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Issue 1
Spring 2009
A n E c o n o m i c E d u c at i o n Ne w s l e t t e r f r o m t h e Fe d e r a l Re s e r v e B a n k S t. L o u i s
What’s Your
Question? H owever, democratic governments, even
in rich countries, often enact redistribu-
tive policies that reduce economic freedom
as a matter of policy, without the need of
institutional limits such as those provided by
a democracy.
Education and that are harmful to economic growth. In a study of about 100 countries from
and Earnings Therefore, although most economists agree 1960 to 1990, Barro found that at low levels
that economic freedom promotes growth, of political freedom, an increase in politi-
Economic it is not clear that more political freedom cal rights might enhance economic growth
(that is, more democracy or political rights) by imposing limits on government. But he
Snapshot improves economic performance. noted that in countries that have already
Fourth Quarter Data achieved medium levels of democracy,
What Factors Create further increases in political rights might
Economic Growth?
Bulletin Board slow growth because of growing concerns
Summer School Economic growth is primarily a result of the about income redistribution. Barro’s conclu-
accumulation of both physical capital and sion that the overall effect of democracy on
at the Fed human capital. The accumulation of capital growth is slightly negative continues to be
It’s Your Paycheck is affected by public policies, which, in turn, challenged by alternate views.
depend on the political institutions that are One alternate view suggests that the
in place. In a classic study, Robert Barro adoption of democracy—or, more generally,
Resources explained that because citizens express their of political institutions that impose checks
GDP and Pizza approval or disapproval when they vote, and balances on the government—promotes
democratic institutions provide checks on investment in physical and human capital
government power that impose limits on and, therefore, growth. In contrast, a second
politicians’ ability to amass wealth and enact view suggests that reaching a certain level
unpopular policies. These constraints, he of economic development is what allows
noted, help improve economic freedom. countries to adopt better institutions.
On the other hand, authoritarian govern-
www.stlouisfed.org/education ments may also improve economic freedom continued on Page 2
T h e f e d e r a l r e s e r v e ba n k o f s t. l o u i s : Ce n t r a l t o A m e r i c a’ s e c o n o m y ™
Which Came First?
continued from Page 1
Do Political Institutions Promote Growth? of institutions adopted in the early stages of either
colonization strategy lasted even after the colonies
A study that supports the view that political institu-
became independent.
tions promote economic performance found a strong
relationship between a measure of protection against Or Does Economic Growth Stimulate Democracy?
government expropriation (as a measure of political The second view is that it is economic growth that
institutions) and economic performance (measured stimulates democracy or the adoption of better
by real income per capita) across a large sample of institutions. Supporters of this view make the point
countries. The study looked at two types of coloniza- that the accumulation of human capital is a more
tion strategies that led to different types of political important determinant of economic growth than
institutions. political institutions. Supporters of this belief studied
The first strategy was the creation of extrac- a large set of countries in the period from 1960 to
tive states. In these colonies, the main goal was 2000, classifying them in four categories: autocra-
to transfer much of the resources of the colony to cies, imperfect autocracies, imperfect democracies
the European power. Institutions created in these and stable (or perfect) democracies.
colonies did not provide much protection of private In 2000, nearly all countries with high levels of
property and did not impose checks against gov- education were classified as stable democracies, and
ernment expropriation. Examples of this were the nearly all stable democracies were highly educated.
Spanish colonies in Mexico and Latin America, and In contrast, nearly all countries run by dictators were
the Belgian colonization of the Congo. poorly educated. In addition, as education levels
In the second colonization strategy, European set- increased, democracies were more common, though
tlers migrated in large numbers and created institu- many were imperfect. In 1960, most of the poor
tions that replicated those in their home country. countries in terms of growth were run by dictators.
These institutions emphasized the protection of In the four decades that followed, the growth rates
private property and checks against government among poor countries varied, and some of them
expropriation. Examples of these were Australia, New managed to get out of poverty while still being
Zealand, Canada and the United States. The types run by dictators.
2
glossary
3
w h a t ’ s y o u r ques t io n ?
Q. How are investment in human capital and Q. What is the relationship between level of
personal income in the United States related? education and unemployment?
A. There is a strong positive correlation between A. Americans with more education are less likely to
investment in human capital through education and be unemployed. This is especially true in the 25-34
expected earnings. The benefits of education and age range of the work force where the jobless rate
experience really show up over the long term: can be three or four times higher for the high school
dropout than the college graduate. Although a
substantial difference remains in older age groups, it
Education Level Estimated lifetime earnings is not as dramatic because work experience improves
Less than 9th grade $976,350 employment prospects.
High school dropout $1,150,698 Q. How does having a relatively free economic
Bachelor’s Degree $2,567,174 environment relate to investment in human capi-
tal and GDP per capita?
Master’s Degree $2,963,076
A. Investment in human capital can’t achieve its full
Professional Degree $5,254,193 economic potential without labor market freedom.
When companies and workers are free to make job
decisions, scarce labor resources are channeled to
Q. Over time, what has happened to the per- their best uses, making the economy more produc-
centage of people in the United States who have tive and allowing investment in human capital to
finished college and per capita income? yield greater dividends. This can be validated by
A. As the percentage of Americans who finish a comparison of countries through the Index of
college has increased over time, per capita income Economic Freedom. In reference to GDP per capita
has also increased. In 1950, per capita income was and years of school completed, more-free economies
estimated at little more than $10,000, and the have a higher GDP per capita when compared to
percentage of the population with college degrees years of school completed than less-free economies.
was around 7 percent. In 2004, per capita income
was estimated at slightly less than $35,000 and the Q. What is the Index of Economic Freedom?
percentage of the population with college degrees A. The Wall Street Journal and the Heritage Foun-
was around 28 percent. States that have a higher dation track levels of economic freedom using the
percentage of the population that are college gradu- Index of Economic Freedom. The Index ranks the
ates also have a higher per capita income. world economies based on 10 categories: business
Q. In today’s economy, how does investment in freedom, fiscal freedom, monetary freedom, trade
physical capital and investment in human capital freedom, government size, investment freedom,
compare in the United States? financial freedom, property rights, labor freedom
and freedom from corruption. The higher the index
A. Although physical capital once drove the U.S. score, the higher the degree of economic freedom
economy, investment in human capital now takes in a country.
precedence. In the early days of the country’s
Source: 2004 Annual Report, Federal Reserve Bank of
economic development, most work required muscle Dallas, pp. 7-19; www.heritage.org/research/features/
power. Today, there is a shift toward more sophisti- index/faq.cfm
cated jobs that require more brains than brawn.
Services now dominate the U.S. workplace and
provide 80 percent of the nation’s jobs. Although
some of the work requires only basic skills, many jobs
require handling complex tasks which demands more
investment in human capital.
4
e c o n o m i c s n apsho t
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2005 2006 2007 2008
5
b ulle t i n b o a r d
little rock
Activity-Based Economics:
Pig. E. Bank Economics It’s Not the Dismal Science
May 6, 2009 | 8 a.m. to 4 p.m. July 13-17, 2009 | 8:30 a.m. to 4 p.m.
Federal Reserve Bank of St. Louis— Pulaski Technical College
Little Rock Branch Little Rock, Ark.
Stephens Building | Little Rock, Ark. This workshop features microeconomics, macroeconomics,
25 Cents’ Worth of History teaches globalization and technology presentations by award-
Eighth District economics and winning economic educators.
history using state coins. For information about this workshop, go to
To register: http://economicsarkansas.org/calendar/.
• visit www.stlouisfed.org/
education/conferences,
l o u i s v i l l e / m e m ph i s
• call Julie Kerr at
501-324-8296 or Focus on Finance
• e-mail julie.a.kerr@stls.frb.org. A personal finance workshop for K-12 educators
April 2–3, 2009
8:30 a.m. to 4 p.m.
lit tle rock/louisville Federal Reserve Bank
of St. Louis—
It’s Your Paycheck! Memphis Branch
Little Rock, Ark. Memphis, Tenn.
March 11, 2009 To register, e-mail jeannette.n.bennett@stls.frb.org.
Federal Reserve Bank of
St. Louis—Little Rock Branch Right Start
Bowling Green, Ky. An Institute for New and Beginning
March 24, 2009 Teachers of Economics
Bowling Green Junior June 8-11, 2009
High School Federal Reserve Bank of St. Louis—
Louisville Branch
Evansville, Ind. Crowne Plaza Hotel
April 16, 2009 Louisville Airport—Kentucky Expo Center
Southern Indiana Career and Technical Center Louisville, Ky.
Learn more about It’s Your Paycheck, a new high school per-
To register, visit www.econ.org/programs/rightstart.html.
sonal finance curriculum from the Federal Reserve
Bank of St. Louis.
Focus on the Economy
For more information, go to www.stlouisfed.org/
education/conferences. June 23-25, 2009
Millsaps College
Jackson, Miss.
To register, visit www.mscee.org and click on
“Focus on the Economy”.
6
b ulle t i n b o a r d
Bank Contacts
Arkansas History and the Great Depression e i gh t h d i s t r i c t
Little Rock
Curriculum Workshop
A one-day professional development workshop
Annual Educator Conferences Billy Britt
501-324-8368
Fiscal Policy: What Does It Mean for the
July 10, 2009 | 9 a.m. to 4 p.m.
Economy and Why Does It Matter to You? Louisville
Northeast Arkansas
Education Cooperative Louisville, Ky. David Ballard
July 21, 2009 (grades 5-12) 502-568-9257
Walnut Ridge, Ark.
To register, e-mail jeannette.n.bennett@stls.frb.org. Little Rock, Ark. Memphis
July 22, 2009 (grades K-12) Jeannette Bennett
901-579-4104
Kids and Money Fayetteville, Ark.
Workshop July 23, 2009 (grades K-12) St. Louis
Mary Suiter
A one-day professional Memphis, Tenn. 314-444-4662
development workshop Nov. 4, 2009 (elementary)
July 17, 2009 | 9 a.m. to 4 p.m. Barb Flowers
Nov. 5, 2009 (secondary) 314-444-8421
Northeast Arkansas
Education Cooperative St. Louis, Mo.
Oct. 13, 2009 (grades 5-8)
Walnut Ridge, Ark.
Oct. 14, 2009 (grades 9-12)
To register, e-mail jeannette.n.bennett@stls.frb.org.
This one-day conference will cover the role of fiscal
policy in the economy. Robert Rasche, Senior Vice Presi-
dent of Research at the Federal Reserve Bank of St. Louis,
s t. l o u i s will provide content.
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f e a t u r e d resources
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