Chronic Murmuring

you going?

Maybe. I wish I could've made significant progress (ie, any progress) on that clergy study, so I could've maybe actually sent something to present. Maybe next year, though. This year, I would like to attend, but we'll have to see whether I can get the monies together. Iannaccone has launched a new economics and religion center at George Mason, and I think that this year's speaker could be exceptional. He had Becker two years ago, and I think Deidre McCloskey either the year before him, or the year after him. He might have someone like Robert Barro there this year as keynote speaker, since Barro and his wife Rachel McCleary have together two working papers on economics growth and religion.

Scott,

Lou Dobbs at CNN has writen this article calling for balanced trade policy. He's says the US has lost 3 million jobs in the past three years. Is that accurate? He also says that Canada, China, Japan, and the EU all pursue balanced trade policies. What do you think about this?

Bobber, that sounds about right actually. I read a number closer to around 2.5 million since 2001. I'll check out the BLS for you and figure exactly what the number is. It's probably worth it, for myself, to have that number handy.

As for whether the trade balance is a problem or not, my impression is that trade balances are not as much of a problem as people make it out to be. Wal-mart has a positive trade balance with me. I export virtually nothing to them; only import goods from them. When we talk about trade between countries, I think we too often let ourselves be misled by aggregating everything into trade between nations. So we'll conclude, "the US has a sustained trade defecit with Japan" or whomever, and it worries us. But one, US doesn't have anything, nor does Japan. Countries don't trade with one another - individuals and firms trade with one another. I don't understand if that is a problem or not, but I think that that is something that needs to be kept in mind. But in a few weeks, I'll teach on trade defecits/trade balances, and once I do, I'll post some stuff on here, and then maybe you and I can have more conversations about it.

The second thing I want to note about that number of 3 million. We entered into a recession in 2000/2001 - which was also the point when jobs were being lost. Outsourcing is not the mechanism driving these larger numbers of jobs lost, though. Outsourcing, at present, is accounting for a tiny fraction of the number of jobs lost so far (according to an economist article from three weeks ago, which I'll find and post up here soon). There are three distinct types of unemployment: "frictional," "structural" and "cyclical."

Frictional is nothing to worry about, nor is cyclical. Structural is the kind of unemployment that we all need to worry about, and arguably, if our manufacturing base is going completely overseas, then we will see people who are chronically, structurally unemployed. Why? Because structural unemployment means that workers cannot find work, even when the economy is performing at a normal rate. This might mean you are seeing longterm worker mismatching. Example: we have a comparative advantage in financial services and not manufacturing. We export financial services to the world, and import manufactured goods. Domestic workers in manufacturing are put out of work, and yet, even though we are creating new jobs in financial sector, those workers unemployed in manufacturing cannot transition in. Why not? Well, it's probably obvious - for one, it's not easy to move from lowskill work to highskill work. One needs substantial investments of human capital. It requires education. These are real barriers keeping those workers from entering the new labor market, and since they can't move in, they're going to be chronically unemployed. You would expect this to affect different types of manufacturing workers differently - younger workers might be less affected than older workers, for instance, since younger workers will probably be more flexible in regards to uprooting their families, etc.

Cyclical unemployment is what I personally think we're seeing right now. We entered a recession and unemployment began to rise. We're exiting the recession and unemployment is falling. Not only is it falling, but productivity is high - it is abnormally high, in fact. Productivity had stagnated for a long time, beginning in the early 1970s. It's picked up in the late 1990s, and is now even higher than it had been. I think for 2003, it was around 4%. The reason this is worth holding onto is that productivity is the principal driver of economic growth, and secondly, of the demand for labor. Again, this is why so many economists of all political persuasions are optimistic about job growth, and it's why Greenspan felt like it was right around the corner.

The unemployment we saw is most likely cyclical, not structural. These people are only temporarily out of work. There is possibly some structural unemployment, but we are seeing productivity growth, which means the demand for labor will shift. This is why I still think it's too soon to say anything.

What do you think about this article. In it, Buchanon argues that economic policy should be shaped by power politics and that by allowing our manufacturing to be obsorbed by China, we will diminish in power and China will increase. Here's a quote:

" By keeping the value of their currencies low, Japan and China not only keep their factories humming, as ours shut down, they are effecting the steady transfer of the factors of production from America to Asia. They are making this once self-sufficient Republic a future dependency of Asia, as we ship them our industrial base, our technology, factories, plants, and skilled jobs.

In classical liberal economics, free trade is win-win. But that is not true of power politics, where, as one nation rises, another recedes. As China knows and we have forgotten, trade is foremost among the means nations use to advance in industrial and military power at the expense of rivals. Great powers that run chronic trade deficits, with declining currencies, are invariably fading powers."

If this is true, are you not concerned that China could be shaping and having the most influence on global policy?

test

Bobber, Sorry I didn't reply to this article when you posted it earlier. I printed it out, but the printout cut off the margins, so I didn't read it. I printed it now and will respond.

Bobber - I read the Buchanan article. I don't know anything about power politics, though, so I can't really say much here. I can't really even claim to understand what Buchanan is saying exactly. Because we trade with China, that therefore it is a threat to our national interests? Why exactly? His article is full of a lot of warnings about the consequences of trade, but I guess I don't read Buchanan enough to understand why this is so problematic.

Here's my simple response, though. China is moving towards markets, at least according to what I've read. Per capita, they are still a poor country, but trade is instrumental in raising living standards in their country. Insofar as we care about the plight of Chinese workers - whose standards of living are far, far below that of even the worst American worker - then trade is vital.

Secondly, manufacturing jobs - if they are moving overseas - are doing so because American firms are cutting costs to keep their companies profitable. This move, while tragic for those who lose their jobs, allows shareholders to get returns on their investments and allows the firm to continue to employ their factors of production, including the remaining American workers.

Thirdly, the trade defecit - if I understand it correctly (which I might not) - is not a problem at all. It says that we are consuming more than we are producing. But this is exactly the outcome predicted from trade. Trade allows both participants to extend their consumption beyond their own production. This is, in fact, the thing we mean by "gains from trade." So, the fact that we are importing more than we are exporting is not something I am at all worried about.

As for Lou Dobbs' piece. He points out that we're not creating jobs. I think he's confused about the causes of the unemployment. I think it's cyclical, not structural (ie, permanent). It's being driven by the recession, and as recessions recede, unemployment falls but does so at something of a lag. But we are seeing unemployment falling. It was at 6.2% in June and is now at 5.6%. But regardless of whether you agreee with the accuracy or realism of those statistics (ex: one reason the unemployment rate is falling is because workers are discouraged and have stopped looking for work, which gives the false signal that the real unemployment rate is falling), the productivity measures are very positive. And this is the driver of job creation. Job creation is coming. Firms are seeing the value of workers' production going up (ie, driven by the increased productivity), and as they do, they will need to hire more workers to increase profits. This is coming - it just needs a little more patience.

Dobbs makes the point, like Buchanan, that the US hasn't had a trade surplus in two decades and now has a trade defecit. But to me, the fact that we've had a trade defecit for two decades, and yet have seen substantial economic growth, increases in real incomes (as well as increases in income inequality as lower skilled workers have lost in this period) and increased employment causes me to wonder why Dobbs is therefore so concerned about trade defecits. How exactly will a sustained trade defecit hurt us? Trade defecit just means we're importing more than we're exporting. It means we're consuming more than we produce. But this is exactly the result of trade - trade allows us to consume more than we produce. This is why trade is so important. It functions as a kind of technology which allows us to consume well beyond what we could if we were self-sufficient.

Third, Dobbs says we've lost three million jobs and are at risk of losing more to outsourcing. One, the timing of those three million jobs is very important. We began losing jobs right around the time the recession began. If you look at the history of recessions, what do you see? You see increases in unemployment. And as the recession recedes, what do you see? You see unemployment recede as well - usually lagged a little bit. But we have seen over the last thirty years the manufacturing base getting smaller. The share of employment going to manufacturing has continued to get smaller and smaller, and workers in that industry are feeling the crunch. It's tough for them - very tough. I don't pretend to imagine what it's like to see your future slip away. But as harsh as this sounds, it is nonetheless a good thing, even if it does temporarily put people out of work. For one thing, those lost manufacturing jobs signal to the next generation to not invest their skills and resources in manufacturing. They realize that they need to go to college, that they need to look beyond the plant. This happened before in American history with the farm. It became clear that Americans were going to have to leave farms, and they did. The labor market is constantly changing, and one can never rest on one's laurels. Nobody can. We all have to stay competitive.

And if one doesn't like that, what other option is there? This is the world we live in, and Buchanan is living in a dream world if he thinks that America can actually embrace protectionism. It can't. You saw what happened when Bush just instituted some freaking steel tariffs. The WTO retaliated. How? Not by threatening to blow us up, but by responding with their own tariffs against our exports. Is that what we really want? How is that fair to those other American industries who are then hurt by the rest of the world behaving that way? Besides, there are real gains from free trade - real ones, not imaginary ones. It's key to increasing living standards, raising incomes, driving technological innovation and possibly even diminishing political tension between countries.

Besides, all this talk about job loss - the job loss has stopped. It's stopped, interestingly, once the recession began to also stop - thus giving more evidence that this was cyclical (temporary) unemployment.

I say, sit tight, let's continue to watch what happens. Buchanan is an isolationist and a protectionist. He is not going to tell you that there is anything positive about trade. He's just simply not. He's completely biased, completely non-objective when it comes to this. But I think it's interesting that economists - who are not cut from one political cloth - are more or less in complete agreement on the job market. Almost all of them (I'm sure there are some freaking out, but they're in the minority) aren't worried. Greenspan is completely calm about this. He keeps saying, "we're about to see job growth. IT's coming." And seriously, if there was anything to this, Paul Krugman - the most liberal economist I can think of - would be all over it. He has an agenda against the Bush administration, and would gladly take Bush to town over this if he thought for a second outsourcing and trade really was a problem. But Krugman doesn't criticize Bush on those points. He criticizes him because job growth isn't happening, but that's not the same as criticizing him for embracing free trade. Krugman is a trade scholar; he'll likely win the Nobel Prize for his work in new trade theory. He knows that protectionism sucks, to be frank, and that it's no good for anybody. People who have studied this extensively do not come to the journalistic conclusions of guys like Buchanan and Lou Dobbs.

Sorry this was so long.

Scott,

That was a very good response. Thanks for taking the time to explain yourself and your views. There's a lot there that I understand and I tend to agree with (although, I am not an economist by any stretch of immagination). But one more point on Buchanon's concern's. I think if you look back to WW II and see who the real powers were that helped win that war (both the US and Russia), it was because of manufacturing might. Not so much technological might. Germany had some great technology but couldn't bring it to production fast enough and in enough numbers to make a difference.

The reason why we can respond to the threat of radical Islam today is because of our military might. But this military capability will begin to decrease and erode if we can't create and manufacture the goods (like Germany) and we will grow increasingly more vulnerable to those countries that can. Does that not make sense to you? Yes, I would like to help the poor worker in China achieve a better life. But I have no illusions about the Chinese government. They are not really our allies and I can't believe that you totally trust them to become the biggest supper power due to their military might. Do you?

Is it not a bit illogical to seperate economics and trade from politacal power and it's resulting effects in the world we will live in?

Remember that Buchanon is a historian. He is harkoning back to Alexander Hamilton and the stratagy that made our country great in the first place. Is this not a valid approach to consider?

Just because Buchanan is a protectionist doesn't mean that he's a Hamiltonian. For starters, what are the differences between Buchanan's 21st century America and Hamilton's 18th century America? Let us count the ways . . . (Besides, why would you think that Buchanan's an historian in any serious sense of the word? He's been in politics since the Nixon administration.)

Also, if you like historical examples, recall that America's first foray into trade policy as power politics was Thomas Jefferson's pin-headed attempt to bring Britain to its knees by embargoing American exports to the country prior to the war of 1812. All that did was to impoverish Americans and create an economic special interest group with a direct interest in maintaining high tariffs. His policy consequently had a pernicious affect on U.S. domestic politics for the next century, and contributed to the sectional cleavages that finally expressed themselvse in the Civil War.

In any event, I'm happy to sublimate trade policy to national interest, but that doesn't settle the argument. We need to balance the benefits of free trade against the ostensible political costs that are only possible and uncertain.

Helping China to prosper might risk the rise of an Asian Germany. It might also facilitate the rise of a South Korea.

Why would we want to be dependent on anyone for military manufacturing? South Korea might be more tolerable than China but not ultimately IMHO.

Ok, let's just say that Buchanon has a historical approach to his politics. If you read him frequently, he is always appealing to lessons learned in the past. And the US from the bigining, strobe to be an independent power. That does not seem to be the case today in terms of economics. At least that's the case that Buchanon is making. Of course, he could be wrong. If so, please persuade me.

That Buchanan (not "Buchanon") imputes lessons from the past does not mean that he identifies lessons "learned" from the past.

In order to respond to Buchanan I'd need specific examples. That being said, to be a completly "independent power" means autarky. Unless Buchanan is advocating autarky, then all we're engaged in is line-drawing. Does Buchanan advocate autarky (i.e., no dipolomacy and no trade with other countries)?

Well identifying "lessons learned" may be difficult and subject to opinion. At least Buchanon discusses relevent history to a particular topic.

I do not believe he is advocating autarky. Here is a position statement on trade.

Right, I didn't think he was advocating autarky. So where does he want to draw the line? His organizations states, "A quarter of our steel, a third of our autos, and two-thirds of our textiles were imported."

How much steel can be imported consistent with "jobs" and "security"? An eighth? One twentieth?

How many autos should we produce ourselves if not all of them (i.e., autarky)? Five-sixths? 90 percent?

What percentage of our textiles should be domestically produced?

Further, given that taxes need to be raised to do this -- that's what tariffs are, after all, taxes on imports -- we'd need to justify the expected benefit from the tax increase relative to the cost we're paying in increased prices.

Further, why simply protect industries threatened by foreign competition? Technological innovation has disemployed millions of Americans as well. Why don't we impose protective taxes on, say, automobiles in order to protect workers employed in the horse and buggy industry? I doubt they love their jobs any less than textile workers. Why should American workers in the automobile industry be protected from cheap Japanese cars, but American workers in the horse and buggy industry shouldn't be protected from cheap American cars?

We need some specific justification regarding how much free trade Buchanan believes is consistent with U.S. security and worker interests, and by what magnitude that level of free trade that Buchanan wants differs from the current level. What's the marginal increase in security and employment that Buchanan will provide us, and at what cost?

That was me.

Well, those are some good questions. My thought would be why not pursue a balanced trade strategy like Japan, China, and the EU are persuing? Why not at least adopt the same rules that they are?