Busy week

Sorry it’s been a longer gap in this space than usual. I am — despite, or because of — the situation, I am flying to Moscow today. Plus it was a week of interesting events in New York. Updates coming this weekend, so stay tuned!

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Is China the new Number 1 Economy, and India Number 3?

According to new figures issued this week by the World Bank, estimating the Gross Domestic Product for countries across the world, the rankings of major economic powers are in for a shake-up.

The new numbers show that China has nearly caught up to the US in economic output; in 2012 its GDP was already over 75% as large as America’s.  If current growth rates are maintained (7.5% per year for China, 2% per year for the U.S.), then China’s economy will surpass that of the US in six years, becoming the largest in the world. India, according to the new figures, had already become number 3 by 2012, bypassing Japan!  Russia, despite its problems, jumps up to become the sixth largest economy in the world, Brazil is at number 8, Mexico at number 11, and Turkey is at number 15, right behind Canada (thus making Turkey’s goal of becoming a top 20 economy a reality). Even more surprising, Iran comes in at number 18, despite sanctions, ahead of Saudi Arabia, and Egypt in 2012, despite its problems, shows up as the 24th largest economy in the world.

Fascinating — but are these numbers believable? This is just one ranking, and an alternative ranking, also from the World Bank, shows very different numbers.  The numbers above are based on comparing economies at Purchasing Power Parity (PPP), adjusting the entire economy for the relative purchasing power of their currencies to buy goods and services in their own economy.   A different ranking arises if we use a measure based on current exchange rates (e.g. how large is the Chinese economy if it’s total output in renminbi was converted to dollars).    One way to think of this is that if China were to sell ALL the output of its economy to American buyers making their purchases in current dollars, how much of the U.S. economy would it be able to buy with the money it raised by selling ALL of its output of goods and services?

In this current exchange rate approach, China’s economy is not 75% as large as America’s, but only 51% as large.  With that ranking, at current growth rates (same as above), it would take 13 years for China to surpass America’s economy; and if China’s growth rate should drop from 7.5 percent per year to average 6 percent per year over that period, it would take 18 years to catch the U.S.   So the U.S. is not really in danger of becoming #2 in the next decade, or perhaps even two, by this measure.  Moreover, in this mode of measuring economies, India’s economy is not larger than Japan’s, but only 30% as large;  Iran shifts from being roughly the same size economy as Australia to being only one-third as large; and Egypt drops to 39th, just behind Israel, whereas in the PPP rankings Egypt’s economy is twice the size of Israel’s.

Clearly, it makes a HUGE difference in comparing economies whether we assess them in PPP terms or in current exchange terms.  Many economists seem to prefer PPP estimates today.  They say this is because currency exchange rates can fluctuate wildly from year to year and even month to month — for example, the Russian ruble sank by 10% compared to the U.S. dollar in the last six months; would you then want to say that the entire Russian economy shrank by 10% relative to the U.S. economy?   Exchange rates can also be manipulated by governments, holding them lower or higher for extended periods.  That is true.  Yet I think that using PPP adjusted figures is the wrong way to compare economies as a whole.

Let us use the example of Russia.  If sanctions cause capital to flee and the ruble to sink, that IS real economic pain.  It may not change what Russians can buy inside Russia with rubles that much (although inflation has undercut that a bit).  But it immediately affects what Russia can buy on the world market with its own resources.  And that does suggest an alteration in its relative economic strength as a nation compared to others.

PPP adjustment takes into account the local costs of goods and services.  So, for example, if a Chinese household needs to buy 10 kilos of rice each week to feed the family, how do we value the income used for that purchase in GDP, versus what an American would pay for that much rice in America?  If we just added it up in current prices, and locally produced rice in China is very cheap, because labor and land are much cheaper than in the US, we would say that 10 kilos of rice consumed in China has much LESS value for GDP than 10 kilos of rice consumed in America.  The same for anything else.  For example, a nice apartment in Guangzhou costs a bit less than a similar apartment in San Francisco; so do we add all the housing costs up and say that housing consumption in Guangzhou is less than in San Francisco even if people have equivalent homes, just because real estate prices in San Francisco are higher?   In other words, PPP adjusted figures try to give GDP in terms of the things people actually have, the physical goods and services people buy each year.  So the PPP adjusted figures tell us that in 2012, the total amount of steel, cement, housing, rice, cars, meat, copper, even smart phones and laptops, actually purchased in China was about 75% of the value of the physical commodities and tangible services purchased that year in the U.S.

Now to my mind, that kind of PPP adjustment is valid, even essential, if we are comparing living standards across countries.  That is, if a Chinese household has a four-bedroom apartment, buys 10 kilos of rice and 3 kilos of meat each week, has a car and takes an international vacation, we want to compare that level of consumption with levels of consumption of households in other countries — regardless of whether the prices of rice and meat and apartments and cars in China is lower or higher than in other countries.  We would want to somehow adjust out price fluctuations and differences in price levels to get at actual consumption, and that is exactly what the PPP adjustment does.

However, when you use that adjustment to measure the consumption of entire nations, major distortions creep in.  After all, while you can compare the consumption of households, nations have VERY DIFFERENT kinds of consumption.  For example, in China today, fully one-half of GDP is investment, bulk purchases (often by government owned or backed companies) of steel and cement and copper and earth-moving and construction equipment to build cities, train lines, and power stations.  In most other countries, investment is a quarter or less of the economy, and consumer consumption is far greater.  So how do you assess the precise mix of goods and services and adjust for the amount and quality of goods that people are actually buying?

The answer is that you usually don’t.  Instead, PPP adjustments are based on a standard basket of commodities and services that is supposed to mirror what most people in the economy consume.  But as economies change and consumption patterns are altered, very VERY big adjustments in PPP corrections are sometimes required.

In 2007, the World Bank suddenly decided it had the consumption bundles in China wrong, and that consumption in an increasingly urban and expensive China was greater, and local prices not generally as low, as it had thought.   So it adjusted China’s PPP measured GDP downwards by 40%.   When compared to the U.S., the adjustment meant that China’s GDP fell from 71% of the US to 43% — a similar adjustment today would again set China back compared to the U.S.

Of course, when you visit any of China’s major cities today — Beijing, Shanghai, Guangzhou, Shenzen — the fancy restaurants, elegant apartment towers, endless ring roads filled with cars, and vast shopping centers filled with quality goods scream that China has caught up with the West.  And it has, at least in the better areas of the major coastal cities.  But that is only a slice of China’s economy and society; and for two-thirds of Chinese, living standards remain much lower.   Whether the overall size of China’s economy is really 50% or 75%  as large as America’s depends on how you value the consumption of that other two-thirds of China; at consumption in local prices at international exchange rates, which are low, or in consumption at prices adjusted for local purchasing power, by which the value of their consumption is much higher.

But perhaps more important is the PPP adjustment for countries like Iran and Egypt — is the former really as large an economy as Australia?  Or the latter really twice as large an economy as Israel’s?   Here the PPP scaled GDP figures make much less sense.

What the PPP adjustments inevitably do is raise the value of daily food and clothing consumption by poor people consuming local products.  In poor economies, food and clothing and most housing is much cheaper than the same items would be in rich industrial economies.  So in international exchange terms, the value of mass consumption by vast numbers of poor people doesn’t count for much.  All the rice consumed by the 1.3 billion people in India, valued at the cost of rice in India, isn’t a huge number in international value terms.  But if you raise the value of that rice consumption to an adjusted figure, say to what the cost of rice would be in Japan, then the value of India’s total consumption shoots up and surpasses the value of Japan’s economy.  By contrast, small but rich countries generate a lot of goods that have high values on international currency exchange markets — the cost of a Nikon camera is high in Japan, Hong Kong, or America, and so where a lot of fancy cameras are consumed, PPP adjustments are small.  But when we are talking about local goods like rice or cotton shirts, which are very much cheaper in local markets in poor countries, the adjustments are quite large.

So large countries with low income per capita and lots of consumption of locally produced and priced goods tend to benefit a lot from the PPP adjustments — Iran and Egypt, for example.  Small countries with high income that consume lots of internationally-priced goods, like Japan and Israel, have small PPP adjustments and thus fall behind larger poor countries when the PPP adjustments are made.

So what is the best measure of reality?  Will China have another major downward adjustment of its PPP-adjusted GDP when the Bank again assesses the complexity and consumption baskets of the country, as happened in 2007?   I should point out that adjustments can also go the other way.  Nigeria this year recorded an 89% increase in GDP — not by any magical super growth, but by rebasing its GDP measurements in current prices, to take better account of production of services, communications, electronics, entertainment and other items that were virtually absent from its GDP index in 1990 when it was last revised.  But that adjustment had no effect on the living standards of the tens of millions of Nigerians living in desperate poverty!

So my advice is: Take all GDP measures with caution.  To compare the real-world power of global economies for nations as a whole, take the GDP in current international exchange rates.  Yes, currency exchange rates fluctuate and can be manipulated, but this is a better measure of an economy’s ability to produce and purchase high-value internationally traded goods and services, whether it is oil, iron ore, and copper or airplanes, cameras, and computers.  But to compare the standard of living of households in different countries, use the GDP/capita measures in PPP adjusted terms, to get more closely at actual consumption levels.  But use caution here too, and look at poverty levels, infant mortality, and income inequality to get a better sense of whether the average GDP/capita is misleading as to how people are faring.

Confusing?  Yes.  But imagine your country’s GDP was suddenly adjusted up by 89%, or downward by 40%, overnight.  You would wake up, and nothing would be changed — except the rank of your country is some tables published by international agencies.  So keep a look out, and remember there are lies, damn lies, and statistics.


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A Blast from the Past

On a recent flight from Geneva to Moscow, I noticed a familiar face in First Class (as I passed through on my way to the economy seats).  It was the Italian actress Sophia Loren, now 79 but still a commanding presence.

I mention this because I recently saw that Ms. Loren who rose to fame in films in the late 1950s, 1960s, and 1970s, was ranked as the highest paid actress of 2013!   Income from residuals for showings of her movies, advertising endorsements, product lines, and other related business ventures lifted her income above that of any actress performing today.

I really shouldn’t be surprised.  The Beatles, who disbanded in 1970, and Elvis Presley, who passed away in 1977, are still the top-selling recording artists of all time.  I listen to satellite radio in my car (Sirius-XM), and I am always glad there are so many, many stations playing classic rock, classic vinyl, and hits from the 60s and 70s.  What surprises me is that teen-age children listen to exactly the same music.  While I have since acquired a healthy admiration for the music of Frank Sinatra, George Gershwin, and Cole Porter, I have to say that most of the music of the 1930s and 1940s left me flat; and still does.  Yet today, songs that were hits fifty years ago are as popular as ever.

I thought this was perhaps just a feature of pop music, for after all the 1960s were a golden age.  British pop, folk, rock, heavy metal, and everything in between thrived in those days of great invention.  But as I look at the movie screens today, the blockbuster hits are overwhelmingly from the comic books I devoured in the 1960s — Avengers, Spider Man, Iron Man, Thor, Batman.

So why is it that the last fifty years have found it so hard to eclipse the popular entertainment innovations of the 1960s era?

It may be that we have too many choices now, with audiences so divided among YouTube and cable channels and do-it-yourself internet production that it’s hard for anyone today to claim a dominant audience.  Yet I do not think that’s it.  Real talents, like Nora Jones, or Adele, can still come out of nowhere and find a global audience. But even they may not have the staying power of even the Beach Boys or Supertramp, not to mention the Beatles or the Rolling Stones.

No, it just seems that there isn’t as much that is new and exciting.  This may have to do with life itself getting to be more of the same old, same old (and excuse me if this is just nostalgia from an aging baby boomer, but I think there is an important sociological and economic argument here).

My colleague Tyler Cowen reminds me that we are living in the best of all known worlds.  Infant mortality, even in the poorest countries, is a fraction of what it was for most of history.  We have operations and pills for almost everything (my brother survived a bout of deadly illness that he likely would not have survived in the 1960s).  Things that were aspirations and dreams for most people in the 1950s — air conditioning, washing machines and dryers (most people, like my family, still dried their laundry on outdoor clotheslines in the 1950s), color TVs, multiple cars, vacations with air travel — are now commonplace elements of middle class life.  The world as a whole is safer, healthier, and more accessible than ever.

And yet, do most people feel the quality of their life is better?  I have a cell phone in my pocket that serves, in one neat package, as a telephone, music player, radio, calculator, address book, calendar, flashlight, email/message center, newspaper, alarm clock, etc.  But except for email, it doesn’t actually let me do more than I did before on my telephone, music-player, radio, calculator, address book, etc.  Because of computers, I no longer can ask for a secretary (standard for most full professors at major universities 50 years ago).  Yes, I can call up my own plane tickets, read my own emails, type and edit my own manuscripts, and do all the things I once would have had to rely on a secretary to help me accomplish.  But I don’t spend any less time on work, and I don’t think I can claim my work is any better, than that of the distinguished faculty under whom I studied 40 years ago.

And yes, cars are more efficient and more comfortable than they were 50 years ago; but the cars of the 1960s were super-cool and just as fast (and in today’s traffic congestion, using cars doesn’t get you anywhere you want to go faster than a generation ago).  Airplanes too are much more efficient, and carry far more people to more places at much cheaper prices.  But the charm of air travel has been lost for those of us still flying economy commercial fares (private jets still have some romance, or so I’m told).  And waiting for two hours to get through check-in and security for a two-hour flight to an airport two hours from your city destination makes air travel seem clumsy today.

So while we do have incredible video games and movie special effects that were unattainable just a few years ago; and we have some cheaper amenities, the bottom line for me is that our cars and planes are not significantly more enjoyable, our furniture and clothing no more comfortable, our heating and cooling not much cheaper, and the hourly pressures of day to day life not less, than they were decades ago.

There has been some social progress, to be sure.  Minorities, gays, and women have far more freedom and opportunities than they did in the 1960s, even if true equality remains a goal.  We no longer need a military draft.  Crime, especially homicides, have fallen dramatically. And more people go to college than ever.

Yet some of the most crucial aspects of middle class life — college education, good elementary and secondary schools, medical care, open public space and recreation — have become far more expensive than before.  My kids can go to any Best Buy and for $1000 get computing power in a laptop that beats what took up a whole room at UC Berkeley in the 1960s.  But if they wanted to actually go to UC Berkeley to get a degree, it is ten times more expensive, and many times more difficult to get into, than it was in the 1960s, when virtually any high school graduate with a B+ average could go to a UC for almost free.

And what are today’s equivalents of the washers and dryers, color TVs, air travel, cars, air conditioners, and other things that suddenly, in the 1950s and 1960s, transformed middle class life?   Is the flat-screen TV or X-Box the new game-changer?  If you ask me today, what can a family buy for $500 that would change their life as much as a washer or dryer or air-conditioner or TV did in the 1950s for families that didn’t have such amenities, I can’t think of one.  Can you?

So let’s enjoy the blasts from the past while we have them — Sophia Loren movies, Beatles’ records, Marvel films, and such.  And of course enjoy Apple’s latest toys.  But meanwhile, let’s think about what we could wish for that would be affordable, really improve the quality of life for people, and make us feel that we were living in an exciting, ever improving age where life if more convenient, more fun, and more enjoyable.

Google glasses, anyone?


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Can Innovations Save Us?

My last post dwelt, a bit gloomily, on the decline in the U.S. middle class compared to other countries around the world. But the U.S. has always pulled itself up by innovations, and people continue to come up with good ideas. While many of these ideas have a whiz-bang new technology approach (the internet of things, 3-D printing for self-manufacturing), some are just good common sense.

One of the great advances that fueled the middle-class boom in the U.S. in the 1950s and 1960s was the development of mass-produced housing tracts in the suburbs to provide affordable, quality, middle-class housing for the masses. From Levittown in Pennsylvania, the trend spread across the nation, giving Americans indoor plumbing, well heated homes, and an alternative to tenement flats.

Today, however, accessible affordable housing seems like a dream to many. Even in 2013, the number of families on food stamps and who are homeless continues to increase. Meanwhile, the trend in American home-building during the boom of the 1980s and 1990s was to build ever bigger homes, and to demolish low-cost public housing (which had become rundown and crime-ridden) and to gentrify decayed inner-city regions. While this process greatly increased the quality of housing and the value of urban real-estate, it also pushed up the cost of that housing, making it harder for those who are out of work or low-income to find places to live. And for those who lost their homes during the great real estate collapse of 2007-2011, the loss of homes did not mean a great increase in affordable housing — those devalued homes were snapped up by speculators who have repurposed them as rental properties, at steadily rising prices.

So what can be done to restore housing options that are cheap and accessible for low-income Americans? Emily Maynard has submitted this post with ideas for low-cost “mini-homes” made of cheap, environmentally friendly materials. These would be alternatives to the trailer-parks of manufactured homes going up across America today.   With community gardens, solar heating and cooling (which is rapidly becoming more affordable) and recycled materials, communities of min-homes could become attractive alternatives to the McMansion mentality and restore the Levittown ideal of close-nit communities with both space and privacy.

Of course, it is vital that these developments be privately owned and economically feasible; with homes attractive enough that they will appreciate in value over time.  Creating more “dumping grounds” for the poor in substandard housing will only recreate the disasters of urban public housing and tenement slums that we want to avoid.   Still, the creative use of new materials, eco-efficient designs, and available space (think of all the now unused space in places like Detroit or Cleveland waiting to be restored to attractive use) could help revive our cities.

Check out Maynard’s infographic for more details.  Whether or not you agree, it’s important to start rethinking how we build our societies to cope with a challenging future.  Keeping after the goals of the 1980s and 1990s won’t work anymore; we need fresh approaches taking advantage of what we know now to do better for our society.

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The Best Country in the World?

There are many ways to rank countries, including by income per head, infant mortality, educational achievement, stability of families and marriages, openness of social mobility, quality of government, and so on.

Americans are accustomed to viewing the United States as the world leader in most respects. In the popular mind, we are the richest large country, the freest, the one with the most opportunity, the best public education, the best medical care, the one with the largest and best-off middle class. We may have a lot of inequality, but that is the natural result of individual freedom in the capitalist system, and thus the result of a system in which everyone has the best chance to do well overall.

Yet two publications this week give reason to pause and ask Americans (and those who want to migrate here) if all this remains true. Michael Porter’s new Social Progress Index ranks the U.S. as 16th in the world on a broad measure of social well being, including access to knowledge, health, clean air and water, opportunity, etc. Even on basic after-tax real income, America’s middle class has been losing ground compared to other industrialized nations.  According to a story in the New York Times yesterday, the middle classes of almost all other countries (Germany being the main exception) have enjoyed much greater gains in income than Americans since 1980.   Indeed, for the lower 40% of Americans, comparable income groups in many other countries are now equal to or even higher than in the U.S. in real after-tax incomes.  In the middle (fourth quintile), the U.S. still has a modest lead, but it is shrinking fast.  It is only for the top 20% of US earners, and especially for the top 5%, that incomes in the U.S. remain  much higher and deserve the envy of the world.

Another way to put this is that in 1980, the average income at almost any point in the U.S. income distribution (excepting only the bottom 5%) was about double the real income of other industrialized countries for the same point in their income distribution (for the bottom 5% it was about equal).  But by 2010, this was only true of the top 5% of US earners.  For all other groups, the U.S. income advantage has been reduced, sometimes substantially, and for the bottom 40% the advantage has virtually disappeared.

We need to be asking why this has happened.  But one answer leaps out from the data.  That is the lack of investment in America’s younger generation.  The top of America’s income distribution is dominated (silicon valley whizzes aside) by the generation raised in the 1960s — the baby boomers.  This generation benefitted from extensive investment in public education, from K-12 through universities.  For this generation, raised to compete under the scare from Sputnik that the U.S. was falling behind in the space race and other knowledge area, schooling was by far the best in the world.  This generation has had much higher educational achievement, including college completion, than its counterparts in other countries, even the wealthiest.  America’s vast expansion of colleges and well-funded outstanding public universities produced the world’s best-educated and most productive generation.

By contrast, the 20-30 year olds in America today lag behind their counterparts in educational attainments.  America’s elite and richly-endowed private Universities may still be the best in the world, but the rest of America’s university system, especially the state colleges and universities, have become poorly funded, underperforming institutions that do a poor job educating people, with amazingly high drop-out rates and low levels of skills for most graduates.  By comparison, the state universities of European and other rich countries may not shine as brightly at the top, but they do a much better job of instilling education across the board for the average college student.   And the with cost of American public education having skyrocketed (not due to higher faculty salaries, but due to increased administrative, physical plant, and accessory function costs), college is less accessible to most Americans today than it was forty years ago.

So it is not surprising that other countries have caught up, and may soon surpass us, in the incomes of average earners.  America’s top echelon — the elite universities, their graduates, and the top earners in the country — still lead the world.  But is that really as wonderful an achievement if the rest of the country falls behind?

Of course, to some degree this catching up is necessary and desirable.  America had such a huge lead over other countries at the end of World War II, that it is no wonder that the baby boomers who grew up afterwards should have an edge on their counterparts elsewhere.  We would expect the generations in Europe growing up after 1980, when the war damage and trauma had finally healed, would do much better than their parents and begin to close the gap with America.

Yet what is distressing is that for the 40% of Americans in the lower portion of the income distribution, average after-tax real income has nearly flat-lined since 1980, while the rest of the world has enjoyed strong growth.    Now for business and political leaders, it may be that this does not matter.  If the elites can lead the way, and the grunt work be done by robots and foreign labor, at a much lower cost than paying lower middle-class Americans to do that work, what does it matter?

It matters in terms of whether we are all one country, connected to each other, or a set of separate classes, living in separate neighborhoods, going to wholly different schools, homes, vacation places, and workplaces, as Charles Murray claims we have become.   After all, the U.S.’s ranking of 16th on social progress is largely due to huge shortfalls in health and education among the lower portion of the income scale.  If these people matter, and America’s average or overall well-being matters (not just that of the top 5%), then it is imperative that our country does a better job of investing in the young, and creating better health and opportunities for the lower half of the income distribution as well.

So this is America today.  To the extent that we lead the world, we are doing so on the backs of the generation raised with a huge advantage in the 1950s and 1960s; and on the accomplishments of our top 5% in income and achievement.   Will that be enough to preserve the America we have come to value in the last half-century?   Or will we continue to do as we have done since 1980 — cherish the best and forget the rest?

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A Prayer for Peace

Happy Easter and Happy Passover week to all my friends and followers. Please join me today in a much-needed prayer for peace. Whether for families that have lost loved ones to tragedies (as from the South Korean Ferry capsizing or Malaysia Flight 370 disappearance or countless smaller and less visible accidents), or for societies experiencing violence and conflict, from the Central African Republic to Syria to Myanmar and beyond, may God bring an end to your conflict and suffering and help us bring a better world to future generations. Amen.

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The State has not Gone Away

Today I am headed to the Wharton School at the University of Pennsylvania for a conference on the “Future of the State.” It is an interesting title. Ten years ago, we thought the state was on the way out. Between the rise of global corporations and global NGO’s, not to mention global networks of trade, internet communities, and international governance, it seemed that states were quaint anachronisms, important for keeping roads maintained and paying pensions to the boomer generation. But they no longer seemed so powerful, not major agents of change that would shape the world!

The actions of Vladimir Putin in Ukraine have just put an exclamation point on the continued relevance of the state. But in France, the UK, Hungary and Japan, in the rich world, and in Brazil, Turkey, Venezuela, Thailand, and other places in the developing world, we are seeing politics focus on the state once again — who will control the government, and what will they do, is the central question for these societies.

In fact, global networks and trade have not made the state irrelevant. Quite the reverse; the quality of governance and the choice of state policies now is the determining factor in whether countries benefit from the gains made available through global finance and the international economy.

Where a state invests in its workers, creates sound infrastructure, regulates the financial sector, encourages international investment, and maintains political stability and accountability, economies thrive in global competition. Where a state maintains access to economic and political opportunities, limits corruption, and provides strong public services, a middle class can grow and boost human capital, productivity, and consumption.

Yet where states fail to do these things, leaving workers with educations that are not useful for work, produce economic or political uncertainty, and corruption that diverts capital from useful ends and produces rampant inequality, people fall behind.

Today’s world has two huge challenges. Africa retains extremely rapid population growth, and will add 2 billion people to its population this century. Will they become productive contributors to the world economy and fast growing markets for the rest of the world? This is the greatest potential growth source in future — but whether it is realized depends entirely on the quality of governance in that region. And that is something that is very uncertain as we write today, with some countries like Ghana looking like models of good governance, and others like Uganda appearing to descend into the wreck of personalist and autocratic rule.

The second challenge is for rich countries (and China) who have rapidly aging and contracting workforces. How will these countries keep productivity rising fast enough to support aging populations, whether by keeping older people productive at work or raising the productivity of younger workers? Right now, these countries are not investing in the younger generation, but visiting on them high rates of unemployment and sharply decreased public investment in education, forcing the young to incur large debts just to acquire human capital. My daughter is starting college this Fall, and we were offered loans with an origination fee of 4% PLUS an interest rate over 6% per year. Can students truly move ahead with that kind of burden? Can the state turn over the future of its labor force to market forces when such forces threaten to choke off much-needed improvements to human capital?

In short, states and state policy matter hugely. Unfortunately, in the long run and on the big things that matter, we are getting it wrong. Not surprising, perhaps, that some states are flexing their muscles and not expecting a particularly strong and effective response from others.

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