Volume 5, Number 125
28 June 2005

Leadings

by Jack Powelson

Dear Friends, 

Inter-Mountain Yearly Meeting's keynote topic (2005) was "Leadings." Unfortunately, I missed the keynote speaker because I was taking Robin (my wife) to the hospital for a heart problem (she's okay now). But Friends were talking afterward about leadings, and I had many conversations.

Announcement

The Quaker Economist announces with pride and pleasure the online publication of A History of Wealth and Poverty: Why Some Nations are Rich and Many Poor, by Jack Powelson.

Originally published in 1994 by the University of Michigan Press as Centuries of Economic Endeavor, this new electronic edition is now available to the public at no cost. Click here to see the Table of Contents.

Every day, one young girl was wearing a traditional Quaker dress and bonnet. Why, I asked her? "Because," she replied with a smile, "God told me to." One Quaker said he favored forgiving debts of Third World countries, because "Jesus forgave." I wondered whether accepting the leadings of God or Jesus means that Quakers no longer think for ourselves.

Let me illustrate.

Minimum wage. Many Friends are led to demand a higher minimum wage, because workers do not earn enough on which to live. But the history of minimum wage shows that it causes unemployment, is racially prejudiced, brings inflation, and finally leaves the purchasing power of workers about where it was before. It does the first because, with higher wages to pay, employers shift to machines (like the computer) and fire (or fail to hire) workers. It does the second because the ones they fire (or do not hire) are usually the minorities against whom they are prejudiced. It does the third because workers culturally know their places in a hierarchy, and to keep them they demand higher wages up the line. It does the fourth because higher wages cause higher prices, and workers ultimately have no more purchasing power than earlier. (Yes, I'm an economist, and I know some economic history.) Though the sequence is not exact, all this is generally what has happened in economic history. In one case of higher minimum wages in the United States annually for two decades, the unemployment of Blacks went up from less than 10% to more than 40%. (Other factors may have been at work, but surely wages were one cause.)

Forgiving debts. On June 11, the "Big Eight" agreed to cancel $40 billion of debts of many countries in Latin America and Africa to the World Bank and other international institutions, provided their governments agree to an anti-corruption campaign and other "good" practices. "Everyone" agrees that these debts would never be paid anyway, but the countries were nevertheless paying interest annually (out of new loans from the Word Bank, of course). To prevent losses to international institutions (mainly the World Bank), the Big Eight governments promised them grants in compensation.

A debt is a contract, and whoever breaks a contract, for whatever reason, becomes "branded" in the international debt market. That does not mean they may never borrow again, but it does mean that incoming investment will be curtailed, as it now is in Argentina and Bolivia. But investors do not believe that "good government practices" can be imposed by an outsider anyway, and neither do I. There is, however, a precedent in international law that a succeeding government may renege if a dictator borrows, pockets the money, and vanishes.

The Argentines defaulted on their government debt because of their own profligacy, and the Bolivian government canceled an unpopular water contract with a U.S. company. It was not a good contract, and the people were right to protest. But these exceptions matter little in the international economy. Debts must be paid and contracts honored, or much-needed foreign investment will not be forthcoming. One Quaker at Inter-Mountain Yearly Meeting told me he was "led" to forgive debts because "Jesus forgave." I wonder if Friends are led (by God or Jesus) to ask for policies that will damage the very countries they wish to protect.

My proposal, instead, is to form an international bankruptcy court to determine, country by country, how much can be repaid and who will suffer the losses, just like a domestic bankruptcy court. Countries going bankrupt will be "branded" in international finance just as bankrupt people are branded in domestic finance, but that cannot be helped.

Outsourcing. For decades the United States has been assisting Third-World countries financially. Now, suddenly, we are "outsourcing" jobs to, say, India.  Outsourcing is the only way in which Indian wages can rise (the aid was minimal and helped little). Yet some are led to oppose outsourcing; we prefer to keep American jobs for American workers (and pay higher prices as a result). By the way, the very firms that outsource also "insource" by hiring more skilled foreign workers than the unskilled jobs they outsource.  But outsourcing is not the only reason for unemployment. Our employment is held down by machinery (see two paragraphs above). The bank's teller machines make it unnecessary to hire so many live tellers, and online buying cuts down the number of store clerks needed. We do not seem to complain about these, however.

Anti-globalization. Many Friends have leadings against globalization, thinking that if we globalize, multinational corporations (MNCs) will "rule" the world. In fact, those nations that have globalized (freeing trade and easing the entry for MNCs) are the very ones that have increased the income of their poor, while for those that have not done so, the poor remain in poverty. Consider the cases of South Korea versus North, or Taiwan and Hong Kong versus mainland China, or Singapore versus Indonesia.

Multinational corporations. Many Friends are led to believe that MNCs abuse the poor abroad. In fact, MNCs provide jobs, raise wages (sometimes 100% higher), and supply social services (housing, education) much more than do local corporations. They follow this policy because it brings them the best workers. To most residents in less developed countries — have you asked them? — a job with an MNC is a plum.

Many Bolivians are protesting that newly-discovered gas should be kept in the ground and not sold to MNCs. As a result, that is where it remains, and the country is in an uproar. They say the price will rise in the future, but many economists think otherwise. First, it would have to increase about 7% a year to equal alternative investment possibilities. Second, some economists believe the price of gas will fall because alternative means of energy will be discovered. What are you led to believe?

Work conditions in trade agreements. Many Friends are led to demand that trade agreements be conditioned on good working conditions and provision of social services. All well and good, except that history does not work that way. Historically, trade with others increases the incomes of both parties as well as the trust for each other. Only when their incomes are increased do they provide the social services and higher wages.

How to raise the incomes of the poor. Besides economic growth, the only way to increase the incomes of the poor in less developed countries is to improve their education and skills. In some ways this is happening, as in micro-lending. But it will not happen by Quakers (or others) being led to interfere with international policy in ways that seem "good" but ultimately are adverse to the poor.

Sincerely your friend,

Jack Powelson


Readers' Comments:

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So nice to know that thinking like "an economist" has such easy answers, and, obviously no debate among economists. If you really want us to be thinkers, it might be useful to present a variety of thinking about solutions and various possibilities. (On a personal note: So happy that your wife is better. Must have been a stressful beginning to Inter-Mountain Meeting.)

— Barbara Seidel, Gwynedd Monthly Meeting.


Outstanding letter! Thank you for summarizing these issues so succinctly. I hope to jump-start an economics discussion with my sister by sending your letter to her. Thanks again for your efforts with TQE. Glad to hear Robin's doing better now, too.

— Jennifer Mukhtiar, Minneapolis, MN (formerly Jennifer Miller of the Salt Lake Monthly Meeting).


Thanks for this "pocket powelson" synopsis of economic issues. These are complex topics for me to absorb and you do a good job of making them understandable. One of the reasons I have been drawn to these ideas is my association with 3 successive work placements in the printing industry. Each placement was with a company run by entrepreneurs who built the company from the ground up. They were successful enterprises because the owners worked long hours and took great (but intelligent) risks to provide trustworthy products for their customers. They also paid their workers well which supported their business goals.

This has led me to see that one of the true causes of wealth in a society is the "ambitious" entrepreneur. Not a figure whom most Quakers that I know feel comfortable with, but perhaps one which we should be seeking ways to support, both here and abroad.

— Rich Ailes, Middletown Monthly Meeting, Lima, PA.


1.  You are 110% right that an international bankruptcy court is a better way out for highly indebted poor countries, than "debt forgiveness".

2.  However, there also should be provision for writing down individual loans, or re-setting lending rates, where projects have no performed as appraised; and ex-post interest rates prove to be usurious.

3.  Billions of dollars have been lent by the World Bank on the basis of project appraisal documents projecting great rates of return, which have not materialized. Is this ethically the responsibility of the lender or the borrower? With its claim to technical excellence the World Bank clearly cannot claim ignorance. The Bank knew the regimes to which it was lending, and at any time could cancel a loan due to non-fulfilment of lending conditions. Clearly the World Bank would claim (and rightly) to have more experienced and qualified technical staff than the borrowing countries. Surely it is the Bank, not the country to which we should turn to pay for failed investments? And, indeed the much heralded "poor country debt forgiveness" is a bail out of the World Bank and other multilateral aid agencies. None of the "forgiven" money will actually flow to poor countries, much less the poor (Bob Geldorf and others notwithstanding).

4.  If the World Bank is to be allowed to lend to countries whose debt has been written off, it should be under a new lending instrument where some of the risk of project failure is born by the Bank.

5.  You might be interested in my paper "The World Bank and Poverty: Cause or Cure?" (click here to download a copy in PDF format), in which I show that poor borrowing policies by the Bank lead to developing countries having to repay $60 billion more (in US dollars) than they borrowed (in US dollars). For decades the Bank had a policy of minimizing the interest rate at which it borrowed, with the "no brainer" result that it borrowed currencies that the markets (rightly) expected to appreciate in value. And, as usual, the market turned out to be right. Sixty billion dollars later the Bank now pursues a more sophisticated borrowing strategy.

— Wilfred Candler, Annapolis Friends Meeting.


In the late 17th and early 18th centure, Friends were severely discriminated against through governmental action. The professions of the time were also discriminatory. Freinds were barred from being doctors, professors, lawyers, and many other lucrative and emerging middle class occupations. Thus many were led to pursue commerce. Living their faith, they were good employers and concerned citizens, as well as much more honest than many of their peers in business. These very practices created great opportunity for many, and generated wealth and higher overall standards of education, health and other measures.

Today many Friends are led to enter the very professions that had historically been closed. Few are engaged in commerce or industry. Lacking the first-hand knowledge and experience of applied economics (that is, running an enterprise and creating employment and opportunity), many of our Friends are called to support policies based on their intent rather than on their practical outcome. Thus our continued need to engage in the conversation and educate ourselves. But I do not want to engage in that conversation if I am expected to make arguments both for and against open markets and free trade. Proclaiming and educating regarding the overall benefit of pursuing these policies in a balanced institutional framework is a leading for me.

— Christopher Viavant, Utah Information Systems Project Director, Wasatch Homeless Health Care, Inc.


As a large investor in the bonds of poor countries, I favor the establishment of an international bankruptcy court. Such a court would have powers similar to bankruptcy courts in the developed world.  For example, the court would make sure that all creditors are treated fairly in a debt restructuring, and not allow some debt holders to do much better than others. (Currently, governement and multilateral creditors demand better payment terms from debtors than private sector creditors do. The IMF in particluar insists on getting paid in full, even though legally its claims are not senior to anyone else's.)

Such a court would also need the power to prevent fraudulent conveyance of sovereign assets to politically favored parties, and it would need the power to make sure that the sovereign doesn't throw too much money away on financially imprudent welfare, pension and medical care schemes.

The probability of such a court coming into existence is zero.  No debtor country would agree to be bound by its rulings, and no favored creditor would either.

— Tom Cooper, Lincoln, MA.


Am I getting a fundamentalist economic course here? Every item in TQE #125 sounds like an apologist for the corporate Robber Baron which is the main cause of today's Global economic inequality (and many more say that they are the root cause for the Bushwhacked Evil Empire's imperialist ventures since 9-11). I hope to see sounder economic lessons here in the future! Peace, Aloha and forward to a new Collaborative & Collective future World.

— Danny Li

TQE #99, entitled "How I learned economics," tells the story of how Jack Powelson learned the economics lessons to which you object. I encourage you to read that story, and perhaps others in Jack's series of memoirs on his experiences as a consultant to Latin American governments. — Loren Cobb.


Your comment on Bolivian natural gas does not seem to square with the statement quoted below from an economics professor living and working in Bolivia. You say the gas is newly discovered, he says that it was privatised in the 1990's. That makes it between 15 and 5 years ago.  When you say 'newly discovered,' do you mean last year or 10 years ago? Of course I don't know whether Professor Teran is any more qualified to speak on this issue than yourself.  No doubt you know more about him than I do.  However, having introduced the subject in TQE #125 I would be most grateful if you would print and pass comment on Professor Teran's  letter to the New York Times for my benefit and for all other readers of TQE.

— Eric Walker,  Ipswich Quaker Meeting, UK.

Statement by Prof. Roberto Fernando Terán, Dept of Economics, University of San Simón, Cochabamba, Bolivia:

The Times’ coverage of the Bolivian debate over gas and oil (Bolivia Epitomizes Fight for Natural Resources, May 23, 2005) oversimplifies the issues and leaves readers with the false impression that there are not solid reasons behind the popular demand for nationalization.

Why are social movements calling for Bolivia to take back control of its gas and oil?

First, the contracts that gave Bolivia’s gas and oil to foreign energy companies in the 1990s are unconstitutional because they were never approved by the Bolivian Congress, as required by law. Second, those same corruption-driven privatization deals gave away, to foreign companies, proven gas and oil reserves worth more than $11 billion. Third, before privatization, nearly half of the revenues coming into the Bolivian treasury came from the publicly-owned gas and oil industry. Today the foreign oil companies that have replaced that public ownership are contributing less than ten percent and much of that is passed on to Bolivian consumers.

In Bolivia the cost of producing and transporting a barrel of oil is approximately $7. Yet Bolivians are being forced to pay world market prices for our own oil, currently $48 per barrel.

Like any other country, we in Bolivia do not want to sell our gas and oil in raw form at bargain prices. Countries reap the real economic benefits from their gas and oil when they industrialize domestically and sell it as processed products – gasoline, plastic, electricity, etc. Foreign oil companies want to keep Bolivia, South America’s poorest nation, from doing that.

Why would the people of any nation with severe unemployment and a lack of economic opportunity willingly accept such an arrangement? It should be no surprise that millions of Bolivians are not willing to accept the give away of the nation’s oil and gas.

Reply: Jack was referring specifically to the natural gas discoveries of 2002 (see TQE #85). For the record, however, Bolivia began producing natural gas in 1960, and exporting it in 1975. Exploration for natural gas has been in progress since at least 1950, if not earlier. New reserves are added to the Bolivian estimated total every year, as new fields are discovered and old fields are resurveyed using improved methods. Reserves increased from 33 billion cubic meters in 1988 to 1.5 trillion in 2005, a growth rate of better than 25% per year for 17 years. The current debate in Bolivia was triggered by this overall increase, and by speculation that the ultimate amount of recoverable natural gas will be much higher than proven reserves known today.

There is no question that most if not all of the Bolivian government's negotiations with private industry over the entire last century have had a striking lack of transparency, and post-hoc evidence of massive corruption and embezzlement. Given this abysmal record, it is not surprising that Bolivians deeply distrust private industry, their central government, and capitalism generally. In my personal opinion, nothing will improve until the systemic and structural causes of corruption are corrected. Without a professional civil service and judicial system, insulated from political and financial influence, no part of Bolivian government will function as intended, no matter which political party is in power. The fate of Bolivian natural gas is merely the latest consequence of this insidious pattern. — Loren Cobb, editor.


Dear Jack: You got a lot off your chest in TQE #125, but I found your discussion incomplete on three items.

Minimum wage. Your free-market fundamentalist views and conclusions ignore the way real wage markets work. When minimum wage increases force employers to increase wages to their low paid employees, they respond by hiring better educated, more qualified employees to replace their least qualified workers, and try to increase productivity per worker based on their better qualifications. I find the economic incentives of minimum wages — to get more education and be better qualified for higher paying jobs, and to increase productivity of the firm — to be beneficial from the viewpoint of the economy as a whole. Any resulting drop in employment can be partially offset by increases in aggregate demand in the economy. Modest increases in minimum wages, such as those we have had in the past few decades, have little macroeconomic effect on labor markets, but do help to improve wage situations in backwaters where poorly educated people are exploited. Some Princeton economists studied what happened to fast food employment in New Jersey and Pennsylvania, when New Jersey raised its minimum wage and Pennsylvania did not. They found little or no effects on employment in the two states.

Defaults and bankrupcy in international debt. I think your readers should know that Anne Krueger, after she was named Deputy Managing Director of the IMF several years ago, proposed in some detail a mechanism for declaring bankrupcy on sovereign debt. It was given careful consideration by financiers and economists but ultimately did not receive much support; instead new sovereign debt issues now contain clauses making them easier to modify for a 'workout' if default threatens.

Multinational corporations. I doubt that your critics will be convinced that MNCs pay top wages out of the goodness of their hearts! They are transferring new technology from developed countries requiring fewer but well qualified workers. It is often very costly and difficult to adapt new technology to a lower priced labor market, so the corporations must hire off the top of the labor market in the developing country to get the reliable skilled workers they must have to make their technology work.

— William G. Rhoads, Germantown (PA) Monthly Meeting.


As a Friend who thinks for himself, I have chosen to follow the teachings of Yeshua as I understand them through my own personal studies and those confirmed in leadings from the Light.

What I have come to understand is Yeshua's ministry included a social and economic activism that called for all his followers to seek to bring about a state of perpetual Jubilee.

He doesn't tell us, however, as some have suggested that we give up personal possessions in favor of a communal arrangement. He does, in the same manner practiced by Friends, submit queries on the nature of our economic activity. Is it morally defensible, for example, to pay an adult employee working full-time the minimum wage knowing that it is not a living wage? Can even the hardest working senior executive justify before God laying off thousands of workers while continuing to take home the sizeable salary that comes with his/her job?

How does a Friend who believes God's laws supercedes man's (another example being a member of a peace church) find a way to justify following your economic advice that seems so distant from Yeshua's call for Jubilee?

I'd be more interested (having read many of your letters) to know, not how you would fix economics as it stands today, but how you would suggest we achieve what God wants.

— George Anderson, Rahway/Plainfield Monthly Meeting. [26 July 2005]

Reply: What if you were a legislator, and could set any minimum wage you wanted? Why not set it to a living wage? The problem is that it would change the mix of capital versus labor. Work which is currently being done by people would become more expensive. Machinery which could do the job would become affordable. Many people would lose their jobs. Some might eventually be able to find other jobs, but the disruption alone would be bad enough. The informal economy, which does not pay attention to rules and regulations, would grow.

Think what that minimum wage would do to customers. The money to pay the minimum wage doesn't come from nowhere. It comes from customers. Anybody who currently earns the new living minimum wage would find their costs increase. If they mostly shop at stores that employ minimum wage workers, they would find that their entire pay increase would go to pay the employees' no-longer-quite-living minimum wage.

What if you could set any prices you wanted to any level. How would you set wages and prices so that you have your desired Jubilee? What guidance could you rely on to set your wages and prices not too high and not too low? How would you know when you had made a mistake?

— Russ Nelson, St. Lawrence Valley (NY) Friends Meeting, and publisher of The Quaker Economist.

Editor's Note: The above comment and reply were the beginning of an extended email discussion. The purpose of The Quaker Economist is to stimulate discussions, but not to reproduce them in full on its pages. — Loren Cobb.


I have begun to think, over the last 10-15 years, that what is needed is a "maximum wage." I have read that, until relatively recently (I'm over 60), the average CEO made about 100 times the wage of an average worker in his or her company.

My wife and I moved to Portland, Oregon, in part to start a Friends School. However, our wages have been extremely low for six years because we are ambitious to provide an excellent Friends Education to students who, regardless of economic status, do not work well in classes of around 30 with everyone doing the same thing at the same time. Talk about learning to not think for oneself!

While I also believe that ambitious entrepreneurs are needed, it does seem obscene that many in top management can make millions while most workers make under $50,000. I would think that a maximum salary for top management pegged to the average salary of the workers would enable the lifting of well over 90% of the workers wages. In Peace and Friendship,

— Thomas E. Smith, PhD, Associate Head, Portland Friends School.


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PUBLISHER AND EDITORIAL BOARD

Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting.

Editorial Board

  • Loren Cobb, Boulder (CO) Friends Meeting, Editor.
  • Chuck Fager, Director, Quaker House, Fayetteville, NC.
  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Valerie Ireland, Boulder (CO) Friends Meeting.
  • Jack Powelson, Boulder (CO) Meeting of Friends.
  • Norval Reece, Newtown (PA) Friends Meeting.
  • J.D. von Pischke, a Friend from Reston, VA.
  • John Spears, Princeton (NJ) Friends Meeting.
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.


Copyright © 2005 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.


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