TIMnovate

Innovation Blog

Innovating Economics: How to Do Research on Alleviating Poverty the RIGHT Way! Or

 How to Keep Poor Kids in School with only a Few Pennies.

By Shlomo Maital

MIT Professor Esther Duflo   

Many people have been inspired by Greg Mortenson’s book Three Cups of Tea, about how he stumbled into an Afghan village after failing to summit K2, leading him to launch a huge project that built many schools in Afghanistan.   The CBS program 60 Minutes attacked Mortenson, debunking many of his claims and claiming misuse of his funds, and he later responded.  

  In his New York Times Op-Ed column Nicholas Kristof, who covers the developing world, says the Mortenson affair raises a deeper issue – “how best to make an impact”.  Increasingly Generations Y (the generations that followed the baby-boom generation) want to change the world as their life mission. But how best to doit?  Do we know? 

    In my blog, I’ve been highly critical of my fellow economists for their narrow, greed-ridden detached-from-reality view of the world, shown in their mathematical equations that portray no recognizable human societies.  But there is an exception.  Today young economists are getting out into the field, applying the rigorous methods of scientific research (randomized sampling, control groups) to study how best to alleviate poverty.  The two leading proponents of this approach are MIT Professors Abhijit Banerjee  and Esther Duflo.  Their new book *   documents how their Poverty Action Lab uses randomized trials in countries from  from Chile to India, Kenya to Indonesia, to show how to use resources efficiently to change the lives of the poor.  A second new book, by Dean Karlan (a behavioral economist) and Jacob Appel (an aid workers),  More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty, tackles the same topic.

Among Duflo’s key findings:   ● microfinance, the poverty-reduction solution du jour, isn’t all it’s cracked up to be;  ● the value of foreign aid is greatly overblown;  ●   entice parents to get their kids immunized by giving them free food.  All these findings are tested in carefully-controlled experiments. 

   Karlan  and Appel use psychology  to assess aid  initiatives .  They recommend “small fixes with outsized payoffs”: ● “commitment” savings accounts that make depositors accumulate a fixed amount before they can
withdraw; ● well-side chlorine dispensers to purify water; ● paying parents to take kids for checkups; ●  increasing the application rate to a microloan program by putting photos of  beautifulgirls on the brochure. 

  Kristof supplies another powerful example: Deworming. “Prof. Michael Kremer, a Harvard economist, helped pioneer randomized trials in antipoverty work. In the 1990s, Kremer began studying how to improve education in Africa, trying different approaches in randomly selected batches of schools.  One intervention he tried was deworming kids — and bingo! In much of the developing world, most kids have intestinal worms, leaving them sick, anemic and more likely to miss school. Deworming is very cheap (a pill costing a few pennies), and, in the experiment he did with Edward Miguel, it resulted in 25 percent less absenteeism. Even years later, the kids who had been randomly chosen to be dewormed were earning more money than other kids.  Kremer estimates that the cost of keeping a kid in school for an additional year by building schools or by subsidizing school uniforms is more than $100, while by deworming kids, the cost drops to $3.50. (In a pinch, kids can usually go to “school” in a church or mosque without a uniform.)”

    Bill Gates has put billions of his wealth dollars into health initiatives for the poor. He would do well to speak to
these researchers.  Why not apply the same standards to philanthropy that are used in scientific research?  The aid dollars would go much farther if we did.

 * Abhijit Banerjee  &  Esther Duflo,  Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.  PublicAffairs (2011). 

** Dean Karlan and Jacob Appel . More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty.   Dutton (2011)

Innovation Blog

Innovation That Shoots Blanks

By   Shlomo Maital

  Blank Cartridge

Despite America’s ongoing economic crisis, weak currency and massive debt, the U.S. comforts itself that it is still the world’s most innovative, entrepreneurial nation.  Most of its hopes for emerging from the crisis are pinned on its innovation.

  There is new evidence this hope is misguided. America’s innovation cannon is firing blanks.  This is the view of 2001 Nobel Laureate Michael Spence, from Columbia U., who in a new study with a colleague has explained why American innovation creates no gains for American working people.*  The syndrome he describes afflicts Israel as well.  The gains from Israel’s innovative high-tech sector accrue to a very small fraction of the work force. 

   It is not true that the U.S. economy fails to create jobs.  Some 27 million jobs were created between 1990 and 2008 (the year the global crisis began).  The problem is, all but two per cent of those jobs were in services.  And most of service jobs were low-paying ones, such as Wal-Mart clerks, hotel maids or low-paid government jobs.  

   Almost no job growth at all occurred, according to Spence, in manufacturing, where high-paying jobs for workers once existed.  The reason: outsourcing.  And the few remaining American manufacturing jobs are threatened, because emerging markets are moving up the value chain.   Moreover, though America has cut its trade deficit by half between 2007 and 2009, all of that gain came from import reduction, not from a rise in exports. The weaker dollar makes U.S. exports cheaper and more attractive – the problem is, America makes very few goods for export, at any price.

   In 1979 manufacturing made up more than one out of every five U.S. GDP dollars.  Today, it is about one in every ten GDP dollars, or proportionately half.  The result has been disastrous for the average American worker, whose weekly pay peaked in 1974 at $709 (in 2010 dollars) and fell to only  $649, a drop of 8.5 per cent,  by the end of 2010.  This means that an American, working at exactly the same job as his or her father, earned less, even though in the same 37-year period U.S. GDP per capita almost doubled. The cause is mainly America’s myopic transfer of its manufacturing jobs to China and South Asia. 

   Let us all learn America’s bitter lesson – innovation is fruitless if you only create ideas and let other countries make the products.  You create a handful of billionaires, through massive exits, but no well-paying jobs.  Moreover, innovation joined with on-site manufacturing is far more powerful than R&D isolated from production.

* Michael Spence, Sandile Hlatshwayo, “The Evolving Structure of the American Economy and the Employment Challenge”, Council on Foreign Relations, March 2011.

Global Crisis/Innovation Blog

When Will America Declare Bankruptcy?  In 2020 – Or Before

By Shlomo Maital

Source: MORGAN STANLEY

 The blue line is Revenue as % of GDP;

 The red line is Interest + Entitlements as % of GDP

 A little-noticed report by the Congressional Budget Office (CBO)  (“Long Term Budget Outlook, 6/10”) does the following: It projects revenue as a % of GDP (projected to be stable, at about 20%, mainly because of Republican pressure for tax cuts and no tax hikes),  while two budget components only,  interest payments and ‘entitlements’, will rise from about 10% of GDP today to 20% by 2020, owing to America’s aging and huge debt along with rising interest rates.

  Note:  the CBO is regarded as highly professional and credible. 

  A word of explanation:  Entitlements include federal spending on Social Security, Medicare, Medicaid, based on current legislation.  

     What does this mean?   It means that all tax revenue will be spent on interest payments and entitlements, leaving nothing for discretionary programs (such as defense, education, etc.). 

     At some point, between now and 2020, some American Administration will have to bite the bullet and slash entitlements, regarded politically as a “third rail” (especially Social Security).  But who?  Republicans show no inclination to this, nor does Obama.  With Obama likely to be re-elected in 2012, and his 2^nd term ending in 2016,  he will have to deal with this issue during his second term. 

   But will he have the guts?  And will the Republican opposition allow it? 

   The only solution is to raise taxes.  Republicans are ferociously opposed.  But the CBO study suggests there is no alternative.

    Stay tuned.  Without a major policy change, on spending entitlements and taxes, America is bankrupt by 2020. 

Global Crisis/Innovation Blog

Reforming America’s Banks: Dodd-Frank Act Got It Wrong –Why are We Not Surprised?

By Shlomo Maital

    Andrew Ross Sorkin’s regular Global NYT column (May 11/2011, p. 20) summarizes the Michael R. Milken Annual Conference held recently in Los Angeles, on financial reform and the Dodd-Frank Act.  You will recall, this Act, signed into law by President Obama last July 21, regulates “sweeping” financial reform, to prevent another meltdown like that of 2007-9, and in particular, preventing banks “too big to fail” from failing and needing bailouts.

    Sorkin says the video clip from the conference is “riveting”; find it at the Milken Foundation website.

    Critics at the Milkin Conference were fierce.  Thomas J. Wilson, chair of Allstate (a huge insurance company) and deputy chair of the Chicago Federal Reserve Bank, said the new law “creates more uncertainty than certainty”.  But the most damning critic is Kenneth C. Griffin, founder of a $15 b. hedge fund Citadel, who says the new legislation “will deeply entrench crony capitalism into the very fabric of the capitalist system”.  Readers will recall, it was crony capitalism that got us into this huge mess in the first place. 

    The problem, Griffin explains, is that when the government liquidates a bank (as it did with Lehman Bros.), it decides which creditors it will make “whole” (compensate) and which it will punish severely.  Griffin says, this means “companies connected to Washington that curry political favor will be favored at the expense of companies that do not have their business model “revolve around appeasing politicians and making campaign contributions”. Recall that Obama will spend $2 b. on his 2012 campaign, and so will his Republican counterpart.  One way or another, they have to raise that money – and much of it will come from the financial services industry. 

      Remember that $50 m. check we wrote for you?  Bank X will say, gently, to the ruling politicians, when it lands in trouble. 

     Wilson adds a doom loop scenario, noting that as soon as you declare a major financial institution insolvent, people are going to run from it (withdraw their money), and this will “actually accelerate people’s demise rather than stop it.”  Of course this happened with Lehman Brothers. 

    The fighting head of FDIC (Federal Deposit Insurance Corp.) Sheila Bair has announced she is leaving.   With her departure, and with Dodd-Frank, don’t look for serious fixes in the flaws that led to the 2007-8 meltdown.  And for bankers who gripe at government “over-regulation” – ask them if they would swallow an unregulated pill or fly in an unregulated airplane.   Why is regulation great for everything except where it really matters – banks and money?