The South

Hailing from the South, as I do, I'm always on the lookout for interesting interpretations of its development. My father, who became a sociologist and studied the effects of bringing electricity to the southern Appalachians, of noted the importance of having just a single electric light dangling from the ceiling--it changes everything. Children can study, farmers can work on record-keeping, all setting of a chain reaction of personal and public development. Mark Thoma points out this study today:

A novel contribution of this paper is that it appears to provide a real-world example of the 'Big Push' theory. Never heard of the 'Big Push' theory? Well, here is how the authors describe it:

According to the “big push” theory of economic development, publicly coordinated investment can break the underdevelopment trap by helping economies overcome deficiencies in private incentives that prevent firms from adopting modern production techniques and achieving scale economies. These scale economies, in turn, create demand spillovers, increase market size, and theoretically generate a self-sustaining growth path that allows the economy to move to a Pareto preferred Nash equilibrium where it is a mutual best response for economic actors to choose large-scale industrialization over agriculture and small-scale production. The big push literature, originated by Rosenstein-Rodan [1943, 1961], was initially motivated by the postwar reconstruction of Eastern Europe. The theory subsequently appeared to have had limited empirical application... [S]cholars have found few real-world examples of such an infusion of investment helping to “push” an economy to high-level industrialization equilibrium.

Until this paper, that is. The authors continue:

We argue here that the “Great Rebound” of the American South, which followed large public capital investments during the Great Depression and World War II, is one such application. Although 1930s New Deal programs are typically presented in the context of their attempt to bring relief and recovery to the U.S. economy through demand-stimulating public expenditures, the long-term economic effects of these and subsequent wartime expenditures were profound for the South. Specifically, and consistent with big push theoretical literature, the infusion of public capital—roads, schools, waterworks, power plants, dams, airfields, and hospitals, among other infrastructural improvements—fundamentally reshaped the Southern economy, expanded markets, generated significant external economies, increased rates of return to large scale manufacturing, and encouraged a subsequent investment stream. These improvements helped create the conditions that allowed the region to break free from its low-income, low-productivity trap and embark on its rapid postwar industrialization.

This paper deals with the break from the South's poverty trap. The sustained nature of the South's postwar economic recovery has been covered by other studies: Connolly (2004) looks to improved human capital formation, Cobb (1982) points to industrial policy, Beasley, Persson, and Sturm (2005) finger increased political competition, and Glaeser and Tobio (2008) discuss the merits of the climate or Sunbelt effect. (I will also note I have seen somewhere the advent of air conditioning did wonders for development in the South).

New Deal socialism spurred the development of the "New" South. My parents knew that because the saw it first hand, my father even wrote about it. I'm glad to see the dismal science is now joining in with a "Big Push" Theory. What's interesting to me, of course, is the degree to which the South has forgotten that the roots of its 20th-century growth were planted by FDR, instead opting to side with the neoliberal "conservative" faction. This is in no way surprising, since surplus labor in the South is still regarded as a story of race and not class, which has allowed for the divisive politics of the last 40 years. Division represents politics and economics in the South, where a vibrant middle-class has yet to arise, and where income disparity remains the greatest. I made up the following (hard to read) graph to show this. D.C., NY and CA all have great income disparity for their own reasons--NY and CA both have extremely large concentrations of wealth, for example. Of the next 10 states that follow them in income disparity, 8 are in the south: Lousiana, Texas, Mississippi, Florida, Connecticut, New Mexico, Georgia, Alabama, Kentucky, Tennessee. (I apologize for the chart being so hard to read. Click on it for the full size.)

While the "New South" is in some ways only following the line of increased division between the rich and poor, it tends to be leading the way. By the way, you can find the data for the chart here: http://www.census.gov/hhes/www/income/histinc/state/state4.html

Child Labor

Besides saying that child labor is still practiced on a wide scale, I found this section of the article particularly salient:

[I]t is not inevitable that growth will drive child labour to the economic margins before rooting it out completely. As in the past, if associated with an unequal distribution of income [emphasis mine] and child-intensive production processes, economic growth can increase child labour rather than eliminate it.

And once in place, child labour can be difficult to uproot as child workers forgo schooling and apprenticeship and so grow up to be unproductive adults, who, in turn, cannot earn enough to support their children through education or training. It only takes one generation of child workers to trap an economy in such a low-productivity equilibrium.

Second, despite the spectre of avaricious parents, the children most at risk of early, hazardous, and even slave labour are those without adult kin. Where families have been broken up and denuded of prime-age adults by wars and epidemic disease, the prospects for preserving childhood look bleak.

Why I like Paul Krugman

Paul, I like you because you say it all so well and because you say
things a lot of rich people don't want you to say. Keep making the
aristocrats mad, you have my vote.

"Rising inequality isn't new. The gap between rich and poor started growing before Ronald Reagan took office, and it continued to widen through the Clinton years. But what is happening under Bush is something entirely unprecedented: For the first time in our history, so much growth is being siphoned off to a small, wealthy minority that most Americans are failing to gain ground even during a time of economic growth -- and they know it.

A merica has never been an egalitarian society, but during the New Deal and the Second World War, government policies and organized labor combined to create a broad and solid middle class. The economic historians Claudia Goldin and Robert Margo call what happened between 1933 and 1945 the Great Compression: The rich got dramatically poorer while workers got considerably richer. Americans found themselves sharing broadly similar lifestyles in a way not seen since before the Civil War.

But in the 1970s, inequality began increasing again -- slowly at first, then more and more rapidly. You can see how much things have changed by comparing the state of affairs at America's largest employer, then and now. In 1969, General Motors was the country's largest corporation aside from AT&T, which enjoyed a government-guaranteed monopoly on phone service. GM paid its chief executive, James M. Roche, a salary of $795,000 -- the equivalent of $4.2 million today, adjusting for inflation. At the time, that was considered very high. But nobody denied that ordinary GM workers were paid pretty well. The average paycheck for production workers in the auto industry was almost $8,000 -- more than $45,000 today. GM workers, who also received excellent health and retirement benefits, were considered solidly in the middle class.

Today, Wal-Mart is America's largest corporation, with 1.3 million employees. H. Lee Scott, its chairman, is paid almost $23 million -- more than five times Roche's inflation-adjusted salary. Yet Scott's compensation excites relatively little comment, since it's not exceptional for the CEO of a large corporation these days. The wages paid to Wal-Mart's workers, on the other hand, do attract attention, because they are low even by current standards. On average, Wal-Mart's non-supervisory employees are paid $18,000 a year, far less than half what GM workers were paid thirty-five years ago, adjusted for inflation. And Wal-Mart is notorious both for how few of its workers receive health benefits and for the stinginess of those scarce benefits.

The broader picture is equally dismal. According to the federal Bureau of Labor Statistics, the hourly wage of the average American non-supervisory worker is actually lower, adjusted for inflation, than it was in 1970. Meanwhile, CEO pay has soared -- from less than thirty times the average wage to almost 300 times the typical worker's pay.

The widening gulf between workers and executives is part of a stunning increase in inequality throughout the U.S. economy during the past thirty years. To get a sense of just how dramatic that shift has been, imagine a line of 1,000 people who represent the entire population of America. They are standing in ascending order of income, with the poorest person on the left and the richest person on the right. And their height is proportional to their income -- the richer they are, the taller they are.

Start with 1973. If you assume that a height of six feet represents the average income in that year, the person on the far left side of the line -- representing those Americans living in extreme poverty -- is only sixteen inches tall. By the time you get to the guy at the extreme right, he towers over the line at more than 113 feet. http://www.rollingstone.com/politics/story/12699486/paul_krugman_on_the_great_wealth_transfer/print