Tag Archives: Mexico

Economic policies and institutions matter

Economists often talk about the important role institutions and policies play in generating economic growth. A new paper that examines the role of urban governance and city-level productivity provides some additional, indirect evidence that institutions and policies impact economic productivity at the local level. (The focus of the paper is how administrative fragmentation affects city-level productivity, not what I present here, but I thought the following was interesting nonetheless.)

The authors graph the correlation between city population and city productivity for five different countries. There is a positive relationship between population and productivity in all of the countries, which is consistent with other studies that find a similar relationship. This relationship is largely due to agglomeration economies and the greater degree of specialization within large cities.

One of the figures from the study—for the U.S.—is shown below. City productivity is measured on the y-axis and the natural log of city population is on the x-axis. (Technical note for those interested: city productivity is measured as the coefficient on a city dummy variable in an individual-level log hourly wage/earnings regression that also controls for gender, age, age squared, education and occupation. This strips away observable characteristics of the population that may affect city productivity.)

US city productivity

Source: Ahrend, Rudiger, et al. “What makes cities more productive? Evidence from five OECD countries on the role of urban governance.” Journal of Regional Science 2017


As shown in the graph there is a relatively tight, positive relationship between size and productivity. The two noticeable outlies are El Paso and McAllen, TX, both of which are on the border with Mexico.

The next figure depicts the same information but for cities in Germany.

german city size, product graph

What’s interesting about this figure is that there is a cluster of outliers in the bottom left, which weakens the overall relationship. The cities in this cluster are less productive than one would expect based on their population. These cities also have another thing in common: They are located in or near what was East Germany. The authors comment on this:

“In Germany, the most noteworthy feature is probably the strong east-west divide, with city productivity premiums in eastern German cities being, on the whole, significantly below the levels found in western German cities of comparable size. In line with this finding, the city productivity premium in Berlin lies in between the trends in eastern and western Germany.”

The data used to construct these figures are from 2007, 17 years after the unification of Germany. After WWII and until 1990, East Germany was under communist control and had a centrally planned economy, complete with price controls and production quotas, while West Germany had a democratic government and market economy.

Since 1990, both areas have operated under the same country-level rules and institutions, but as shown above the productivity difference between the two regions persisted. This is evidence that it can take a considerable amount of time for an area to overcome damaging economic policies.

Does statehood trigger Leviathan? A case study of New Mexico and Arizona

I was recently asked to review, “The Fiscal Case Against Statehood: Accounting for Statehood in New Mexico and Arizona, by Dr. Stephanie Moussalli for EH.net (the Economic History Association).

I highly recommend the book for scholars of public choice, economic history and accounting/public finance.

As one who spends lots of time reading  state and local financial reports in the context of public choice, I was very impressed with Moussalli’s insights and tenacity. In her research she dives into the historical accounts of territorial New Mexico and Arizona to answer two questions.  Firstly, did statehood (which arrived in 1912) lead to a “Leviathan effect” causing government spending to grow. And secondly, as a result of statehood, did accounting improve?

The answer to these questions is yes. Statehood did trigger a Leviathan effect for these Southwestern states –  findings that have implications for current policy – in particular the sovereignty debates surrounding Puerto Rico and Quebec. And the accounts did improve as a result of statehood, an outcome that controls for the fact that this occurred during the height of the Progressive era and its drive for public accountability.

A provocative implication of her findings that cuts against the received wisdom:  Are the improved accounting techniques that come with statehood a necessary tool for more ambitious spending programs? Does accounting transparency come with a price?

What makes this an engaging study is Moussalli’s persistence and creativity in bringing light to a literature void. She stakes out new research territory, and brings a public choice-infused approach to what might otherwise be bland accounting records. She rightly sees in the historical ledgers the traces of the political and social choices of individuals; and the inescapable record of their decisions. In her words, “people say one thing and do another.” The accounts speak in a way that historical narrative does not.

For more read the review.


If You Are Successful, Did You Do It On Your Own?

A lot of people are upset with the President’s remarks from last weekend. Here is what the President said:

[L]ook, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there. (Applause.)

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

I agree with those who believe the remarks seem to completely dismiss the role of the entrepreneur. I also agree with those who think the president is exaggerating the role of government. But in two important respects, I think it would be a mistake for free market advocates to dismiss the entire statement. In fact, we should embrace some of it.

First, the president is absolutely right to note that intelligence is not the only determinant of success. In fact, I expressed a very similar sentiment in my SPN piece:

What allows me and my fellow countrymen to command such salaries? I’d like to think work ethic or intelligence has something to do with it. But the truth is that those things can explain only so much. There are plenty in the bottom 99 percent with better work ethics and more intel­ligence than I. Most of the world’s unemployed and underemployed—the ones with nowhere to go and nothing to do—would jump at the opportu­nity to work hard and would excel if given the opportunity to do so.

Second, the president is absolutely correct that a person’s productivity is crucially dependent upon the “system” in which he or she operates. Too many free-market advocates get hung up on the ‘pull yourself up by your bootstraps’ mentality and miss this point. There is a reason more successful businesses are started in the U.S. than in Zimbabwe. It has nothing to do with the inherent business acumen of Americans and everything to do with our “system.”

As I point out in my SPN piece, those who move just a short distance across the border from Mexico into the U.S. increase their salaries more than 415 percent. What could possibly account for such a dramatic improvement?

Physical capital is surely part of it. Once on the American side of the border, the typical worker is more likely to work with machines that enhance her productivity. But an important World Bank study demonstrates that these differences in physical capital only account for a small fraction of the differences in productivity around the world.

Much more important are differences in “intangible assets.” These are factors that cannot be seen but nevertheless help determine our productivity. When a worker produces a good or a service, he uses more than the physical tools in his hand. As I wrote in the piece:

He also uses a legal system, which (ideally) ensures his contracts are honored. He uses a police force, which (hopefully) protects his property. He uses a curren­cy, which either affords him a reliable means of exchange or one that may lose its value at any moment. He depends on the honesty of government officials as they judge his compliance with the laws. Since governments require resources, he relies on the incentives of his country’s tax regime as it encourages or discourages him (and those with whom he does busi­ness) to work, save, invest, and consume. A worker even relies on the culture of his countrymen. Are they disposed to praise him for his hard work and business acumen? Or—like the Romans in their decline—will his countrymen save their plaudits for those who destroy goods in armed conflict rather than sell them in the marketplace?

It turns out that the U.S. has a much larger stock of such intangible capital than Mexico (the World Bank estimates it at $420,000 per capita in the U.S. compared with only about $34,000 per capita in Mexico). And this helps make a Mexican immigrant to the U.S. far more productive than he would be in his home country.

But here is the irony in the President’s statement: the enormous stock of intangible capital in the U.S. is mostly due to the country’s economic freedom, not its active government. Historically speaking, people in the United States have been some of the most-productive on the planet because they have been the most-free. Compared with citizens elsewhere, Americans have enjoyed better protection of their property, lower taxes, fewer and lighter regulations, greater ability to trade with foreigners, and more-sound monetary policy. Historically, business decisions in the U.S. have been more likely to be driven by consumer interests than by political considerations. Our culture has tended to celebrate entrepreneurship and risk-taking and we have been more willing to trust one another. I put all of this in the past tense because there is evidence that many of these things are less true now than they were twelve years ago.

But the basic point is that, historically, the “unbelievable American system” has indeed allowed Americans to thrive.

But the president is mistaken to imply that our “system” is superior because we spend more on roads or bridges, or because we invest more public capital in private R&D, or because we make more grants to start-up businesses like Solyndra. To the extent our system has succeeded, it is because it has allowed Americans more freedom.

It takes a village. A free one.

Where Does Prosperity Come From?

The tour bus wound its way along the narrow road through the thicket of jungle trees. Our faces pressed against the glass; we tried to take in as many sights as we could. But the rainforest was dense and close. There wasn’t much to see but the forest wall as we zoomed past.

Every so often, the forest would give way to a clearing and we’d catch a glimpse of human activity: a house or a hut—often just a tent or a tarp strung between a few trees. “Activity” isn’t quite the right word. Usually, we saw human inactivity. People sat. They stared. They clearly had nowhere to be and nothing to do.

When we reached Chichen Itza, once one of the largest cities in the Mayan world, my wife and I were struck by the contrast. Along the long walk from the bus to the ruins, human activity abounded: eager entrepreneurs sold touristy T-shirts; justifiably proud artisans displayed beautiful handicrafts. These people had somewhere to be and something to do. But despite their spirit, it was clear that life was not easy for many. Soiled clothes betrayed the grinding poverty in which they lived. How strange to see such want in the midst of the ruins of a once-great civilization.

Why do some live in the lap of luxury while others barely scratch out a living? We can begin to answer this question by observing what economists call a natural experiment that takes place every day along the U.S.-Mexican border. In the pages that follow, I discuss this experiment. I show how it reveals the degree to which we all depend on invisible assets that either enhance or hinder our productivity. One of the most important of these invisible assets is human freedom. Those who have it prosper. Those who don’t stagnate.

Those are the opening paragraphs of an essay I recently wrote for the State Policy Network. My goal was to try to make the economic freedom literature accessible to non-economists without sacrificing too much substance. The essay was, of course, inspired by a trip my wife and I took to Mexico in 2007. But it was also inspired by an excellent WSJ OpEd by Ronald Bailey from several years back.

Experimentation in Drug Policy

Last week Mexico decriminalized possession of small amounts of marijuana, cocaine, heroin, LSD, and methamphetamine, creating one of the most liberal drug policy environments in the world, the Wall Street Journal reported. The new approach comes in the midst of the country’s fight against large drug cartels, and prosecutors suggest that by taking the focus off of small-time users, this policy will allow Mexican law enforcement to focus their efforts against large-scale dealers instead.

This decision comes after the War on Drugs, led by the United States, has failed for decades and some say that Mexican law enforcement is losing the battle with drug cartels. However, the decision to decriminalize drug possession does not necessarily mark a departure from the War on Drugs.  The New York Times reports:

The battle against the drug cartels, which has resulted in more than 11,000 deaths since [Mexican president Felipe] Calderón took office in December 2006, will continue unabated, officials insist. Revising drug possession laws, in fact, will help focus the drug war more effectively, they say.

The article says that some Mexican lawmakers have suggested that instead of merely decriminalizing small quantities, legalizing marijuana would provide a better solution, ending the struggle between law enforcement and the drug cartels that traffic marijuana.

Activist groups in the United States such as the Marijuana Policy Project advocate a similar position. Those who assert that the War on Drugs is an unworkable policy agenda argue that criminalizing drugs will never eliminate the supply or demand of illicit drugs. They believe that by ending the federal attempt to fight drug use, resources could be directed toward helping addicts rather than prosecuting and imprisoning drug users and dealers.

Another argument against the drug war is that it is an unconstitutional abuse of interstate commerce clause of the 10th Amendment. Marijuana became illegal in the United States under the Controlled Substances Act of 1970, marking a departure from the previously upheld notion that a constitutional Amendment would be required to ban drugs, such as the 18th Amendment which marked the prohibition of alcohol. Without such an amendment, some argue that drug law enforcement should be left to the states.

It does not appear that drug decriminalization will be pursued by the current administration; however, President Obama has ended the federal raids of medical marijuana dispensaries that were carried out under the Bush administration. This marks an improvement in the constitutional rights of the citizenry of individual states to determine their own drug policies. Furthermore, Attorney General Eric Holder said that federal efforts to prosecute drug law violators who violate both state and federal laws, giving states an increased incentive to pursue individualized policies.

This week, the Argentinian Supreme Court ruled that prosecuting people for possessing small quantities of marijuana is unconstitutional, and some government officials in Brazil and Ecuador suggest that their countries may liberalize their marijuana policies as well. These institutional shifts offer an opportunity to observe drug decriminalization in action. Will the new legal environment help reduce the country’s drug-related violence, or will it simply increase the number of addicts?

This international experiment offers an opportunity for policy makers to observe the changes in behavior that different policies incentivize, and could lead to results that will suggest appropriate approaches for U.S. lawmakers to take toward drugs. By further decentralizing drug laws domestically, the United States could become a country where people have an option to live in states where policies are in line with their beliefs, potentially reversing the wasteful and unsuccessful War on Drugs.

More on Texas and California

The cover story of this week’s Economist discusses Rich States, Poor States, the report published earlier this year by the American Legislative Exchange Council.  The subject of an earlier post, the book attributes Texas’ rapidly growing domestic-born population to low tax rates and favorable business conditions and suggests that California’s loss of domestic population is due to a state government that has grown unsustainably large.

The article points out that in addition to increasing numbers of native-born Americans, Texas along with many other states is experiencing large increases in its population of immigrants from Mexico and Central and South America.  While these large numbers are presenting some challenges to the state’s healthcare and education systems, another piece points out:

Texas has proved far better than the other border states (California, New Mexico, and Arizona) at adapting to the new, peaceful reconquista. In California, Proposition 187, which cracked down hard on illegal immigration, was heartily backed by the then Republican governor and passed in a referendum in 1994, though it was later struck down by a federal court. This kind of thing has only ever been attempted in Texas at local level, and even then only very rarely.

For the most part, Texans seem to see immigrants as adding to the diverse skills in the labor market, increasing the size of the economic pie for all of the state’s residents, rather than acting as a drain on fixed resources.

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Swine Flu and Federalism

As it now appears that H1N1 influenza is probably not going to be a highly lethal worldwide pandemic, we are left with an opportunity to evaluate our available response mechanisms in the event of a more serious medical threat.

As Tyler Cowen writes in his recently published issue of Mercatus On Policy, “Detecting a pandemic, instituting protective measures, and applying treatment all require the effective cooperation of many individuals and institutions…. Local health-care institutions must therefore be both free and able to respond to crises.” A decentralized response to minimizing the spread of disease is the best option that we have because local knowledge is crucial to distribute medical supplies and to spread information about treatment and prevention of illness in communities across the country.

Despite the practical need for city and regional governments to take over leadership during health disasters, the swine flu outbreak has demonstrated that around the world, national governments tend to take more activist roles during times of fear. In Mexico, President Felipe Calderon took executive action to shut down non-essential government work in Mexico City and asked to “shut their doors to reduce the spread of infection” across the country.

While this response may seem Picture of a piglet warranted, it has come at a high economic cost by cutting down productivity in Mexico during a recession.  Without President Calderon’s warnings, some municipalities may have determined that business as usual was appropriate if swine flu was not directly impacting their residents. In Egypt, a much more costly political decision is now widely judged to have been an overreaction: the Egyptian government required the slaughter of all of the nation’s pigs, even though there are no known cases of H1N1 flu in Egypt, and the virus is not spread by eating contaminated meat.  This incident exemplifies the bluntness of nationwide policy actions where local governments could have made more nuanced decisions in crisis situations.

The World Health Organization advises, “Scientific research based on mathematical modeling indicates that restricting travel will be of limited or no benefit in stopping the spread of disease.  Historical records of previous influenza pandemics, as well as experience with SARS, have validated this point.”  While the temptation to block out illnesses along national borders is strong, as exhibited by calls to close the U.S.-Mexican border during this outbreak, viruses do not recognize political boundaries, and attempting to take such action at the national level would direct scarce resources away from the local level where they could be used to treat and prevent illness on a case-by-case basis.

Thankfully, Dr. Richard Besser, acting head of the Center for Disease Control and Prevention, has so far dealt with this public health threat by emphasizing the importance of community preparedness and avoiding making any statements that could cause mass panic.

Thankfully, the H1N1 flu virus appears to be much less fatal and less contagious than the catastrophic Spanish flu of 1918 on which much of our knowledge of contagious disease management is based.  In the event of a more serious virus, the federal government can be of assistance in funding medical research and vaccine stockpiles, but dissemination of medicine and information at the local level must be permitted by a federal government which avoids attempts at micromanagement.