Fernandez-Villaverde and Ohanian on European Economic Errors for the U.S. to Avoid

Jesus Fernandez-Villaverde and Lee Ohanian, "European Economic Errors for the U.S. to Avoid," The Wall Street Journal, December 29, 2014

The story of the Continent’s moribund economy began long before the European Central Bank was founded.

The euro area’s gross domestic product grew a minuscule 0.2% in the third quarter, reflecting very weak performance in Germany (0.1%), France (0.3%) and Italy (minus 0.1%). Spain was the rock star of the large countries, clocking in at 0.5% growth. That investors reacted positively to this abysmal news shows how inured Europeans have become to economic stagnation.

Debates about how to revive the Continent have centered on the European Central Bank’s monetary policy, and on restoring fiscal responsibility in the euro area’s more profligate governments. But the story of Europe’s moribund economy goes back many years before there was an ECB, or before Greece, Spain and Portugal had piled up enormous debt. And that story has uncomfortable relevance for the U.S., if the American economy is going to sustain the encouraging 5% third-quarter GDP growth reported earlier this month.

Europe grew much faster than the U.S. in the decades after World War II. European firms rapidly adopted and developed new technologies and became vigorous competitors. Its people worked longer hours than in the U.S.

France’s per capita GDP, for example, rose from only about half of the U.S. level in 1950 to nearly 80% by 1980, according to data from the Penn World Table, the standard source for international comparisons. But the country began to slide almost immediately following the election of President François Mitterrand, head of the French Socialist Party, in 1981. Today, French per capita GDP is, in relation to the U.S., at about the same level as in 1967. A similar pattern holds for Italy, whose post-World War II boom also ended around 1980. Today, Italy’s GDP per capita is slightly below its 1997 level.

What happened? Europe began adopting high-tax, high-spending, high-regulation and competition-restricting policies that depressed the incentives to hire new workers, to invest in new plants and equipment, and to take risks to start new businesses. The result was a large drop in the number of hours employees worked, in business investment, and in the creation of new economic activity and the adoption and development of new technologies.

Total factor productivity growth, which reflects how technological progress and efficiency improvements make capital and labor inputs more productive, is widely agreed upon by economists as the major factor driving long-run living standards. This growth has been negative in the major euro countries—and today total factor productivity is lower in France, Italy, Spain and even Germany than in 1980. By comparison, U.S. total factor productivity is about 35% higher.

An important cause is the failure of European startups to achieve large-scale success. The Economist magazine has noted that between 1976 and 2007 only one Continental European startup, Norway’s Renewable Energy Corp., achieved a level of success (defined by market capitalization) comparable to Microsoft , Apple, Oracle and the other 20 U.S. startups from that period making the Financial Times Index of the world’s 500 largest companies.

A mare’s nest of economic policies impede European business formation. Tax rates are high—France, for instance, collects about 45% of GDP as tax revenue, compared with 24% in the U.S. Then there are the regulation and licensing restrictions that protect incumbent producers and raise barriers to entry. Obtaining a building permit can take years in Italy, and France has made free shipping from Amazon illegal to protect mom-and-pop bookstores. A 2002 study of how nations regulate the entry of new businesses ranked Italy 75th out of 85 countries, sandwiched between Mali and Senegal, and France ranked 71st, trailing Burkina Faso and Malawi, among others.

Returns to venture-capital firms in Europe have averaged only about 2% a year since 1990, according to Thomson Reuters, compared with an average of about 13% in the U.S. Not surprisingly, there is less private venture capital in Europe, where some 40% of venture funding comes from public money. The European Investment Fund, the EU-backed fund that doles out venture capital, chooses businesses influenced by political factors such as country location and industrial sector, rather than on their profit potential.

The lesson of all this—don’t be like Europe—should be clear enough. But U.S. policy makers have ignored it.

American business is facing an ever-increasing pile of regulations and subsidies that protect incumbents but discourage new entry. These range from established hospitals blocking new hospitals through Certificate of Need state laws, to taxicab restrictions that try to block Uber ride-sharing, to an explosion in licensing-board restrictions that make it difficult for average Americans to open small businesses such as auto shops or even hair salons. Meanwhile, subsidies continue to attract investment to uneconomic industries including wind power and solar power.

At the same time, increased marginal tax rates, higher tax rates on capital gains and dividends and the surtax on investment income discourage investment, hiring and new business formation. Since 2008, the U.S. startup rate has declined nearly 20%, and U.S. business sector productivity growth, which has historically grown at 2.5% a year, has only been growing about 0.9% a year since 2010, according to Bureau of Labor Statistics data.

How to help the U.S. economy keep building on its recent growth spurt? Antiquated and restrictive immigration laws that prevent high-skill workers and entrepreneurs from working in the country and starting businesses need to be updated. Corporate tax rates should be lowered while special deductions and loopholes should be eliminated. Overly restrictive regulation that makes it costly to finance small businesses need to be reformed.

In short, incentives to hire, invest and start new businesses need to be a priority, lest the sclerotic U.S. economic growth of the past six years returns and, as in Europe, becomes a permanent condition.

Mr. Fernández-Villaverde is a professor of economics at the University of Pennsylvania. Mr. Ohanian is a professor of economics at UCLA and a senior fellow at the Hoover Institution

Rubin and Turner on the Cost of America’s High Incarceration Rate

Robert Rubin and Nicolas Turner, "The Steep Cost of America’s High Incarceration Rate," The Wall Street Journal, Dec. 25, 2014 4:36 p.m. ET

About one of every 100 U.S. adults is in prison. That’s five to 10 times higher than in Western Europe.

One of us is a former Treasury secretary, the other directs a criminal-justice institute. But we’ve reached the same conclusions. America’s overreliance on incarceration is exacting excessive costs on individuals and communities, as well as on the national economy. Sentences are too long, and parole and probation policies too inflexible. There is too little rehabilitation in prison and inadequate support for life after prison.

Crime itself has a terrible human cost and a serious economic cost. But appropriate punishment for those who are a risk to public safety shouldn’t obscure the vast deficiencies in the criminal-justice system that impose a significant drag on the economy.

The U.S. rate of incarceration, with nearly one of every 100 adults in prison or jail, is five to 10 times higher than the rates in Western Europe and other democracies, according to a groundbreaking, 464-page report released this year by the National Academy of Sciences. America puts people in prison for crimes that other nations don’t, mostly minor drug offenses, and keeps them in prison much longer. Yet these long sentences have had at best a marginal impact on crime reduction.

This is not only a serious humanitarian and social issue, but one with profound economic and fiscal consequences. In an increasingly competitive global economy, equipping Americans for the modern workforce is an economic imperative. Excessive incarceration harms productivity. People in prison are people who aren’t working. And without effective rehabilitation, many are ill-equipped to work after release.

For the more than 600,000 people who leave prison and re-enter society every year, finding employment can be a severe challenge. Prison time carries a social stigma, which makes finding any job, let alone a good job, all too difficult. The Labor Department doesn’t track the unemployment rate for people with prison records.

But a 2006 study by the Independent Committee on Reentry and Employment found that up to 60% of formerly incarcerated people are unemployed one year after release, with their unemployment rates rising to above 65% during the 2008-09 recession, according to a study in the Journal of Correctional Education. And even when they find employment, people who have been incarcerated earn 40% less than people of similar circumstances who have never been imprisoned, according to a study by the Massachusetts Criminal Justice Reform Coalition. Faced with obstacles to gainful employment, it’s no surprise that 43% of people released from prison end up back behind bars within three years, according to a recent Pew study on recidivism.

The costs of incarceration extend across generations. Nearly three million American children have a parent in prison or jail. Growing up with an incarcerated parent can harm childhood development. Research by Pew shows that children with fathers who have been incarcerated are nearly six times more likely to be expelled or suspended from school. Incarceration therefore helps perpetuate the cycle of family poverty and increases the potential for next generation criminal activity. A 2009 study by two Villanova sociologists found that, from 1980 to 2004, the official poverty rate would have fallen by more than 10% had it not been for our nation’s incarceration policies.

Many of the people who end up in prison are already acutely disadvantaged to begin with. In terms of basic education, more than a third of people in prison do not have a high-school diploma or GED, according to the Justice Department. And Columbia University researchers in 2010 found that two-thirds of people in prison struggled with drug addiction before incarceration. A study released in 2006 by the Bureau of Justice Statistics found that 45% of federal prisoners, 56% of state prisoners and 64% of local jail inmates suffered from mental-health problems.

Instead of allowing these disadvantages to fester in prison, we need new policies that are designed to foster positive change, giving those who are incarcerated the skills they need to re-enter society as productive members of the workforce. For example, the government currently bars people in prison from receiving Pell Grants, a counterproductive policy that should be reversed. Substance abuse and mental-health treatment programs, along with educational support, can help people leave prison healthier and better-equipped to make socially productive choices.

Model programs are being piloted at the state level. For example, the Vera Institute of Justice’s Pathways from Prison to Post-Secondary Education project is working with more than 900 students in 14 prisons. The program provides college classes and re-entry support such as financial literacy training, legal services, employment counseling and workshops on family reintegration. A 2013 meta-analysis by RAND has already found that recidivism decreases when a former inmate graduates from college, which also boosts lifetime earning potential.

And clearly, we need significant sentencing and parole reform. There is widespread bipartisan agreement that we are using prison for too many crimes and for too long, with concentrated effects in many communities. One possibility for reform is the Smarter Sentencing Act, introduced by Democratic Sen. Dick Durbin and Republican Sen. Mike Lee, which boasts 30 co-sponsors and was successfully reported out of the Senate Judiciary Committee this spring. The bill’s House companion also enjoys strong bipartisan support. There are also examples of progress in statehouses around the country. In 2013, 35 states passed bills to change some aspect of how their criminal justice systems address sentencing and parole; since 2009, more than 30 states have reformed existing drug laws and sentencing practices, according to reports from Vera this year.

The time has come to make sensible reform in these four areas—sentencing, parole, rehabilitation and re-entry—a national priority. Doing so could accomplish a tremendous amount for families, communities and the U.S. economy.

Mr. Rubin, a former U.S. Treasury secretary, is co-chairman of the Council on Foreign Relations. Mr. Turner is president and director of the Vera Institute of Justice.

Cochrane on An Autopsy for the Keynesians

John Cochrane, An Autopsy for the Keynesians, The Wall Street Journal, December 22, 2014

We were warned that the 2013 sequester meant a recession. Instead, unemployment came down faster than expected.

This year the tide changed in the economy. Growth seems finally to be returning. The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy.

No government is remotely likely to spend trillions of dollars or euros in the name of “stimulus,” financed by blowout borrowing. The euro is intact: Even the Greeks and Italians, after six years of advice that their problems can be solved with one more devaluation and inflation, are sticking with the euro and addressing—however slowly—structural “supply” problems instead.

U.K. Chancellor of the Exchequer George Osborne wrote in these pages Dec. 14 that Keynesians wanting more spending and more borrowing “were wrong in the recovery, and they are wrong now.” The land of John Maynard Keynes and Adam Smith is going with Smith.

Why? In part, because even in economics, you can’t be wrong too many times in a row.

Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral. Deflation would lower demand, causing more deflation, and so on.

It never happened. Zero interest rates and low inflation turn out to be quite a stable state, even in Japan. Yes, Japan is growing more slowly than one might wish, but with 3.5% unemployment and no deflationary spiral, it’s hard to blame slow growth on lack of “demand.”

Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise. George Washington’s doctors probably argued that if they hadn’t bled him, he would have died faster.

With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.

These are only the latest failures. Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.

Still, facts and experience are seldom decisive in economics. Maybe Washington’s doctors are right. There are always confounding influences. Logic matters too. And illogic hurts. Keynesian ideas are also ebbing from policy as sensible people understand how much topsy-turvy magical thinking they require.

Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time.

I suspect policy makers heard this, and said to themselves “That’s how you think the world works? Really?” And stopped listening to such policy advice.

Keynesians tell us not to worry about huge debts, or to default or inflate them away (but please, call it “restructuring” or “repairing balance sheets”). Even the Obama administration has ignored that advice, promising long-run solutions to the debt problem from day one. Europeans have centuries of memories of what happens to governments that don’t pay debts, or who need to borrow for a new emergency but have stiffed their creditors once too often. More debt? Nein danke!

In Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume. That’s a hard sell, so stimulus is routinely dressed in “infrastructure” clothes. Clever. How can anyone who hit a pothole complain about infrastructure spending?

But people feel they’ve been had when they discover that the economics is about wasted spending, and infrastructure was a veneer to get the bill passed. And they smell a rat when they hear economic arguments shaded for partisan politics.

Stimulus advocates: Can you bring yourselves to say that the Keystone XL pipeline, LNG export terminals, nuclear power plants and dams are infrastructure? Can you bring yourselves to mention that the Environmental Protection Agency makes it nearly impossible to build anything in the U.S.? How can you assure us that infrastructure does not mean “crony boondoggle,” or high-speed trains to nowhere?

Now you like roads and bridges. Where were you during decades of opposition to every new road on grounds that they only encouraged suburban “sprawl”? If you repeat in your textbooks how defense spending saved the economy in World War II, why do you support defense cutbacks today? Why is “infrastructure” spending abstract or anecdotal, not a plan for actual, valuable, concrete projects that someone might object to?

Keynesians tell us that “sticky wages” are the big underlying economic problem. But why do they just repeat this story to justify inflation and stimulus? Why do they not advocate policies to undo minimum wages, labor laws, occupational licenses and other regulations that make wages stickier?

Inequality was fashionable this year. But no government in the foreseeable future is going to enact punitive wealth taxes. Europe’s first stab at “austerity” tried big taxes on the wealthy, meaning on those likely to invest, start businesses or hire people. Burned once, Europe is moving in the opposite direction. Magical thinking—that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace—is moving back to the salons.

Yes, there is plenty wrong and plenty to worry about. Growth is too slow, and not enough people are working. Even supporters acknowledge that Dodd-Frank and ObamaCare are a mess. Too many people on the bottom are stuck in terrible education, jobless poverty, and a dysfunctional criminal justice system. But the policy world has abandoned the notion that we can solve our problems with blowout borrowing, wasted spending, inflation, default and high taxes. The policy world is facing the tough tradeoffs that centuries of experience have taught us, not wishing them away.

Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at Stanford University’s Hoover Institution and an adjunct scholar at the Cato Institute.

Henninger on Obama: The Hangover

Daniel Henninger, “Obama: The Hangover,” The Wall Street Journal, November 19, 2014

The Gruber technocracy is a green sludge consuming the Democratic Party. 

Who can forget the Obama acceptance speech in 2008 on a football field in Denver, the nominee standing amid Greek columns and scrolling through a long list of goals to 84,000 Democrats? That was the high. Six years later, the Democrats get the hangover. On Thursday, Mr. Obama will announce his presidency’s only declaration of war—against the Republicans. After describing how he will redesign the U.S. immigration system on his own authority, he’ll fly Friday to Las Vegas.

The remaining two years will be irregular warfare, with Mr. Obama deploying his weapon of choice, the executive order. This essentially turns the presidency into a cruise missile: The president tells the country what to do, and the country does it. 

Before the U.S. political system goes to the mattresses, I’d like to spend a moment discussing Jonathan Gruber, ObamaCare and the American people. 

Jon Gruber is the now-famous ObamaCare designer and explainer-for-hire who said the Affordable Care Act became law because the American people were too stupid to understand what was in it.

Within days, Barack Obama and Nancy Pelosi were throwing Jon Gruber down the memory hole. You bet they were. The Gruber incident poses a direct threat to the Democratic Party.

Jon Gruber’s remarks matter not for what they say about the Democratic Party’s modus operandi but because of the truths he revealed about the Democratic Party’s reason for being. The Gruber threat to the Democrats isn’t reputational; it’s existential. 

The Democrats have believed for decades that if they build it—a health-care entitlement or any other federal bestowment—the voters will come. That political model is cracking.

For some, the Gruber videos proved that the Obama administration had duped a gullible American public into ObamaCare. But who was fooled by these gambits?

Congressional Republicans knew exactly what the act’s tax provisions were, and not one of them voted for it in 2010. Today, with the Gruberized PG-version of the ACA entering its second round of sign-ups and its defenders claiming the law is “working as planned,” the most recent Gallup Poll reports approval for ObamaCare at 37%. On the other side of that poll are the people whose votes just cast out the Democratic Party at every level of government—Congress, governorships and state legislative seats. Who looks stupid now?

On the left, writers are saying the worst thing about the Gruber filmography is that it gives credibility to conservative stereotypes about the “arrogance” of the technocracy. 

That’s close but not on target. The problem is not one MIT economist’s arrogance. The problem is that the technocracy itself has become a political problem for the Democratic Party.

For some 80 years, that technocracy has been the life force of the Democratic Party. Now it’s a kind of noxious green sludge consuming the party.

Calling itself “the administrative state,” a technocratic army of social scientists, lawyers and bureaucrats has kept the Democratic Party supplied for decades with the policy details behind its promises to the electorate. ObamaCare was going to be one more victory march into the end zone of federal entitlements with a playbook designed by Jon Gruber and the other grandchildren of the original administrative elites. 

But no one’s popping champagne for this one. When 50 years from now historians search for evidence of when the Democratic Party’s decline began, they’ll fix on this famous blurting of the truth about ObamaCare by House Speaker Pelosi: “We have to pass the bill so that you can find out what’s in it.”

ObamaCare is a massive law, designed to refashion the entire U.S. health-care system, just as the massive Dodd-Frank is intended to reshape the whole U.S. financial system. An article this week in the Chronicle of Higher Education noted that universities must now comply with “a vast regulatory regime of hundreds of rules from dozens of state and federal agencies with reams of required paperwork.” The newspaper asked, “for what?” The strangling of higher-ed is especially ironic and rich. These are the intellectual foot soldiers of the administrative state, which is even eating its own.

Now, with his words alone, the Technocrat-in-Chief will redesign the U.S. immigration system.

Why in 2014 did the Democrats lose so many elections in blue or purple states? Within the tight margin that increasingly decides elections, they are losing support from the non-movement Democrats and independents whose lives are being affected in a bad way by what have become the party’s control-freak dives into health care, medical practice, finance, energy, education and now immigration. 

The original Democratic idea was at least benign. In the hands of the Obama-Gruber coalition, it has finally degraded into something else. It has become malign, a politics that has to be faked or crammed down. 

The best and brightest of the Democratic left will now fashion legal arguments defending national government by executive order. Too late. It looks like the stupid people are wising up.

Hugo Restall on Genetically Modified Crops

Hugo Restall, "Growing a Second Green Revolution," The Wall Street Journal, November 21, 2014

The ‘golden rice’ champion on the bewildering campaign to stop a miracle food that could save millions of children from blindness and death.

Los Baños, Philippines

Robert Zeigler is an environmentalist, but he is also a plant scientist. And that has led him to question the motives of an environmental movement that opposes genetically modified crops despite overwhelming evidence that they are safe.

As director general of the International Rice Research Institute, Mr. Zeigler is pushing the development of “golden rice,” a genetically modified variety that began in the lab about two decades ago. Geneticists inserted a gene into the rice plant that allows it to produce beta carotene, which makes its grains yellow.

Because the human body converts beta carotene to vitamin A, golden rice has the potential to dramatically improve the lives of millions of people around the world, particularly in Africa and Southeast Asia, where vitamin A deficiency is an especially common malady that can cause blindness and increases the risk of death from disease. Children are particularly vulnerable: “An estimated 250,000 to 500,000 vitamin A-deficient children become blind every year, half of them dying within 12 months of losing their sight,” according to the U.N. World Health Organization.

Golden rice thus sounds like a godsend—but don’t tell that to activists opposed to anything that falls in the category of genetically modified organisms, or GMOs. In August 2013, anti-GMO vandals broke into the International Rice Research Institute’s research facilities and destroyed field trials of golden rice.

The attack set back the program by only a few months, and Mr. Zeigler still hopes to bring the new variety to market in the next two to three years. But the episode was a reminder that environmental groups will campaign hard to put political obstacles in his way, and try to scare farmers and consumers off the yellow rice.

Greenpeace is petitioning the Philippine government to ban GMOs and promote organic farming. The organization says that vitamin A deficiency can be tackled with more balanced nutrition and calls golden rice a “Trojan horse” designed to overcome public resistance to a dangerous technology.

More than just golden rice is at stake. Total rice production is stagnant but populations are growing. Asia badly needs a second “green revolution” of increased yields—Mr. Zeigler estimates that the harvest must increase to 550,000 tons of milled rice a year by 2035 from 450,000 tons today.

One important way to achieve that is through genetic modifications that will produce higher-yielding varieties, and the International Rice Research Institute will be central to that effort. Founded in 1960 with funding from governments and the Ford and Rockefeller foundations, the IRRI was one of the leading institutions in the original green revolution of the ’60s and ’70s. Transgenic technology is becoming an important part of its research arsenal.

Mr. Zeigler is an avuncular 63, but he maintains a grueling schedule. He is just back from Nepal, where a deal was signed for India, Bangladesh and Nepal to accept the others’ approvals of new rice varieties, and he will give the keynote address at the World Rice Congress in Bangkok next week. Sitting in his office, he looks out on rice fields that the institute has cultivated since 1963 to test whether high-yield varieties will exhaust the soil (so far so good). Nearby is a refrigerated gene bank that holds seed samples of more than 117,000 rice varieties used in crossbreeding programs.

Golden rice is a proof of concept in several ways, he explains. It started out showing that “you could engineer a relatively complex trait into a staple food that addressed a major dietary deficiency in hundreds of millions of people.” But on the way to market, golden rice ran into difficulty not of the radical-protester variety: The difficulty and expense of developing a GM food beyond the lab turned out to be much harder than golden rice’s champions initially understood.

For instance, the Philippine government has a well-established process for assessing rice varieties that are already approved in other countries. The IRRI had to work with the authorities to develop new procedures to certify a GM crop developed in the country.

Then there was the problem that the original patent-holders stipulated that golden rice could not be sold for a profit. While the rice will be provided to farmers at a low cost, eliminating all profits meant that it would be excluded from existing marketing and distribution channels.

Finally there are the extra safeguards imposed on any transgenic crop, even though they are safer than those developed using traditional breeding. Crossbreeding different rice varieties runs the risk of creating a weed that can’t be killed without destroying the crops it infests, whereas GM rice can incorporate a single well-understood gene into an existing variety.

Solving the problems facing golden rice will demonstrate that publicly funded entities can use transgenic technology to enhance food security. While companies like Monsanto make important contributions, Mr. Zeigler believes governments can play a crucial role when there is no clear business model.

Rice is a good example. It is self-pollinating, so farmers can buy a new variety and then save some of the grain to plant next year. Some firms sell sterile hybrids, but these have weaknesses that have confined them to a small share of production. Rice farmers have tended to be poor and isolated and produce on a small scale, hardly an appealing market demographic.

Yet the returns to society as a whole from higher-yielding rice varieties are staggering. The IRRI’s semi-dwarf varieties, including the famous IR8, saved India from famine in the 1960s. And they provided good investment opportunities for the World Bank across the region, since they responded well to better growing conditions. Up went dams and fertilizer factories, and up went Asian incomes and living standards.

However, about half of Asia’s rice farmers were left behind because they tilled marginal land, prone to drought, flooding and other problems. The 1960s breeding technology didn’t have answers for them. But today the rice institute is developing varieties that have better resistance and grow well on poorer land. That will be one part of a new jump in yields.

The environment will also benefit from the second green revolution, as crops will require less water, fertilizer and pesticides. There will be opportunities to use GM technology to develop new varieties faster and more safely—as long as the green activists don’t succeed in demonizing them.

“The question is, will this fantastic technology that has the ability to address so many serious human needs be limited so that only short-term, high-profit products of the private sector will be enjoyed, or will the broader public be able to benefit from them?” Mr. Zeigler asks. “And I think it’s a pretty important question. You can’t destroy the public sector’s ability to take advantage of this and move it forward and then at the same time complain that it’s only the multinationals that use the technology.”

GM food has become a casualty of the anticapitalist ideology of the environmental movement, he explains. “You see that jingoism used when people talk about corporate farming, it is a code word for evil.” This obscures the fact that the fundamental science behind GM is sound.

Mr. Zeigler can’t resist a comparison to partisans on the right who he says willfully misrepresent science in a similar way: “If you strip away the actual words and look at the argument structure, it’s exactly the same as the climate-change deniers,” he says, and “the anti-fracking people. If you’re not tied to the science and the facts, you can say just about anything.”

Nevertheless, the environmentalists are his main target: “This is the thing that drives me crazy. As you’ve probably figured out, my politics are a little bit to the left and I feel that society has roles to play, etc. And to see my former allies just throwing out any association with fact and what I’d like to think of as truth, it’s very disheartening because I look at the position of the left on the environment and GMO technology as being totally indefensible.”

Mr. Zeigler also says that governments need to stop trying to control prices in ways that prevent incentives from reaching the farmer. Shortsighted export bans during the spike in food prices in 2008 further disrupted an already thin and distorted market. And he cites the lack of clear property rights in many countries as a deterrent for farmers to invest in their land.

Private companies may also be able to take advantage of the telecommunications revolution that has put cellphones in the hands of rice farmers. The kinds of tailored information services that help big American farmers make decisions based on satellite images and big data could be provided to small farmers at little marginal cost.

Ideally Mr. Zeigler would like to see the public and private sectors working on GM food in parallel, each focused on what it does best. A partnership of that sort underpinned the original green revolution, but it has been lost.

That’s because the world has become complacent about food security. The assumption is that grain shortages are a thing of the past and we can concentrate on better nutrition and how to meet the demand for meat. While those are legitimate goals, “if we take our eye off the basic staples, we could run into trouble,” Mr. Zeigler warns.

He makes a good case that mass starvation is the kind of risk that governments should make contingency plans for and invest in solutions. Even on current trends, the International Rice Research Institute has a significant role to play. And if the institute can get golden rice to market, it will have forged a key part of the second green revolution.

Mr. Restall is the editorial-page editor of The Wall Street Journal Asia.

,

Cochrane on What the ‘Inequality’ Warriors Really Want

John Cochrane, "What the ‘Inequality’ Warriors Really Want," The Wall Street Journal, November 19, 2014

Confiscating wealth is ultimately about political power. Koch brothers, no. Public-employee unions, yes.

Progressives decry inequality as the world’s most pressing economic problem. In its name, they urge much greater income and wealth taxation, especially of the reviled top 1% of earners, along with more government spending and controls—higher minimum wages, “living” wages, comparable worth directives, CEO pay caps, etc.

Inequality may be a symptom of economic problems. But why is inequality itself an economic problem? If some get rich and others get richer, who cares? If we all become poor equally, is that not a problem? Why not fix policies and problems that make it harder to earn more?

Yes, the reported taxable income and wealth earned by the top 1% may have grown faster than for the rest. This could be good inequality—entrepreneurs start companies, develop new products and services, and get rich from a tiny fraction of the social benefit. Or it could be bad inequality—crony capitalists who get rich by exploiting favors from government. Most U.S. billionaires are entrepreneurs from modest backgrounds, operating in competitive new industries, suggesting the former.

But there are many other kinds and sources of inequality. The returns to skill have increased. People who can use or program computers, do math or run organizations have enjoyed relative wage increases. But why don’t others observe these returns, get skills and compete away the skill premium? A big reason: awful public schools dominated by teachers unions, which leave kids unprepared even to enter college. Limits on high-skill immigration also raise the skill premium.

Americans stuck in a cycle of terrible early-child experiences, substance abuse, broken families, unemployment and criminality represent a different source of inequality. Their problems have proven immune to floods of government money. And government programs and drug laws are arguably part of the problem.

These problems, and many like them, have nothing to do with a rise in top 1% incomes and wealth.

Recognizing, I think, this logic, inequality warriors go on to argue that inequality is a problem because it causes other social or economic ills. A recent Standard & Poor’s report sums up some of these assertions: “As income inequality increased before the [2008 financial] crisis, less affluent households took on more and more debt to keep up—or, in this case, catch up—with the Joneses. ” In a 2011 Vanity Fair article, Columbia University economist Joe Stiglitz wrote that inequality causes a “lifestyle effect . . . people outside the top 1 percent increasingly live beyond their means.’’ He called it “trickle-down behaviorism.”

I see. A fry cook in Fresno hears that more hedge-fund managers are flying in private jets. So he buys a pickup he can’t afford. They are saying that we must tax away wealth to encourage thrift in the lower classes.

Here’s another claim: Inequality is a problem because rich people save too much. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”

I see. Now we need to forcibly transfer wealth to solve our deep problem of national thriftiness.

You can see in these examples that the arguments are made up to justify a pre-existing answer. If these were really the problems to be solved, each has much more natural solutions.

Is eliminating the rich, to eliminate envy of their lifestyle, really the best way to stimulate savings? Might not, say, fixing the large taxation of savings in means-tested social programs make some sense? If lifestyle envy really is the mechanism, would it not be more effective to ban “Keeping Up With the Kardashians”?

If we redistribute because lack of Keynesian “spending” causes “secular stagnation”—a big if—then we should transfer money from all the thrifty, even poor, to all the big spenders, especially the McMansion owners with new Teslas and maxed-out credit cards. Is that an offensive policy? Yes. Well, maybe this wasn’t about “spending” after all.

There is a lot of fashionable talk about “redistribution” that’s not really the agenda. Even sky-high income and wealth taxes would not raise much revenue for very long, and any revenue is likely to fund government programs, not checks to the needy. Most inequality warriors, including President Obama, forthrightly advocate taxation to level incomes in the name of “fairness,” even if those taxes raise little or no revenue.

When you get past this kind of balderdash, most inequality warriors get down to the real problem they see: money and politics. They think money is corrupting politics, and they want to take away the money to purify the politics. As Berkeley economist Emmanuel Saez wrote for his 2013 Arrow lecture at Stanford University: “top income shares matter” because the “surge in top incomes gives top earners more ability to influence [the] political process.”

A critique of rent-seeking and political cronyism is well taken, and echoes from the left to libertarians. But if abuse of government power is the problem, increasing government power is a most unlikely solution.

If we increase the top federal income-tax rate to 90%, will that not just dramatically increase the demand for lawyers, lobbyists, loopholes, connections, favors and special deals? Inequality warriors think not. Mr. Stiglitz, for example, writes that “wealth is a main determinant of power.” If the state grabs the wealth, even if fairly earned, then the state can benevolently exercise its power on behalf of the common person.

No. Cronyism results when power determines wealth. Government power inevitably invites the trade of regulatory favors for political support. We limit rent-seeking by limiting the government’s ability to hand out goodies.

So when all is said and done, the inequality warriors want the government to confiscate wealth and control incomes so that wealthy individuals cannot influence politics in directions they don’t like. Koch brothers, no. Public-employee unions, yes. This goal, at least, makes perfect logical sense. And it is truly scary.

Prosperity should be our goal. And the secrets of prosperity are simple and old-fashioned: property rights, rule of law, economic and political freedom. A limited government providing competent institutions. Confiscatory taxation and extensive government control of incomes are not on the list.

Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at the Hoover Institution, and an adjunct scholar at the Cato Institute.

Gramm and Solon on How to Distort Income Inequality

Phil Gramm and Michael Solon, "How to Distort Income Inequality," The Wall Street Journal, November 11, 2014

The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

What the hockey-stick portrayal of global temperatures did in bringing a sense of crisis to the issue of global warming is now being replicated in the controversy over income inequality, thanks to a now-famous study by Thomas Piketty and Emmanuel Saez, professors of economics at the Paris School of Economics and the University of California, Berkeley, respectively. Whether the issue is climate change or income inequality, however, problems with the underlying data significantly distort the debate

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornell’s Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the U.S. since 1979.

Simple statistical errors in the data account for roughly one third of what is now claimed to be a “frightening” increase in income inequality. But the weakness of the case for redistribution does not end there. America is the freest and most dynamic society in history, and freedom and equality of outcome have never coexisted anywhere at any time. Here the innovator, the first mover, the talented and the persistent win out—producing large income inequality. The prizes are unequal because in our system consumers reward people for the value they add. Some can and do add extraordinary value, others can’t or don’t.

How exactly are we poorer because Bill Gates , Warren Buffett and the Walton family are so rich? Mr. Gates became rich by mainstreaming computer power into our lives and in the process made us better off. Mr. Buffett’s genius improves the efficiency of capital allocation and the whole economy benefits. Wal-Mart stretches our buying power and raises the living standards of millions of Americans, especially low-income earners. Rich people don’t “take” a large share of national income, they “bring” it. The beauty of our system is that everybody benefits from the value they bring.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that U.S. per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute. Mr. Solon was a budget adviser to Senate Republican Leader Mitch McConnell and is a partner of US Policy Metrics

Irwin on The Ultimate Global Antipoverty Program,

Douglas Irwin,  "The Ultimate Global Antipoverty Program," The Wall Street Journal, November 2, 2014

Extreme poverty fell to 15% in 2011, from 36% in 1990. Credit goes to the spread of capitalism.

The World Bank reported on Oct. 9 that the share of the world population living in extreme poverty had fallen to 15% in 2011 from 36% in 1990. Earlier this year, the International Labor Office reported that the number of workers in the world earning less than $1.25 a day has fallen to 375 million 2013 from 811 million in 1991.

Such stunning news seems to have escaped public notice, but it means something extraordinary: The past 25 years have witnessed the greatest reduction in global poverty in the history of the world.

To what should this be attributed? Official organizations noting the trend have tended to waffle, but let’s be blunt: The credit goes to the spread of capitalism. Over the past few decades, developing countries have embraced economic-policy reforms that have cleared the way for private enterprise.

China and India are leading examples. In 1978 China began allowing private agricultural plots, permitted private businesses, and ended the state monopoly on foreign trade. The result has been phenomenal economic growth, higher wages for workers—and a big decline in poverty. For the most part all the government had to do was get out of the way. State-owned enterprises are still a large part of China’s economy, but the much more dynamic and productive private sector has been the driving force for change.

In 1991 India started dismantling the “license raj”—the need for government approval to start a business, expand capacity or even purchase foreign goods like computers and spare parts. Such policies strangled the Indian economy for decades and kept millions in poverty. When the government stopped suffocating business, the Indian economy began to flourish, with faster growth, higher wages and reduced poverty.

The economic progress of China and India, which are home to more than 35% of the world’s population, explains much of the global poverty decline. But many other countries, from Colombia to Vietnam, have enacted their own reforms.

Even Africa is showing signs of improvement. In the 1970s and 1980s, Julius Nyerere and his brand of African socialism made Tanzania the darling of Western intellectuals. But the policies behind the slogans—agricultural collectives, nationalization and price controls, which were said to foster “self-reliance” and “equitable development”—left the economy in ruins. After a new government threw off the policy shackles in the mid-1980s, growth and poverty reduction have been remarkable.

The reduction in world poverty has attracted little attention because it runs against the narrative pushed by those hostile to capitalism. The Michael Moores of the world portray capitalism as a degrading system in which the rich get richer and the poor get poorer. Yet thanks to growth in the developing world, world-wide income inequality—measured across countries and individual people—is falling, not rising, as Branco Milanovic of City University of New York and other researchers have shown.

College students and other young Americans are often confronted with a picture of global capitalism as something that resembles the “dark satanic mills” invoked by William Blake in “Jerusalem,” not a potential escape from horrendous rural poverty. Young Americans ages 18-29 have a positive view of socialism and a negative view of capitalism, according to a 2011 Pew Research poll. About half of American millennials view socialism favorably, compared with 13% of Americans age 65 and older.

Capitalism’s bad rap grew out of a false analogy that linked the term with “exploitation.” Marxists thought the old economic system in which landlords exploited peasants (feudalism) was being replaced by a new economic system in which capital owners exploited industrial workers (capitalism). But Adam Smith had earlier provided a more accurate description of the economy: a “commercial society.” The poorest parts of the world are precisely those that are cut off from the world of markets and commerce, often because of government policies.

Some 260 years ago, Smith noted that: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” Very few countries fulfill these simple requirements, but the number has been growing. The result is a dramatic improvement in human well-being around the world, an outcome that is cause for celebration.

Mr. Irwin is a professor of economics and co-director of the Political Economy Project at Dartmouth College.