Paul Kedrosky's Infectious Greed

What caused the economic boom of the 1990s? Was it chance, conscious policy, or some combination of both? And when it ended, was it because of policy errors, or was it just that it the U.S. economy’s run of good luck simply ended?

Bill Nordhaus of Yale does a yeoman job of trying to reconcile the differing views on the subject in an essay in the current New York Review of Books. He considers the cases laid out in two books: The Fabulous Decade: Macroeconomic Lessons from the 1990s, by Alan S. Blinder and Janet L. Yellen; and The Roaring Nineties: A New History of the World’s Most Prosperous Decade, by Joseph E. Stiglitz.

The latter book — and its Nobel-prize winning author — comes off indiffierently, with Joe Stiglitz being lauded for the practical relevance of his views on asymmetric information (c.f., Jack Grubman & Worldcom), but also being accused by Nordhaus of somewhat thin economic analysis. Here is an example of Nordhaus on Stiglitz:

“Stiglitz occasionally stretches the interpretation of events, and his arguments are sometimes overstated or inaccurate. One example is a tendency to exaggerate the extent to which Keynesian theories are accepted doctrine.”

Instead, Nordaus find much common ground with Blinder in arguing that low inflation and low unemployment were transitory, despite being immensely important to the 1990s growth. After all, as Nordhaus writes, they “reduced inflation by between 2 and 5 percentage points between 1995 and 1999.” As a result, he writes, paraphrasing Blinder, “…by 1999, the unemployment rate was 11/2 percentage points lower than it would have been without the favorable shocks”.

Much of the piece revolves around the following table:

Using the preceding, Nordhaus concludes by arguing, alongside Stiglitz, that whatever you might think of the Clinton years and economic opportunities squandered there (or not), the current Bush administration has been even more irresponsible:

“The long-term management of our economy has fallen prey to the short-term maximization of votes in which the planning cycle of the US administration extends no further than November 2004. For all these consequences, surely, the faults lie in misguided policies of the Bush administration and not in the stars.”

Apparently, the 1990s are going to be a kind of economic Rorschach test, with economists dueling over what the period really means for free-market and more interventionist economic policies. Both schools of economists, judging by this Nordhaus/Stiglitz tussle, are finding what they want there, so it looks like we have ourselves at least one full-employment act — albeit if only for academic economists.

Some reports are saying that Chinese TOEFL-takers (the Test of English as a Foreign Language) have declined precipitously in recent years. According to the article, at peak, in 1999, 100,000 Chinese students a year took the test, most of whom hoped to study abroad, in particular in the U.S. That number has supposedly declined 90%, with only 10,000 Chinese students taking the TOEFL this year. The article blames post 9-11 visa restrictions.

If true (but see below), the decline has many implications. First, and most importantly, it means far fewer Chinese graduate students. And that, in itself, is a big deal for suffering U.S. universities. Foreign graduate students pay among the highest tuitions on campus, and they make up more than half of many graduate science & technology programs. Less Chinese graduate students means less university income, and less income means commensurate cost cuts — or more income from somewhere else, like tuition increases or goverment transfers (taxes).

Fewer incoming graduate students also means fewer outcoming graduate students. Given the disportionate numbers of such graduates employed at U.S. technology companies, from Intel to Cisco and so on, that is an implicit tax on U.S. technology firms. In effect, they are forced to bid for other students, thus raising the cost of doing business, while reducing the overall depth and quality of their workforce.

Finally, while I said at the outset this decline is thought to have to do with post-9/11 restrictions, any real decline would almost certainly also have to do with the slow but steady maturation of the Chinese economy. They simply don’t have as many students who feel that they have to go elsewhere to succeed — and that would be more noteworthy news for the rest of us than whimsical U.S. visa policies.

[Update] Despite the claims to the contrary I cited above, the statistics from the TOEFL folks themselves don’t bear this decline out. See this chart for what ETS says is the number of people in mainland China taking its TOEFL each year since 1999. Sure doesn’t look like decline to me. It actually looks more like a fairly healthy increase. While there may be regional patterns that are missed in this data, overall it certainly looks like 9/11 visa restrictions haven’t cut the Chinese ardor for taking the TOEFL.

From Marginal Revolution:

Political writers have established it as a maxim, that, in contriving any system of government, and fixing the several checks and controls of the constitution, every man ought to be supposed a knave, and to have no other end, in all his actions, than private interest. By this interest we must govern him, and, by means of it, make him, notwithstanding his insatiable avarice and action, cooperate to public good…. It is, therefore, a just political maxim, that every man must be supposed a knave; though, at the same time, it appears somewhat strange, that a maxim should be true in politics which is false in fact.

David Hume, “Of the Independency of Parliament”, in Essays Moral, Political, and Literary. Rpt. Oxford: Oxford University Press, 1963 [1741], pp. 40-47.