Note: I thought readers might be interested in an article that I wrote for the Viewpoint section of Friends Journal (August, 2004). Comments on this article should be sent to Friends Journal, 1216 Arch Street, 2A, Philadelphia, PA 19107-2835, not to TQE. Thank you. Jack
Economics by Innuendo and Error
by Jack Powelson
Sometimes Friends, in their eagerness to be of assistance to the less fortunate, oversimplify factual circumstances and over-sentimentalize the solutions. While we as Friends are correct to sympathize with those in need and do what we can to help, we must always strive to act in light of actual circumstances of various situations in order to offer real, long-term solutions. Otherwise, we risk being counterproductive making the problems worse.
This eagerness has led to one "skill" that our Quaker organizations have handsomely learned: economics by innuendo and error. This technique consists of making sly remarks about the economy, emphasizing a particular slant with which the reading audience is presumed to agree. It is often accompanied by errors in economic history that have been popularly believed. David Morse's "A Quaker Response to Economic Globalization" (Friends Journal, May 2004) exhibits both these innuendoes and the errors.
Let me start with the incorrect statements. "What our press touts as 'free trade' is, in reality, an elaborate set of rules written by large-scale international organizations to give them a competitive advantage over small-scale local operations." (p. 9) Utterly untrue.
The rules of free trade are worked out by consulting governments, with the World Trade Organization. The WTO has often reached decisions that affect "large-scale international organizations" adversely. The decision in the "foreign trade corporations" case went against the United States, and if implemented properly, multinational corporations will lose billions of dollars of tax advantages they once held. So also the decision on steel tariffs forced President Bush to renounce these ill-advised tariffs, a move that was very costly to U.S. steel companies. In April 2004 the WTO decided against American cotton farmers by supporting Brazil's contention that U.S. subsidies were illegal by international trade rules. If the U.S. does not withdraw the subsidies, and if the decision stands despite U.S. appeals most WTO decisions do other countries will be authorized to retaliate by putting heavy tariffs on U.S. exports. Thus some WTO decisions favor corporations; others disfavor them. There is no general pattern other than an honest adherence to international trade rules agreed by about 147 member countries.
Another falsehood (p. 8): "How do we picture the windowless carpet factories in Nepal, where young children work in bondage and sleep under their looms; the slave-worked chocolate plantations; the sweatshops where Nike shoes are produced?" David presents this picture without naming a single such factory. It is my understanding that these children do not work under bondage (except to their parents), and I know of no slave-worked chocolate plantations. These jobs are taken by free choice, meaning that the alternative (in the eyes of the workers) is worse.
"Sweatshops," as we know them, are the universal type of factory employing unskilled workers throughout the less developed world. They are not caused by U.S. corporate policies. If we boycott them, we drive their workers into even more harmful conditions (prostitution, factories less safe, etc.) Economic studies show that this is the case. David does not mention these studies. The way to upgrade labor (and wages) is through training to increase worker skills, not through Quakers wringing our hands thousands of miles away.
Here is a misrepresentation (not necessarily untrue): "NAFTA created low-paying assembly jobs for Mexicans. But some 200,000 of those jobs disappeared since 2001 mostly to China, where labor is paid one-fourth as much." Why? Because Mexican wages had risen to become higher than Chinese. And what does David have against the Chinese, who need jobs as much as the Mexicans? So long as they take these jobs voluntarily (which they do), they believe they are better than alternative work.
Here is another case: "Bolivia, for instance, [insists] that it reduce inflation by tightening the money supply..." As economic advisor to the Bolivian National Stabilization Council in 1960 (to fight inflation), I have a different perspective. The Bolivian government had printed money to feed its cronies. It was loaned funds by the United States and the International Monetary Fund, provided that it stop that practice and balance its budget. To do so, it required cutting down on government expenditures, just as any bank would care about the credit rating of its borrowers. I was there to monitor that this happened.
Should I also admit that for eight years I worked for the International Monetary Fund? I can assure you that my colleagues (who were apparently not consulted for this article) and I never considered the Fund to be an imperialist organization. Its duty was to help governments whose bad (corrupt) policies had caused balance-of-payments deficits. We insisted, in exchange for loans, that good (honest) policies replace the bad. No government was then nor is today forced to borrow from the Fund.
Some minor errors also occur in David's article, such as that the World Trade Organization was "Bretton-Woods inspired." The WTO was actually founded fifty years later than the Bretton Woods conference that created the IMF and World Bank.
David refers (p. 7) to his own earlier article, "The Message of Seattle," in Friends Journal, March 2000. Possibly to be complete, he also mentions Brewster Grace's "Viewpoint" in the May 2000 issue. (Brewster was in the Quaker United Nations Office in Geneva.) But David does not mention that Brewster's article was intended to correct the errors of David's article many of which are repeated in the May 2004 FJ. In fact, Brewster's article opens with the sentence, "David Morse's article on the protests in Seattle contains a number of factual errors about the World Trade Organization."
Let me now turn to the innuendoes. "We must identify the seeds of violence that are scattered in the wake of U.S.-style hypercapitalism when it is forced on the world" (p. 8). This innuendo could be refuted with examples, but it should never have been made in the first place without examples.
Another innuendo: "Clearly, we need to examine as a society what is meant by such terms as 'marginal' and 'efficiency.' Do they reflect the social costs and the environmental consequences? (p. 9)" These are technical terms in economics, that have specific meanings. Sometimes they reflect social costs and environmental consequences, and sometimes they do not, depending on the author who uses them. Here, however, David hints that they are always used as tools of a hypercapitalist society a complete distortion.
Remaining innuendoes, which permeate the article, are too long to merit quotation here.
The worst characteristic of this article is that it assumes (by innuendo) that all Quakers agree with this author. His position is therefore said to be a "Quakerly" one. But there is nothing Quakerly about it. I have long criticized the politicization of Quakers. This article is but one more example.
I wish to inform the Friends Journal that I, along with many other Quaker economists, am available for consultation and review in case any article on economics is submitted.
Jack Powelson is Emeritus Professor of Economics, at the University of Colorado. He has published extensively on issues of poverty and economic development. He is a member of Boulder (CO) Meeting of Friends and is the chief editor of The Quaker Economist.
Copyright © 2004 Friends Publishing Corporation. Reproduced with permission.
How to Lie with Statistics
In 1954 Darrell Huff published a book, How to Lie with Statistics. Among the many ways, he told about selective perception (choosing only the events that agree with your thesis). When I was teaching statistics in the 1980s I often referred to Huff. As part of a review I wrote of another book: ?... the reading was a painful reminder of how development theory and practice has been self-serving, ideological, and unscientific. For economists, it served our practice; for ideologues, it served the ideology; for politicians it served party objectives. No one was interested in a theory of development with no other objective than to understand how it occurs? (Ethics, 10/1988:210). (Actually, I was thinking of the development surge since World War II. Before that war, both Adam Smith and Joseph Schumpeter, the latter a teacher of mine, had written objective theories of economic development.) To fill this gap, I wrote Centuries of Economic Endeavor (Michigan University, 1994).
More on democracy
My friend Bruce Hawkins (see Readers' Comments in TQE #106) really caught me short by mentioning driving on the right (or left) when I said I would prefer "no regulations." This is a point I should have made: There is a difference between "consensus" regulations, adopted after a practice has become commonly accepted, and those that are drafted to get the entire public to behave in some ways that politicians or interest groups feel is good for all.
I was wrong to try to enumerate the qualities of democracy. Instead, in TQE #106 I should have emphasized that whatever they may be, there are certain values held by peoples in a democracy that are not held by others. Among these is independence, such as taking care of oneself. I feel these values are being eroded in modern "democracies" with the welfare state, social security, health care, employment insurance, and similar services offered by employers and governments. As they gain more and more power, the regulators will consider themselves God. "What," they will say, "a cruel dictator in Iraq? God can handle that! Send over the bombers."
In her autobiography, Lillian Gish praised her father who had deserted his family. She became an actress at age 5, for $10 a week, to support her mother. She often had to sleep on the floor in strange cities. Insecurity was a great gift [from my father]. I think it taught me to work as if everything depended on me and pray as if everything depended on God.
How could a democracy not depend on its government and still be a caring society? Easy. Just determine how much income a family should have, to buy all the specified services on private markets, and supplement it with a negative income tax for those that do not have enough. But don't give them more than necessary if they do not work for it. A "negative income tax" occurs when a government pays out to those with incomes smaller than a certain amount (you decide how much!) while it taxes those with higher incomes.
Who cheats and lies?
Why should people buy on the market when private businesses cheat and lie to their employees and customers? Is not the solution to Enron the Sarbanes-Oxley regulatory law? If so, why is the solution to Bush (if that's the way you feel about him) to elect Kerry and give him the same powers as Bush? It seems odd to me that many Quakers appear to believe that corporations are untrustworthy but governments are not. Governments also lie and cheat when they can. Our task now is to create a personal morality, applicable to government and private sector alike, that excludes lying and cheating.
How? I believe partly though religion. But also, by letting people choose what they want and pay for it in the private market. Keep down corruption by competition, not by government monopolies and regulation. Use a negative income tax to supplement the incomes of the poor, and let them spend it as they will, and learn the consequences (just like the rest of us).
One reader (see below) told me I would not feel the same way if regulation had saved my child from the deformities of thalidomide. I don't know how I would feel. But I do believe it is the parent's responsibility not to take dangerous drugs. How are parents to know, except from government? Many ways. One is to subscribe to a research group of scientists who tell parents what drugs are dangerous, what are not, and how scrupulous are the proofs. The present reader obviously depends on bureaucrats for that information. In the case of thalidomide Americans lucked out but Europeans did not.
One reader suggested that charismatic individuals are necessary in a democracy. Quite probably, but charismatic individuals can be wrong as well as right. Abraham Lincoln was a charismatic president. He ordered General Sherman to burn Atlanta and lay waste every farm from Atlanta to the sea, feeding his troops on the spoils and leaving farmers to starve. To my mind, that was wrong. But Martin Luther King and Gandhi were also charismatic individuals. Both had spiritual power, not political power. A charismatic leader may be needed to direct a group or a religion (except Quakers), not necessarily to manage a country.
Cost of regulation
Several readers have challenged my judgment in saying that the cost of government regulations exceeded the benefits. One (see below) sent me a 234-page government document showing how benefits exceed costs. (Sorry, I don't have time to read it.) Why would the government perceive anything else? Well, much depends on which costs are covered. Doctors' time filling out forms? The loss of medical services from doctors and nurses who have quit? The number of patients who have died because of delays to perform cumbersome procedures that may add little value to a new drug?
I generally put a statistical document to the following tests: (1) Does the author gain a benefit from his or her conclusion? (2) Does the report seem biased? (3) Does any other report cover the same territory? Since the answer is "yes" on all three counts, I quote from my own book (The Moral Economy, 1998, page 152):
"The best estimate of regulatory burden, compiled by Thomas Hopkins of the Rochester Institute of Technology, puts the costs of complying with federal rules in 1995 at $668 billion . . . Mr. Hopkins's figures are conservative. They cover only the burden of complying with rules for which cost studies have been done. Some costs, such as the loss in productivity caused when the new regulation forces firms to adjust, are left out altogether. The same study shows that 'in 1995 federal regulation cost the average household $7,000 (more than the average income-tax bill, which was $6,000 last year.' (This does not take into account state and local regulations.)
The Economist (7/27/96) reports: ?Multiple levels of authority produce endless reels of red tape, from the state, county, and city governments to semi-autonomous legal agencies charged with controlling pollution and other evils. All produce rules which overlap, replicate, and on occasion, contradict one another.? One economist (I forget who) built a car to meet all the safety requirements in force anywhere in the country. It was as heavy as an armored tank and would not move.
Well, maybe that’s enough to chew on for the time being.
Sincerely your friend,
Note: I have been asked to provide a brief biographical sketch to accompany my Letters/Opinions. Hence the following, courtesy of Norval Reece, a TQE Advisory Board member:
"Jack Powelson. Professor Emeritus, University of Colorado. Educated at Andover (prep school), Harvard BA, and PhD in economics, and MBA from the Wharton School, University of Pennsylvania. Certified Public Accountant in the State of New York. Taught at Harvard, George Washington, Johns Hopkins, San Andres in La Paz (Bolivia), Pittsburgh and Colorado. Professional assignments or university lectures in more than forty countries of Europe, Asia, Africa, and Latin America. Author of eighteen books, published by the Universities of Princeton and Michigan as well as by McGraw Hill, Westview Press, Harcourt Brace Jovanovich, International Labor Office, and his own publishing company. Became a pacifist in World War II, before becoming a Quaker in 1944. Conducted workshops at Friends General Conference and at Friends Meetings throughout the USA, and in Australia and New Zealand. For more information, click here to see his vita.
"Jack Powelson's Letters in TQE reflect his interest in sharing his economic observations of over half a century with Quakers and others. To agree, disagree and/or comment on Jack's opinions, read ABOUT TQE (below)."
Norval Reece, Newtown (PA) Friends Meeting.
I respect your vita and experience as much as anyone. But did no one along the way insist on the need to deal fairly with positions you criticize, if you wish your criticism to be taken seriously? You quote from your book a bit of a study assessing the cost of various regulations. Somehow this is supposed to prove that the costs outweigh the benefits. But the quote says nothing about the benefits, or the balance between them. Ditto for the tendentious, undocumented clip from The Economist, which on this topic is like quoting the old Pravda on the glories of socialist production.
Chuck Fager, Director, Friends House, Fayetteville (NC).
Reply: You seem to think I am the same 55-year-old you met almost thirty years ago. I am not, and I propose in TQE only to give my observations on over sixty years of economics experience. I am too tired to research again all sources, as I used to do during my book-writing years. I believe your meaning for "deal fairly" is to argue what I do not think to be true. My book, The Moral Economy, contains both sides of every question discussed, and then tells why on balance I come down on whatever side I do. (I just don't repeat all that in TQE.)
Contrary to your comments here and on previous occasions, I have found The Economist to be a reliable source, and my quote from it corresponds to my observations. Your friend, Jack
As always, a delight to read. I was in Denver on Saturday, but did not have time to run up to Boulder or I would have scheduled a visit. Schumpeter was one of your teachers? Always my favorite in studies of economics... I spent the night as a guest of Marian Davis. My concurrence with your economic beliefs was a part of our chat, very delightful.
Christopher Viavant, Salt Lake City (UT) Meeting
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Copyright © 2004 by John P. Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.