.

Under this kind of system saving would be strongly incentivized. For those who wished to avoid taxation, saving and wise investment would be the safest harbor for their money. Everyone would be faced with compelling reasons to defer spending to a later date. Government subsidized retirement could become unnecessary for average Americans.

It's possible to take this idea to a more extreme level and suggest that leisure (time spent not producing or learning) could be taxed when it exceeded a certain minimum amount. This could spur the indolent and chronically unemployed (whether poor or wealthy) to return to productivity, lending their efforts to the improvement of society.

Undoubtedly there are many weaknesses in such a plan, and opportunities for clever gaming of the system. But that is no different from our current system for taxation.

Are there structural problems with this proposition?