Coyote Blog

The media and many politicians have an inventive system that drives them to take the most pessimistic possible interpretation of every economic event (the media to sell papers, politicians to panic us into giving them more control of the economy).   Chinese ownership of US debt securities is one such issue that everyone seems to be in a tizzy about.  Thanks to Don Boudreaux for finally stating the obvious:

In fact,
foreign-government
holdings of U.S. debt arguably make these governments "hostage to the
economic decisions being made in Washington."  The Fed, after all,
could monetize this debt, inflating away its value.  Or Uncle Sam could
repudiate this debt, or unilaterally change its terms in ways
unfavorable to holders.  Or you and your colleagues could implement
economically disastrous policies that drive up long-term interest rates
and, hence, drive down the value of outstanding treasuries.

Finally!  All you have to do to understand this is reverse the situation.  If the US government owned a hundred billion dollars of Venezuelan government bonds, would this really give us power over Hugo Chavez?  Or would it, more likely, given him more power over us, at least in terms of circumscribing our actions?

TJIC has a good example of relying on the government to legislate taste.

More than 30 years after outlawing big flashing signs"¦
Boston wants to bring back some glitz to parts of town deemed too dark
and staid at night.

It's a good thing we've got a single monopolistic authority making aesthetic decisions for everyone.

Saying it wants colorful electronic marquees to create an
atmosphere like Times Square in New York, the Boston Redevelopment
Authority is planning to amend the city's zoning code to permit
electronic signs that make "bold use of graphics" and create a sense of
"animation and motion" and "images that engage the public."

So, basically, the rationale 30 years ago was "some bureaucrat
finds these tacky, so they're forbidden", and now the rationale is
"some bureaucrat likes these, so they're encouraged".

This from the city of Boston, whose government's sense of aesthetics dropped this butt-ugly eyesore of a city hall into the middle of historic downtown Boston:

And, in case you are one who supports government "redevelopment" and mandates on aesthetics but think that it would all work out fine if architectural experts and committees of academics made the decisions, here is the hideous Peabody Terrace at Harvard University, presumably vetted by the finest architectural academic minds in the country:

These buildings, where Harvard stuck me for a full year, were transported right out of East Berlin, right down to the elevators that only stopped on every third floor for efficiency sake (efficiency of the builder, obviously, not the occupant).  The interior walls were bare cast concrete and no amount of heat could warm them in the winter.  It was the most depressing place, bar none, I have every lived.  But the "experts" loved them, and wished that this vision could have been forced by urban planners on all of America:

Leland Cott, an adjunct professor of
urban design at the [Harvard] GSD, calls Peabody Terrace 'a model of design
efficiency, economy, and attention to scale.'

Fortunately, someone gets it:

The magazine Architecture Boston has focused attention on the
controversial aspects of Sert's work by devoting its July/August 2003
issue to an examination of Peabody Terrace, expressing the essential
disagreement about the work in the form of a stark conundrum:
"Architects love Peabody Terrace. The public hates it."

In fact, the public's hostility to the structures may be in
proportion to its degree of proximity, with the most intense feelings
confined to those households on the front lines of the town/gown divide....

Otile McManus, in a companion essay, discusses the reactions of many
Cambridge residents, who have described the complex as "monstrous,"
"cold," "uninviting," "overwhelming," and "hostile," and have compared
it to Soviet housing.

Actually, the most intense feeling were by those who lived there, who really, really hated it  (though I will admit there were several third world students who loved it -- must have been nostalgic for them).  The article goes on to accuse detractors of being anti-modernist.  Which is a laugh, since my house is one of the most starkly modern in the area, so modern I could not sell it several years ago.  I am not anti-modern.  I am anti-bad-design.

Wow!  I am kindof amazed at the hostility I still feel fifteen years after the fact.  I had started out just to link TJIC's post, and here I am in full-blown rant mode.  Sorry.

Here is all you need to know to understand the two political parties as they are in 2007:  Both parties want to return to the 1950's.  The Republican Party wants to return to Leave-it-to-Beaver type social/sexual options and media offerings.  The Democratic Party wants to return to the large company / heavily union work models and economy of the 1950's. 

Which makes the titles "Conservative" and "Liberal" worse than meaningless, since each vision is inherently small-c conservative.  Both fear change, diversity, and risk, though in different sectors of our lives.  In some sense this is the real culture war, between dynamism and fear of change.

I know that my short-term memory isn't very good (a result of my Y chromosome, by my wife's explanation) but I could have sworn that the big issue in the last election from the left (beyond the war of course) was the indictment that real wages were not increasing -- i.e. that the average worker's wages were growing more slowly than inflation.

Now, this hypothesis was mostly bullshit, particularly when you factored in benefits with wages, but economic facts have never stood in the way of a little populist class demagoguing.  However, now it appears that when push comes to shove, no one on the left really believed any of it.

The other day, Kevin Drum posted this:

At the Democratic debate yesterday, Tom Vilsack
proposed a slow reduction in future Social Security benefits by
switching from wage indexing to price indexing

A number of folks, most on the left, called it a really bad idea.  Drum himself didn't have a definitive opinion, but seemed to think the idea at least screwy.  Why?  Well, these folks all thought that a shift from wage to price indexing would reduce benefits, and in fact that is what Vilsack thought -- he proposed it as a way to help close the future cash flow gap in Social Security.  Am I understanding this right?  Because the only way that this switch could reduce benefits would be if wages were growing faster than prices!  Surely I must be missing something?  Do we really have a bunch of Democrats all criticizing a plan because everyone universally assumes wages increase faster than prices?  Doesn't this contradict their whole meme in the election?

So I followed a link in one of these posts to the Center for Budget and Policy Priorities (I don't know how they would describe themselves politically, but looking at their body of work on the home page, you won't confuse them with Cato).  Apparently, this re-indexing scheme was also proposed by GWB (I missed that) and this site was criticizing his plan because it would reduce benefits.  And yes, there was the key line (emphasis added):

Under current law, initial Social Security
  benefits for each generation of retirees grow in tandem with average wages in the economy.  This ensures that each generation receives Social Security benefits that reflect the living standards of its times.  Full "price indexing" would make a change in the Social Security benefit formula so that initial Social Security benefits would keep pace only with prices, rather than wages, from one generation to the next.  Because prices increase more slowly than wages, this would result in progressively larger benefit reductions over time

There you have it.  Democrats and the left criticizing a plan because they assume wages go up faster than prices, so re-indexing from wages to prices would reduce benefits.  In fact, the folks I read accept this fact as so fundamental, everyone just assumes it to be true.  Is this wildly hypocritical or what?

I like reading about the history of science, and one of its more famous chapters is the debate between the Neptunists and the Vulcanists in early 19th century Great Britain.  At the risk of oversimplifying, the debate was over whether the earth's features (and life on it) were formed slowly over long periods, or relatively quickly through catastrophes.  Secondarily, it was about heat and fire vs. water as forces shaping the Earth (thus the names).  Eventually a consensus  (an actual consensus, not a declared one) developed that they were both right in some ways and both wrong in others. 

What struck me reading about this again over the weekend was that it took decades, and sometimes centuries, for this to sort out.  Take the part of this debate over extinction.  The initial consensus was that extinction was due to catastrophes, ala the Biblical flood.  Then Darwin came along and shifted the consensus away from catastrophes, showing that extinctions occurred in the normal order of species action-reaction to threats and opportunities.  And then in the 20th century, revisiting the K-T geologic layer we have come around to dinosaur extinction being catastrophic as a result of a big meteor.  Except nowadays there are scientists who think this is too simplistic.  Geology, in turn, made it all the way until the 1960's before anyone was even talking about plate tectonics, something that was still being derided in the 1970's but is fundamental to our understanding of numerous aspects of the earth today.

And so it goes in normal scientific inquiry.   Scientists expect it to take decades and generations to really shake out new theories and areas of inquiry.  Sometimes, as with Newton's laws of motion, we still accept the theory, though even here we have tweaked at the edges (e.g. relativity when things are moving fast) and exempted certain regions (e.g. quantum mechanics and the very small).  Other times, we have thrown theories that were cherished for decades completely away (e.g phlogistan).   After decades of work, string theory in physics could easily be thrown out completely and looked upon as the 20th century's phlogistan, or it could really be the theory of everything Einstein searched for in vain.

Which is all fine and expected, except when governments are standing by to make trillion-dollar choices, as they are in global warming, a scientific body of inquiry that is barely 20 years old.  Go back to any new scientific theory in its first 20-years, and think about the governments of the world betting the entire global economy on scientific understanding of that theory at that point in time.  It's pretty scary.  We'd probably have a 5-trillion dollar government controlled medical leach industry.

Q&O has a nice roundup on the science around the Sun and the Sun's well documented increase in intensity and its potential affect on global warming.  As I have mentioned before, there is a growing body of evidence that some warming has to be laid at the Sun's doorstep.

The best measurements of global air temperatures come from American
weather satellites, and they show wobbles but no overall change since
1999.

That levelling off is just what is expected by the chief
rival hypothesis, which says that the sun drives climate changes more
emphatically than greenhouse gases do. After becoming much more active
during the 20th century, the sun now stands at a high but roughly level
state of activity. Solar physicists warn of possible global cooling,
should the sun revert to the lazier mood it was in during the Little
Ice Age 300 years ago.

Climate history and related archeology
give solid support to the solar hypothesis. The 20th-century episode,
or Modern Warming, was just the latest in a long string of similar
events produced by a hyperactive sun, of which the last was the
Medieval Warming.

There is a lot more.  I am not ready to say, though, that the substantial increases we have seen in atmospheric CO2 levels are not also having an impact.  That impact is just a lot less than warming-panic-spreaders like Al Gore would like to acknowledge  After all, it is much easier to demagogue your way through an election beating up Exxon and GM than by beating up the Sun.  And, after failing to take over the economy under the banner of socialism, statists want to use global warming to take a second shot at world domination. 

Why the CO2 contribution to warming exists but is greatly overstated is explained here.

Hugo Chavez has had himself declared dictator of Venezuela. 

Venezuela's National Assembly has given initial approval to a bill
granting the president the power to bypass congress and rule by decree
for 18 months.

President Hugo Chavez says he wants "revolutionary laws" to enact
sweeping political, economic and social changes. He has said he wants
to nationalise key sectors of the economy and scrap limits on the terms
a president can serve.

Mr Chavez began his third term in office last week after a landslide election victory in December.

The bill allowing him to enact laws by decree is expected to win
final approval easily in the assembly on its second reading on Tuesday.
Venezuela's political opposition has no representation in the National
Assembly since it boycotted elections in 2005.

Recognize that Chavez is the man, more than any other world leader, that progressives in this country have adopted as their hero.  Nowhere will you see a better illustration of what end-game progressives are really after.

By this definition of "not normal", I am not normal either.  I share with Tabarrok the strong sense that the New Deal (combined with shockingly stupid use of Wilson's Federal Reserve and of course rampant scorched-earth protectionism) extended rather than shortened the Great Depression. 

Imagine, increasing the power of
unions to strike and raise wages during a time of mass strikes and mass
unemployment. Imagine thinking that cartelizing whole industries
thereby raising prices and reducing output could improve the economy.
Not everything Roosevelt did was counterproductive - he did end
prohibition (although in order to raise taxes) - but plenty was and
worst of all was the uncertainty created by Roosevelt's vicious attacks
on business.

One of the things I think we have done historically is understate the true degree to which Roosevelt showed himself willing to take the country down the road to socialism, or more accurately, Mussolini-style fascism. Via David Gordon:

Roosevelt never had much
use for Hitler, but Mussolini was another matter. "'I don't mind
telling you in confidence,' FDR remarked to a White House
correspondent, 'that I am keeping in fairly close touch with that
admirable Italian gentleman'" (p. 31). Rexford Tugwell, a leading
adviser to the president, had difficulty containing his enthusiasm for
Mussolini's program to modernize Italy: "It's the cleanest "¦ most
efficiently operating piece of social machinery I've ever seen. It
makes me envious" (p. 32, quoting Tugwell).

Why did these
contemporaries sees an affinity between Roosevelt and the two leading
European dictators, while most people today view them as polar
opposites? People read history backwards: they project the fierce
antagonisms of World War II, when America battled the Axis, to an
earlier period. At the time, what impressed many observers, including
as we have seen the principal actors themselves, was a new style of
leadership common to America, Germany, and Italy.

Once more we must avoid a
common misconception. Because of the ruthless crimes of Hitler and his
Italian ally, it is mistakenly assumed that the dictators were for the
most part hated and feared by the people they ruled. Quite the
contrary, they were in those pre-war years the objects of considerable
adulation. A leader who embodied the spirit of the people had
superseded the old bureaucratic apparatus of government.

If you don't believe me, it is probably because you are not familiar with the National Recover Act (NRA) -- the famous "blue eagle".  This program was the very heart of Roosevelt's vision for the American economy, a vision of cartelized industries managed by government planners. (via Sheldon Richman of the Concise Encyclopedia of Economics):

The image of a strong
leader taking direct charge of an economy during hard times fascinated
observers abroad. Italy was one of the places that Franklin Roosevelt
looked to for ideas in 1933. Roosevelt's National Recovery Act (NRA)
attempted to cartelize the American economy just as Mussolini had
cartelized Italy's. Under the NRA Roosevelt established industry-wide
boards with the power to set and enforce prices, wages, and other terms
of employment, production, and distribution for all companies in an
industry. Through the Agricultural Adjustment Act the government
exercised similar control over farmers. Interestingly, Mussolini viewed
Roosevelt's New Deal as "boldly... interventionist in the field of
economics." Hitler's nazism also shared many features with Italian
fascism, including the syndicalist front. Nazism, too, featured
complete government control of industry, agriculture, finance, and
investment.

And further, from John Flynn's The Roosevelt Myth via Anthony Gregory:

[Mussolini] organized each trade or industrial group or professional
group into a state-supervised trade association. He called it a
corporative. These corporatives operated under state supervision and
could plan production, quality, prices, distribution, labor standards,
etc. The NRA provided that in America each industry should be organized
into a federally supervised trade association. It was not called a
corporative. It was called a Code Authority. But it was essentially the
same thing. These code authorities could regulate production,
quantities, qualities, prices, distribution methods, etc., under the
supervision of the NRA. This was fascism. The anti-trust laws forbade
such organizations. Roosevelt had denounced Hoover for not enforcing
these laws sufficiently. Now he suspended them and compelled men to
combine.

And read this to see the downright creepy Soviet-style propaganda Roosevelt used to promote the NRA.  One example:

A hundred thousand schoolchildren
clustered on Boston Common and were led in an oath administered by
Mayor James Michael Curley: "I promise as a good American citizen to do
my part for the NRA. I will buy only where the Blue Eagle flies."

The fact that the worst of the NRA was dumped by the Supreme Court, and eventually by FDR under pressure, cause us to forget what businessmen in the 1930's were seeing.  The unprecedented fall in asset prices in the early thirties would normally have started to attract capital, at least from the bottom-fishers.  But any reasonable observer at that time would have seen the US government on a path to controlling wages, prices, capacity, etc  -- not an environment conducive to investment.  In fact, under Roosevelt's NRA industry cartels, its not clear that private industrial investment was even legal without the approval of the Code Authority for that industry.

People look back fondly and give credit to the CCC and large public works programs for our recovery, but in fact these programs were necessary because FDR's New Deal, and particularly the NRA, made private investment dry up.

Postscript:  By the way, questioning the greatness of the New Deal is one of those issues that will get you labeled a wacko almost as fast as being a climate change skeptic.  Here is Janice Rogers Brown getting slammed for questioning the New Deal.

Please stop tell me that I have no right to question Al Gore when he wants to take over the world economy to his own ends.  And please stop telling me that catastrophic man-made global warming is now beyond question:

One of the many disturbing aspects of global warming hysteria is the
way moonbats who use it to promote their ominous political agenda
insist on a consensus that simply does not exist. A recent survey
of more than 12,000 environmental scientists and practitioners by the
National Registry of Environmental Professionals shows that despite the
hysteria and considerable pressure to conform to the "correct" view,
many scientists are choosing skepticism over the safety of the herd.

The survey found that:

• 34% disagree that global warming is a serious problem;
• 41% disagree that warming trends "can be, in large part, attributed to human activity";
• 71% disagree that human activity has significantly contributed to hurricanes;
• 33% disagree that the US government is not doing enough about global warming;
• 47% disagree that international agreements such as the preposterous
  Kyoto Protocol provide a useful framework for addressing global climate
  change.

There are good reasons to believe in some man-made global warming, but there are very good reasons to doubt it will be as catastrophic as portrayed in the media, and very, very good reasons not to hand over the throttle of the world economy to environmental groups in anticipation of such uncertain events.  My position on the skeptical middle ground on climate change is here.

New numbers for US vs. European CO2 growth have been making the rounds, based on a Wall Street Journal article today.  Jonathon Adler at Volokh has the key numbers for CO2 growth rates:

	U.S.	E.U.
1990-1995	6.4%	-2.2%
1995-2000	10.1%	2.2%
2000-2004	2.1%	4.5%

The Wall Street Journal tries to make the point that maybe the US somehow has a better approach to CO2 reduction.  Here is the reality:  Neither the US or the EU has done anything of substance to really reduce CO2 production, because at the end of the day no one can tolerate the political and economic costs associated with severe reduction using current technology.

But there is a story in these numbers.  That story goes back to the crafting of the Kyoto treaty, and  sheds an interesting light on what EU negotiators were really trying to achieve.

The Kyoto Treaty called for signatories to roll back CO2 emissions to 1990 levels.  Since Kyoto was signed in the late nineties, one was immediately led to wonder, why 1990?  Why not just freeze levels in place as they were currently?

The reason for the 1990 date was all about counting coup on the United States.  The date was selected by the European negotiators who dominated the treaty process specifically to minimize the burden on Europe and maximize the burden on the US.  Look at the numbers above.  The negotiators had the 1990-1995 numbers in hand when they crafted the treaty and had a good sense of what the 1995-2000 numbers would look like.  They knew that at that point in time, getting to 1990 levels for the EU was no work -- they were already there -- and that it would be a tremendous burden for the US.  Many holier-than-thou folks in this country have criticized the US for not signing Kyoto.  But look at what we were handed to sign - a document that at the point of signing put no burden on the EU, little burden on Japan, no burden on the developing world, and tremendous burden on the US.  We were handed a loaded gun and asked to shoot ourselves with it.  Long before Bush drew jeers for walking away from the treaty, the Senate voted 99-0 not to touch the thing until it was changed.

But shouldn't the European's get some credit for the 1990-1995 reduction?  Not really.  The reduction came from several fronts unrelated to actions to reduce CO2:

• The European and Japanese economies were absolutely on their backs, reducing economic growth which drives CO2 growth.  I have not looked up the numbers, but the 1990s are probably the time of the biggest negative differential for the European vs. US economy in my lifetime.
• The British were phasing out the use of carbon-heavy domestic coals for a variety of reasons unrelated to carbon dioxide production.
• German reunification had just occurred, so tons of outdated Soviet inefficient and polluting industrial plant had just entered the EU, and was expected to be shut down and modernized for economic reasons over the 1990's.  The negotiators went out of their way to make sure they picked a date when all this mess was in their base number, making it easier to hit their target.
• The 1990 also puts Russia in the base.  Since 1990, as the negotiators knew, the Russian economy had contracted significantly.
• At the same time the American economy was going gangbusters, causing great envy among Europeans.

Kyoto was carefully crafted to make America look like the bad guy.  The European's goal was to craft treaty responsibilities that would require no real effort in Europe, with most of the burden carried by the US.  But times change, and the game is catching up with them.

Prior to the election, folks on the left were pushing the idea that US wages had been stagnating.  Often this argument was a subset of a zero-sum class warfare rant, complaining that though the economy has grown, the "rich" have taken all the gains.

There were always two problems with the hypothesis that real wages were stagnating:

1. "Wages" are only a part of total compensation.  In fact, I don't think anyone denies that real compensation (wages plus benefits) has been growing, and it would not surprise me that non-wage compensation, like health care, has grown much faster than wages.  A discussion about only one component of total compensation is nearly irrelevant.
2. Even if the average is stagnating, that does not mean that the wages for individuals is stagnating.  What is actually going on is that everyone's real wages are improving, but new low-skill low-wage immigrants and teenagers move in behind them and bring the average down.  If you showed real wages for people who were in the work force in 1980 without any entrants after that, average wages would be way up.  The average is less important, from a general well-being standpoint, than what is happening to individuals.

The New York Sun (Hat tip: Most all the libertarian blogosphere) that also takes on these issues.  The author makes the further distinction between individual and family income, and argues you also need to correct for changing family sizes.

The American family has
shrunk due to changes in society, such as more divorces, longer
life-expectancy for women, and fewer children. So family income in 2004
cannot correctly be compared to family income in 1964 "” today's family
income is spread around fewer people.

Adjusting for decreasing family size, real median family income is
13% higher than in 1994, 22% higher than in 1984, 37% higher than in
1974, and 88% higher than in 1964. That's a significant increase.

Mickey Kaus says:

And I was excited about Windows XP,
because I thought its sturdier code would stop it from crashing. I was
wrong, at least for the early version of XP that I bought. Now I can't see a thing Vista's going to do for me that seems worth braving the inevitable Microsoft early teething problems.... Needless
to say, if everyone has this attitude Vista (and the need to buy new
computers powerful enough to run Vista, etc.) won't provide much of a
boost to the economy

Does upgrading an operating system just to fix bugs and flaws in the old version ever really "boost the economy?"  I mean, isn't that the broken Windows fallacy?

[sorry, I couldn't resist.  You don't get many chances at an economics joke]

For some reason, probably because no one there has actually read my blog, the Minutemen Project has me on their email list for press releases.  This one caught my eye:

Judge John H. Wilson has stepped out of his judicial robes to write a children's book. Hot House Flowers is aimed at entertaining and educating children, but adults will find the story an informative and useful object lesson in politics and current events and a cautionary tale to share with family and friends.

Judge Wilson tackles the topic of illegal immigration in an imaginative manner, and the publisher adds a colorful assortment of illustrations to the Judge's metaphorical story of cartoon "hothouse flowers" which must resist the intrusion of weeds from outside the borders of the protected house.

On first reading this, I wanted to barf.  Comparing immigrants to weeds that attack us lovely (Caucasian) flowers is really insulting.  However, on second thought, I thought this analogy was somewhat apt. 

A hothouse flower is one that can't compete or survive outside of the limited confines of its greenhouse.  Rather than being able to survive on its own, a hothouse flower takes a ton of outside care and feeding.  The very term "hothouse flower" when applied to a person tends to mean someone who can't really function in the real world.  And in some sense this is what our citizens and businesses will become in a Lou-Dobbsian world of limited immigration and trade protectionism, each of us hot house flowers or Marie Antoinette's who have no ability to function in the larger world.  We all need healthy interchange and competition with the world at large to stay vital and growing as a country and as individuals.

By the way, a lot of those weeds turn into flowers:

"Over the past 15 years, immigrants have started 25 percent
of U.S. public companies that were venture-backed." These businesses
employ some 220,000 people in the U.S. and have a current market
capitalization that "exceeds $500 billion, adding significant value to
the American economy."

I have been thinking about this previous post on trade and wanted to improve my answer to Jon Talton, our free-markets-hating business columnist in the Arizona Republic.  In his recent column advocating that we finally give up on all this free trade stuff, he said:

Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.

I thought my answer was OK, but I want to take another shot at it, because I hear the argument all the time that "trade only benefits the US if other countries buy our exports."  This is wrong, but this misconception drives many people's thinking on trade.

If we are importing more from other countries but they are not "buying more of our exports," such that we have a large trade deficit, there are two possibilities to explain this:

• The definition of exports is too narrow
• Someone is throwing away value by building up a big pile of US dollars

The first is the most likely explanation.  A dollar is valueless in China, and the UK, and France except to the extent someone thinks they can eventually use it to buy something in the US.  Dollars that aren't or can't be used to buy dollar-denominated assets of some sort have no value.  The money a Chinese exporter accepts from Wal-mart is only valuable if they can recycle it and buy something in the US with it (or trade the dollars to someone else in China who wants to buy something in the US). 

So the dollars we send overseas for imports are going to come back.  But the  reason our trade accounts are out of balance is that the trade deficit numbers they quote on TV define our exports narrowly.  In short, "exports" as commonly measured don't include all the things we sell to foreigners for dollars.

One example of this is if a Chinese company takes the $10 million dollars it earns from exporting to the US and then invests $10 million in US materials to build a factory in the US.  That sounds OK, right?  That seems to be in balance.  But in the way we calculate the trade deficit, that would show as a $10 million trade deficit, because goods (and services) that foreigners buy in the US and consume in the US (rather than back in their home countries) are not considered an "export."  In fact, I would consider this "better" than an export, since both the dollars and the goods stay in the US.  But to trade deficit hawks, this is worse, mainly because their measurement is flawed.

A second example is if a Chinese company take the $10 million dollars it earns from exporting to the US and invests the money in US mortgage bonds.  Again, this would show as a trade deficit, but the US economy benefits from lower interest rates.  In this case, we are again selling foreigners a product, in this case wealth protection, which the US is very good at since we have a more stable economy and stronger rule of law than any other country in the world.  And again, the way we measure "export" does not encompass this product, since our trade measurement has a strong manufacturing bias that does not match the more diverse nature of our economy today.  (For those that lament forefingers helping to fund the enormous government debt, I share your pain, but that is a government spending problem and not a trade problem).

But what if the foreigners are totally perverse.  What if they ignore their own best interests and refuse to buy our exports and just sit on the dollars they get from trade without recycling them in any way to the US?  What if they do this even if by doing so, they would be throwing away billions, even trillions of dollars in value?  As absurd as this sounds, this is exactly the concern Talton and other trade-skeptics raise.

Well, the US in this case would STILL be better off.  First, the US would be getting whatever goods we are buying overseas cheaper or better (or else people would not be buying them).  This would reduce the costs of inputs to other products, and increase money consumers have to spend on other things.  The labor that would have gone into making these products domestically would be redeployed to making other things, increasing our net wealth. 

By the way, it is this last sentence I think Talton and his peers would not accept.  They tend to view employment as zero-sum, ie there are a fixed number of jobs in the world, and if we import, that creates jobs overseas which must reduce jobs in the US.  But labor markets have never worked that way.  As I wrote before:

I have taken on this zero-sum mentality before,
but it is particularly wrong-headed in this case.  Historically, the
argument makes no sense.  For example, the automation of the farm
sector wiped out 80 or 90% of the farm jobs in the US over the last
century.  By the zero-summers logic, we should be impoverished.
Instead, these people were redeployed to manufacturing and service jobs
that create far more wealth than the old 19th century farm employment.
But while people can sort of accept this historically, they can never
accept this in real-time.  But the fact is that when we lose, say, a
textile job to foreign competition, we not only gain because everyone
pays less for textiles and thus has more money to spend on other
things, but that worker gets redeployed over time to higher-value
functions.  Look at the old textile belt in North Carolina - what's
there now?  Electronics and Bio-tech.

By the way, the other thing that would occur if foreigners just buried dollars in the sand without recycling them is that the value of the dollar would rise to levels higher than it would be at if these countries recycled their dollars, thus further lowering the price of inputs for the US.  Talton laments this very effect:

Now, the populists will get a chance to make their arguments,
especially over what the American response should be to Chinese
currency manipulation, tariffs and subsidized exports.

The currency manipulation and subsidized exports have one thing in common:  They are both ways that the Chinese destroy value for their own citizens in order to lower prices for American consumers.  And Talton claims that the populist argument should be to end these practices?  Why?  I think its great that the Chinese want to hold billions in dollars just to keep the dollar high and prices low in the US.  I think its great that their taxpayers want to subsidize lower prices in the US.   I can understand why a Chinese citizen might want this to stop, but why should we, who are the beneficiaries?

Update: By the way, another common misconception is that a trade deficit implies someone is building up a debt.  This is not (not not not) at all true.  We can run a trade deficit indefinitely without building up a debt.  Yes, foreigners are currently investing some of their trade profits in US government bonds necessitated by the federal government's deficit spending, but the two are only weakly related - a trade deficit does not cause government debt.  A great way to see if a columnist has any idea what they are talking about is to see if they confuse the federal budget deficit with the trade deficit.  It is almost funny how often I see this confusion appears in print.  Anyway, this confusion is why people like Talton call the trade deficit "unsustainable".  See my posts on why the trade deficit is not a debt (and here).

I was wondering this morning if I could turn public opinion against penicillin.   After all, hundreds of people die every year from taking penicillin.  If I ran a newspaper, every day I could feature another heart-rending story about a small child or a single mother with four kids dieing from a penicillin allergy.  Sure, some heartless fools who don't understand these poor people's suffering will say that penicillin is a net benefit.  But that will be easy to counter - I'd ask them to show me who was saved.  Sure, lots of people take it, but how can you prove they would have been worse off without it?  How can you prove how many people would have died without it?  I would have an easy time, because the victims of penicillin are specific and very visible, and the beneficiaries are dispersed.

I thought of this analogy while I was reading Jon Talton's column on the front page of the Arizona Republic business section celebrating the Democratic victory in Congress because we may finally be able to get rid of this awful free trade stuff.  As an aside, Talton has always been an interesting choice as the primary business columnist int he Republic, given that he doesn't really feel bound by the teachings of economics and he really does not like business.   His socialist-progressive formulations may be appropriate somewhere in the paper, but seem an odd choice for lead business columnist, sort of like finding a fundamentalist evolution denier, who still accepts Archbishop Usher's age of the earth, as lead science columnist.

I would fisk Talton's column in depth, but he doesn't really say anything except throwing together a hodge-podge of progressive rants against globalization (CEO pay, China, decimation of manufacturing -- he's got everything in there).   Like most progressives, he extrapolates flatness (not even declines, but flatness!) from 2001-2004 and declares that the world economy has changed and he has seen a major macro-economic trend (no mention of how the business cycle and recession we had in the same period might have affected things).

I will just take on one piece, where he says:

Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.

Economists, what grade does Mr. Talton get?  F!  Because he demonstrates that he does not understand the economic argument for trade.  Because the argument does not actually require that foreign countries buy our exports for us to be better off with trade.   Comparative advantage says that even imports alone help our economy, allowing us to purchase inputs more inexpensively and refocus our domestic labor on tasks which we do comparatively better. 

The second fallacy with his statement is that export numbers grossly understate the amount of goods and services that foreigners buy from us.  Exports are only the goods they buy from us and take back to their country.  But foreigners buy many goods from us and use them in the US (say to build a factory or as an investment or financial instrument) and these foreign purchases of American goods don't show up as exports.  As long as the US is the safest and most stable country in the world, we will probably always run a trade deficit, as foreigners will continue to want to keep the goods and financial instruments they buy from us in the US where these assets are safer.  I wrote a lot more about this topic, and the recycling of dollars from China, here.

Finally, implicit in this anti-globalization view of trade is an assumption that the economy is zero-sum -- ie, there is sort of a global fixed pool of jobs, and if China gains steel market share and employment, the US net loses employment.  I have taken on this zero-sum mentality before, but it is particularly wrong-headed in this case.  Historically, the argument makes no sense.  For example, the automation of the farm sector wiped out 80 or 90% of the farm jobs in the US over the last century.  By the zero-summers logic, we should be impoverished.  Instead, these people were redeployed to manufacturing and service jobs that create far more wealth than the old 19th century farm employment.  But while people can sort of accept this historically, they can never accept this in real-time.  But the fact is that when we lose, say, a textile job to foreign competition, we not only gain because everyone pays less for textiles and thus has more money to spend on other things, but that worker gets redeployed over time to higher-value functions.  Look at the old textile belt in North Carolina - what's there now?  Electronics and Bio-tech.

The problem with trade is very like the one in the penicillin analogy -- it is all-to-easy to identify the few short term losers, who lost their job in American industries that can't compete with foreigners, but all-too-hard to find the huge dispersed benefits from lower prices and the continuing creative destruction that comes with strong competition.  This doesn't mean that individuals lives aren't disrupted, but it does mean that it's short-sighted to the point of being a Neanderthal to use these disruptions as an excuse to throttle free trade, just as it would be short-sided to ban penicillin because some people have allergic reactions.

It will be interesting to see if the Lou Dobbs populists rule the day on this issue.  If so, they it will be ironic that it is the Democrats, not the Republicans, who take the first major steps to dismantling the work of Bill Clinton  (because it sure as heck hasn't been GWB supporting free trade).

My prior posts on why you should stop worrying and learn to love the trade deficit are here and here and here and here.  I also looked at trade with China from the other side, and found it is China that should be mad about their government's trade policies and currency manipulation, not us:

It is important to note that each and every one of these
government interventions subsidizes US citizens and consumers at the
expense of Chinese citizens and consumers.  A low yuan makes Chinese
products cheap for Americans but makes imports relatively dear for
Chinese.  So-called "dumping" represents an even clearer direct subsidy
of American consumers over their Chinese counterparts.  And limiting
foreign exchange re-investments to low-yield government bonds has acted
as a direct subsidy of American taxpayers and the American government,
saddling China with extraordinarily low yields on our nearly $1
trillion in foreign exchange.   Every single step China takes to
promote exports is in effect a subsidy of American consumers by Chinese
citizens.

This policy of raping the domestic market in pursuit of exports
and trade surpluses was one that Japan followed in the seventies and
eighties.  It sacrificed its own consumers, protecting local producers
in the domestic market while subsidizing exports.  Japanese consumers
had to live with some of the highest prices in the world, so that
Americans could get some of the lowest prices on those same goods.
Japanese customers endured limited product choices and a horrendously
outdated retail sector that were all protected by government
regulation, all in the name of creating trade surpluses.  And surpluses
they did create.  Japan achieved massive trade surpluses with the US,
and built the largest accumulation of foreign exchange (mostly dollars)
in the world.  And what did this get them?  Fifteen years of recession,
from which the country is only now emerging, while the US economy
happily continued to grow and create wealth in astonishing proportions,
seemingly unaware that is was supposed to have been "defeated" by Japan.

I was going to respond to Kevin Drum's post crowing that the Oregon minimum wage increase didn't do any harm.  But Brian Doss at Catallarchy does a fine enough job that I will outsource to him. Here is a taste:

The 5.4% unemployment rate tells us a bit more; its 1 point higher
than the national average. I'm not going to be as quick as Kevin to
infer causation from correlation here either, but it doesn't seem like
much of a positive spin to say that a rate of unemployment that's 25%
higher than the national average is good because it happened to be 7.2%
back in 2002"¦

Also, the quote seems seriously confused that there is a meaningful
distinction (in this case) between the theoretical and statistical
(what else would employment economists use in their theory?). Despite
that confusion, David Neumark (mentioned in the WSJ article) does lay out a fairly comprehensive, concrete,  statistical study of minimum wage laws and their effects here,
among other things showing that for whatever else a minimum wage does,
the effect is primarily among the teenaged to those in their early 20s,
the sign is negative, and in the long run negative if a minimum wage
prevents a teen or young adult from gaining employment and more
importantly not gaining the habits of employment.

Further evidence of the this kind is summarized by Alex Tabarrok here,
whereby he relates studies showing that 25% of the folk on the mininum
wage (nationall) are teenagers, and 50% of all minimum wage earners are
aged 25 and younger. These are people, Alex notes, that with age and
experience will likely soon earn more than minimum wage anyway, thus as
an antipoverty tool it's fairly weak....

Its a particularly bad antipoverty tool, it has non-trivial effects
on the structure of employment within and across industries, and has
possible non-trivial long term negative effects on low-skill
individuals' abilities to stay employed and to increase their own
productivity and standards of living. All of the things it purports to
want to do can be done by much more targeted, efficient, and effective
policy tools.² 

"˜Liberals' of America, please, I beg of you: save your breath for policies that actually help poor Americans, eh? And it you won't do it for me, can you do it for the children"¦?

There is much more good stuff.

Whenever I read these articles by progressives that basically boil down to "the most basic laws of supply and demand don't apply to labor, which is the most fundamental trade good in the economy," I just have to shake my head.  I am reminded of my advice to progressives:

Economics is a science.  Willful ignorance or emotional
rejection of the well-known precepts of this science is at least as bad
as a fundamentalist Christian's willful ignorance of evolution science
(for which the Left so often criticizes their opposition).  In
fact, economic ignorance is much worse, since most people can come to
perfectly valid conclusions about most public policy issues with a
flawed knowledge of the origin of the species but no one can with a
flawed understanding of economics.

When I see statements like this, I am left to wonder whether folks on the left really believe this, or if it is just throwaway political rhetoric which no one really expects intelligent people to believe (key passage in bold):

But how are people dealing with these drops on their own today?
Mostly by going into debt. As I show in my book, median household debt
as a share of income for married parents was more than 125 percent of
income in 2004. The economist Herb Stein once said, "If something can't
go on, it won't." And the debt hemorrhage of the American family simply
can't go on.

If the returns of rising risk add up to the ability to borrow more
to dig oneself out of short-term holes (thus digging a deeper long-term
hole), then I think we can safely say that most Americans would be
happy to give up the returns to obtain greater security.

But here's the kicker: We can provide security and help our
economy. Just as businessmen and entrepreneurs are protected against
the most severe economic risks they face to encourage economic
investment and growth, we are most capable of fully participating in
our economy, most capable of taking risks and looking toward our
future, when we have a basic foundation of financial security.

How are businessmen and entrepeneurs protected?  By who?  I own and run my own small business, and I have yet to encounter
anyone who has given me any help or succor in our bad years. Or good
years. I don't even get covered by the minimum safety net type stuff my
employees have (workers comp, unemployment) without paying extra out of
my own pocket, which they don't have to do.

This is exactly the kind of throwaway absurdly false statement that
makes it impossible for me as a small business owner to take anyone on
the left seriously, however much I am attracted to them for their
position on a variety of social and war issues. I am sure that this is
the type of statement that most of his readers on the left nod their
heads to, sure that all of us business owners are all dialed into the
fat life somehow via the government, when in fact I spend most of my
life dealing with the myriad of government-required wastepaper that
makes it nearly impossible to run a business at all.

  I am certainly willing to believe that there are certain Fortune
100 companies that recieve all sorts of government rents -- Steel
companies, in the form of protectionism; Wal-mart, in tax abatements
and eminent domain handouts; ADM, in the form of ethanol subsidies;
tobacco companies, in the form of government roadblocks to new
entrants.

However, these type of large politically connected corporations make
up about .001% of the total mass of corporations. And, entrepeneurs,
unless they are already rich and powerful from a previous business,
never get any breaks and in fact often face government roadblocks set
in place by powerful incumbents with political pull. I am all for
eliminating these coporate welfare handouts and incumbent protection
schemes. Before you scream aha! remember that 3 of the 4 government
rent recipients I listed as examples are beneficiaries of programs from
the left side of the aisle.

I discussed this risk-shift concept in more depth here.  One thing I didn't mention in the previous article was the author's attempt to tie household debt to income risk.  I skimmed the book and didn't see any
empirical linkage between rising income uncertainty and household debt.
I am willing to believe they both went up at the same time, but
correlation is not equal to causation. Ten years ago, when folks
lamented rising household debt, it was an issue of personal
responsibility and having the discipline to live within one's means.
Are we past that now? Is debt really going to be added to the list of
things nowadays that are-not-my-fault?

Update:  If he is referring to stuff like this, I share his outrage.  But it doesn't justify his general statement.

Hit and Run, trying to make a different point, quoted this statement from Harold Meyerson (my emphasis added):

But the new growth of selective libertarianism in the Democratic ranks
is hardly going to be the main source of controversy in coming party
debates. More likely, that debate will pit those who think retraining
is the answer to our more layoff-prone society (that's the Bob Rubin
solution) against those who think that retraining needs to be
supplemented by, for instance, publicly funded alternative energy
programs that would generate millions of jobs (that's the solution of a
number of union leaders, and one that I favor as well). The latter
position is clearly more in the New Deal liberal mode, but Rubin's is
hardly libertarian.

Do serious people actually favor publicly funded alternative energy programs of the scale that would employ millions of people?  Note that since the total civilian labor force is approximately 150 million people, he is talking about a program encompassing several percent of the US workforce.  I am supposed to be on vacation this week, but here are a couple of random thoughts:

• A huge government make-work program seems to be an odd response to an increase in employment volatility, which is how the problem is framed, even by Meyerson.  He calls it our "layoff-prone society."  I don't accept that this is necessarily a bad thing, but even if it is, a jobs program does not solve it.  Our unemployment today is at a low level (less than 5%) so that the problem, if it exists at all, has to be volatility, not the absolute size of employment.  So a jobs program helps, how?
• I will confess a big government-funded jobs program would reduce employment risk in one way:  once someone is hired by the government, whether it be a teacher or bureaucrat,  it is impossible short of a felony conviction to fire them, no matter how horribly destructively incompetent they are.  So anyone hired by this new job program would have a job for life, I guess, though at an enormous dead-weight-loss of the overall economy.
• The current economy hovers near full employment.  That means that millions of people sucked by the government into an alternative energy program would be pulled out of areas the market currently says is the most productive place for them.  Unless the government has identified a massive market inefficiency, such a program will net reduce the productivity and output of the economy.  Remember -- these millions of people are likely employed somewhere else today, so those places they are employed either have to scale back or pay more for labor.
• Does anyone really think the government is going to make the right technology and investment choices in such a program?  It will take about 47 seconds before the investment process is politicized and spending is handed out as pork to valued supporters in key Congressional districts. (just look at ethanol and the Midwest Archer Daniels Midland lobby). Remember, the government has been pouring all its investment and subsidies and regulations (e.g. zero emissions requirements) into plug-in electric cars, which still are not there technologically.  In the mean time, the market has latched onto hybrids, a technology actually opposed at first by government energy czars in places like California (because they were not zero emissions).  Hybrids have done more to reduce automotive fuel consumption than any of the technologies, from plug-ins to fuel cells, that the US government has supported in any big way.

Postscript:  Yes, I know plug-in hybrids may be here soon, but batteries are apparently still not where they should be.  I would love to have a plug-in hybrid.  Note, of course, a plug-in hybrid is very very different from a straight electric car, which was the choice of the bureaucrats.  Also, I know that some areas have started to subsidize hybrids, for example by allowing their use by one passenger in the car-pool lane.  These are late-to-the-party efforts to claim some government credit for a private market trend already in progress.

Update:  In fact, today's SJ($) brings us a relevent example:

[Former Airbus CEO] Mr. Streiff talked of moving production jobs between
partner countries, running Airbus like a business. For the first time,
there was talk of apportioning work on the basis of competitiveness,
not national entitlement. There were hints that Airbus should emulate
Boeing with major risk-sharing partnerships, looking beyond Europe for
new product development resources and production sites. He even
committed the ultimate sin"”publicly admitting that Airbus had fallen
over a decade behind Boeing in new product development.

In his exit statement, Mr. Streiff said, "I
progressively came to the conviction that the mode of corporate
governance at Airbus didn't allow for the success of my plan." In other
words, the now former CEO implies, he was blocked by people who like
the status quo. So who would be happy with the status quo when the
situation is degenerating with each day? Well, any government official
who wants governments to stay in charge of the economy. The last thing
they want to see is private sector cash reinventing the fruit of their
state-directed industrial policy.

For the best clue to this dysfunction, consider
France's finance minister, Thierry Breton. He recently told reporters
that Airbus is a "European success," but vowed to "defend this model."
Now why would a model need defending if it were successful?

Airbus was created when European governments
orchestrated their economies, creating new national and continental
champions according to politicians' whims. As far as industrial policy
goes, Airbus was a no-brainer: The jetliner industry offers guaranteed
growth rates and extremely high barriers to entry. Take some legacy
industrial assets, insert government cash, find some talented sales
people, and watch it go. Every other European industrial
scheme"”shipbuilding, cars, Concorde"”obliterated value. Airbus was the
only state-supported success. Unfortunately, Europe's politicians
forgot a crucial fact: Airbus succeeded despite government industrial
policy, not because of it. In fact, this government interference has
created some serious trouble.

Look at the Airbus record: a series of moderate
successes (A300/310, 330), one huge home run (A319/320/321), and some
lamentable but forgivable near misses (A340, A340-500/600). But with
the full support and connivance of parent governments, they launched a
spine-breaking disaster, the superjumbo. Without the A380, Airbus would
still be a tremendous success. Instead, they've got a serious
industrial crisis, right in the middle of the best jetliner market in
years. Mr. Breton's "model" of state-guided industries is alchemy in
reverse: spinning gold into straw.

I'm not really into the culture, so prevalent here in Scottsdale, of purchasing expensive cars and boats for use as ego-prosthetics (I drive a Volvo, for god sakes, a chick-anti-magnet if there ever was one).  But I have to admit this is cool, a new supersonic business jet.  The real breakthrough seems to be their ability to substantially reduce the sonic boom, which got the Concorde banned from over-land flights, to a legal and manageable level.  They claim sound levels 99% lower than the Concorde at ground level, though this is theoretical and has not been tested.

They don't mention fuel economy -- the Concorde drank fuel. 

Oh, and the price - expected to be $80 million for a twelve seat aircraft.  For those of you who don't routinely shop for private aircraft, this price is steep even in that rarefied market.  You can get a Boeing 737 outfitted very nicely as a private plane for half that.  But this new plane will get you to your house in Gstaad twice as fast.

On a number of occasions, I have pointed to the strong echos of Italian-style fascism in Roosevelt's New Deal, particularly in the National Recovery Act, which was practically a copy of Mussolini's political-economic model.  David Gordon reviews a new book called the Three New Deals which delves deeper into this parallel development on matters of state control of the economy between Roosevelt, Hitler, and Mussolini.

Roosevelt never had much
use for Hitler, but Mussolini was another matter. "'I don't mind
telling you in confidence,' FDR remarked to a White House
correspondent, 'that I am keeping in fairly close touch with that
admirable Italian gentleman'" (p. 31). Rexford Tugwell, a leading
adviser to the president, had difficulty containing his enthusiasm for
Mussolini's program to modernize Italy: "It's the cleanest "¦ most
efficiently operating piece of social machinery I've ever seen. It
makes me envious" (p. 32, quoting Tugwell).

Why did these
contemporaries sees an affinity between Roosevelt and the two leading
European dictators, while most people today view them as polar
opposites? People read history backwards: they project the fierce
antagonisms of World War II, when America battled the Axis, to an
earlier period. At the time, what impressed many observers, including
as we have seen the principal actors themselves, was a new style of
leadership common to America, Germany, and Italy.

Once more we must avoid a
common misconception. Because of the ruthless crimes of Hitler and his
Italian ally, it is mistakenly assumed that the dictators were for the
most part hated and feared by the people they ruled. Quite the
contrary, they were in those pre-war years the objects of considerable
adulation. A leader who embodied the spirit of the people had
superseded the old bureaucratic apparatus of government.

He also gives us a good hint as to why so many people on the left today are trying to find way to paint the American economy as somehow broken or at some historical low point:

He concludes the book by recalling John T. Flynn's great book of 1944, As We Go Marching.

Flynn, comparing the New Deal with fascism, foresaw a problem that still faces us today.

But willingly or
unwillingly, Flynn argued, the New Deal had put itself into the
position of needing a state of permanent crisis or, indeed, permanent
war to justify its social interventions. "It is born in crisis, lives
on crises, and cannot survive the era of crisis"¦.

I guess it's inevitable come election time, but a cottage industry has arisen of late to spread the word that the US economy is broken and that conditions for all but the rich are actually eroding.  This historically has been a winning strategy -- Remember, in late 1992 Bill Clinton campaigned with the absurd (but generally unchallenged in the media) contention that it was the worst economy since the Great Depression.  Most of the lamentations about the current condition of the poor and middle class are presented with the standard populist baggage that the economy is zero-sum, and these groups ills are somehow related to and the result of the income growth of the very rich.

Jacob Hacker of Yale now adds to the chorus, arguing that in addition to worse material fortunes, the middle class faces more risk.  As someone who gave up a good, high-paying job in corporate America for the risk roller coaster of running by own business, I have little sympathy -- after all, I am part of his trend and I happily chose my path.  And its astonishing to me in this day and age anyone can argue that we have too much of a culture of personal responsibility.  Please.

However, rather than fisking this in depth, I will leave the task to my much more capable ex-roommate from Princeton, who also happens to be a senior something-or-other at Cato, Brink Lindsey:

But if we're talking about
security from material deprivation, that's a different story. Let's
start with the biggest risk of all: that of premature death. Back in
1970, during Mr. Hacker's golden age of economic stability and
risk-sharing, the age-adjusted death rate stood at 12.2 deaths per
1,000 people. By 2002, it had fallen more than 30%, to 8.5 per 1,000.
In particular, infant mortality plummeted to 7.0 from 20.0, while the
number of Americans killed on the job dropped to three per 100,000
workers from 18.

Next, look at the two main
indicators of middle-class status: a home of one's own and a college
degree. Between 1970 and 2004, the homeownership rate climbed to 69%
from 63%, even as the physical size of the median new home grew by
nearly 60%. Back in 1970, 11% of Americans 25 years of age or older had
a college or higher degree. By 2004, the figure had risen to 28%.

As to consumer possessions, the
following comparison should suffice to make the point. In 1971, 45% of
American households had clothes dryers, 19% had dishwashers, 83% had
refrigerators, 32% had air conditioning, and 43% had color televisions.
By the mid-1990s all of these ownership rates were exceeded even by
Americans below the poverty line.

No matter how the
doom-and-gloomers torture the data, the fact is that Americans have
made huge strides in material welfare over the past generation. And
with greater wealth, as well as improved access to consumer credit and
home equity loans, they are much better prepared to deal with the
downside of increased economic dynamism.

Mr. Hacker leans heavily on his
findings that fluctuations in family income are much greater now than
in the 1970s. But research by economists Dirk Krueger and Fabrizio
Perri has shown that big increases in the dispersion of income have not
translated into equivalent increases in consumption inequality. In
other words, most Americans are able to use savings and borrowing to
maintain stable living standards even in the face of economic ups and
downs. And those standards are much higher than those of the
all-in-the-same-boat era.

Mr. Hacker, however, shows little
interest in providing such context or balance. Fully committed to what
could be called a "free market bad, big government good" narrative, he
simply ignores data that point in the other direction. Thus he
lambastes reforms such as Health Savings Accounts and Social Security
privatization for shifting risks onto individuals while failing to
mention that the policy status quo imposes massive risks of its own.

I know Brink has been finishing up his new book.  I would love to see him start blogging again.

More Thoughts:  I have a couple of thoughts of my own on the risk issue:

• Risk, I guess defined as income volatility, may be higher for the average person today that it was in 1970.  However, in a broader context, it is still drastically lower than any time in history or than in most places in the world.  Certainly pre-WWII people had substantially more risk in their income, particularly in the agricultural sector, which dominated the economy of this and other countries through most of history.  In subsistence agricultural economies, every year even the most productive and competent people face not just the risk of income loss but starvation and extinction through factors wholly beyond their control.
• The vast majority of the risk reduction people experienced in this country after WWII came from the operation of the private market economy, and not from government programs.  It was the incredible productivity growth, export growth, and technology growth of American industry that provided whatever security people might be nostalgic for.
• Further, the author worries about a risk-shift.  But in the 50's and 60's, there was very little risk in the system.  Corporations faces little risk in world markets, executives at corporations faced little risk to their jobs, and most workers faced little risk.  There has not been a risk shift -- this implies there was once some Atlas that bore the burden of all this risk and has now shrugged.  One might argue that there is more risk in the whole system - corporations are not guaranteed their market share so workers are not guaranteed their jobs.  The author tries to make it a populist argument, as if rich folks are shrugging off risk onto the poor.  The fact is that everyone faces more income volatility today, from largest corporation to lowest paid worker.  The good news, as Mr. Lindsey points out, is that this volatility is around a much higher mean.
• The costs of income security programs were always funded by workers
  themselves.  There was never a time when this security was provided by a mythical "someone else".  General revenue programs like welfare and defense over
  the last 30 years have been effectively funded by "the rich", since by
  any definition, that is who pays the income taxes.  However, programs
  like social security, Medicare, and unemployment are all based on
  payroll taxes with caps that mean that most of the tax is paid for by
  the poor and middle class themselves  (some of these are technically
  paid as a percentage of wages by the employer, but trust me that they
  have the same effect on take-home pay as if they had been deducted
  directly from the employee's check).  To the extent workers have
  security, it is only because they have been forced to buy and pay for
  an insurance policy.  So again, there can be no shift, because the workers bore the cost of the insurance themseleves.  Are they getting good value for this insurance?  I don't know --
  nobody knows.  Many reform proposals the author worries will further
  increase risk in fact are structured to put this insurance premium back
  in the hands of the worker, to let him or her decide if and how they
  want to spend it to insure themselves.
• The current obsession with this topic of risk strikes me as a case of white collar bias.  I am not sure anyone but the highest seniority workers ever had this mythological income security in the blue collar sector.  Layoffs and technology-based job obsolescence that created turmoil for blue-collar workers never seemed to touch white collar workers in the same way.  My sense is that what's new today is that middle class white collar workers are now facing these same forces of change, in many industries for the first time.  In fact, a skilled machinist is probably more secure in his job today than an account paybables clerk.  For years, the left has joined unions in criticizing companies like GM for continually cutting blue collar jobs without touching bloated white collar payrolls.  It's odd to see them jump suddenly to the other side of the issue.
• I hate to point out the obvious, but what government income-risk-management program has gone away since 1970, other than welfare reform?  Social Security, unemployment insurance, food stamps -- they all exist, most at levels higher than 1970.  Government-funded health care programs cover far more people for far more stuff.
• Certainly some private practices have changed that may affect employee risk.  It is interesting that the author mentioned 401K's.  To Hacker, shifting from defined benefits pensions to 401K's is an increased risk.  I am sure he would point in part to plans like Enron's where 401K holders took a bath because they were encouraged to funnel a lot of their savings into Enron stock.  But most 401K plans don't work that way, and it does not matter since defined benefit plans are even worse.  Defined benefit plans presuppose that the company you work for will remain financially solvent for decades, and they assume workers will never switch jobs, since they are not very portable.  Defined benefit plans are horrible for workers  -- it reduces their flexibility and increases their risk.  401K's are a fabulous, worker-empowering invention and are bad only for a few union leaders and large pension fund managers (e.g. Calpers) who gain political power by virtue of the money they control.
• Yes, many jobs are less stable, but there is no evidence that there are long-term unemployed people out there.  The nature of the people losing work and the job market today has changed, such that there are much better tools to find new work, and there is more work out there for their skills.  White collar workers today probably find new work easier than blue collar workers in West Virginia ever did in the 1950's and 1960's when the mines closed.  My guess is that most everyone from Enron has found a new job (or jail cell).  There are people in Appalachia who still haven't found a job 40 years after the mine closed.

Economics have a concept called the "broken window fallacy" that many of the media to this day do not understand.  Here is an example:  Every hurricane season, the media always writes a "silver lining" story about how recovery from a devastating hurricane spurred the local economy.  One might assume from this reasoning that it is good to go around breaking windows, since one will make a lot of work for glaziers and boost the economy.  The problem is what is not measured.  What would the money that was spent on window replacement have been spent on instead?  It is a safe presumption that had they not had to repair storm damage, they would have spent the money on something more productive  (test:  if this were not true, everyone would be breaking their own windows).  Advocating the broken window fallacy is a bit like saying that stealing money from banks would increase the savings rate, since people would have to deposit even more money to replace that which was stolen.

Anyway, I bring this example up because today I saw the most amazing example of the broken window fallacy I have ever seen, via Kevin Drum and Business Week:

 Business Week's cover story in their current issue tells us that healthcare inefficiency is what's keeping the American economy afloat:

The
very real problems with the health-care system mask a simple fact:
Without it the nation's labor market would be in a deep coma.  Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related
industries such as pharmaceuticals and health insurance. Meanwhile, the
number of private-sector jobs outside of health care is no higher than
it was five years ago.

.... The U.S. unemployment rate is 4.7%, compared with 8.2% and
8.9%, respectively, in Germany and France. But the health-care systems
of those two countries added very few jobs from 1997 to 2004, according
to new data from the Organization for Economic Cooperation &
Development, while U.S. hospitals and physician offices never stopped
growing. Take away health-care hiring in the U.S., and quicker than you
can say cardiac bypass, the U.S. unemployment rate would be 1 to 2
percentage points higher.

....Both sides can agree that more spending on information
technology could reduce the need for so many health-care workers. It's
a truism in economics that investment boosts productivity, and the U.S.
lags behind other countries in this area. One reason: "Every other
country has the payers paying for IT," says Johns Hopkins' Gerard
Anderson, an expert on the economics of health care. "In the U.S. we're
asking the providers to pay for IT" "” and they're not the ones who
benefit.

Let's go back to slow-motion instant replay.  What was that first line?

Business Week's cover story in their current issue tells us that healthcare inefficiency is what's keeping the American economy afloat

I am not seeing things, am I?  Did he really write that it is the inefficiency of one of the largest and most ubiquitous and perhaps most important industries in the country that is propelling the economy?  Do I really have to state the obvious?  Do you really think that if all those people were not hired to push paper around in health care they would be sitting unemployed today?  What about all the money either consumers or corporations would be saving from more efficiency -- would that really not have been spent on something else?

In a way, I guess this is sort of consistent with Drum's position on Wal-Mart.  If Wal-Mart is detroying the economy (according to him) by bringing increased productivity to retail, I guess this argument that health care inefficiency helps the economy is at least consistent.  Maybe if we could get our state drivers' license agency folks to take over the whole economy, we would have a boom! And the old Soviet Union must have been an economic powerhouse!

This is some of the worst economics I have seen in a while.  Lefties like Drum often rail against conservatives for being anti-scientific in their opposition to teaching evolution or approving the morning-after pill, but for God sakes the most fundamentalist Bible-belt home schooled conservative Christian probably knows more about the science of evolution than journalists understand about the science of economics.

I hate the term "pro-business."  In my mind, it helps to define what is wrong with the political choices we are presented with in this country.  All of us in civics class were taught the statist "heads I win, tails you lose" political spectrum from left to right.  On this spectrum, everyone is in favor of government intervention and the sacrifice of one group of people to another.  The only thing that varies across the scale is who is the beneficiary of the plunder and the targeted areas of intervention.  For years, most of the politicians who have called themselves "pro-business" were not free market capitalists -- they spent much of their time in office sending their businessman-buddies slices of pork, zoning variations, special permission to trash other people's property (e.g. via pollution) etc.

Beyond the fact that we small government libertarians and anarcho-capitalists are given no spot on the civics class political spectrum, I have always been frustrated at being lumped together with "pro-business" politicians, and have been asked to defend (which I won't and can't) various subsidies and corporate welfare.  An example of my attacks on this type of corporate welfare crap are here and here.

So, without further comment, I present this great except from an article by Gary North of the Mises Institute:

The idea that businessmen are strong defenders of the free
enterprise system is one which is believed only by those who have never
studied the history of private enterprise in the Western, industrial
nations. What businessmen are paid to worry about is profit. The
problem for the survival of a market economy arises when the voters
permit or encourage the expansion of government power to such an extent
that private businesses can gain short-term profits through the
intervention into the competitive market by state officials. Offer the
typical businessman the opportunity to escape the constant pressures of
market competition, and few of them are able to withstand the
temptation. In fact, they are rewarded for taking the step of calling
in the civil government.

The government's officials approve, but more to the point, from the
point of view of the businessman's understanding of his role,
shareholders and new investors also approve, since the favored
enterprise is initially blessed with increased earnings per share. The
business leader has his decision confirmed by the crucial standards of
reference in the market, namely, rising profits and rising share prices
on the stock market. No one pays the entrepreneur to be ideologically
pure. Almost everyone pays him to turn a profit.

This being the case, those within the government possess an
extremely potent device for expanding political power. By a
comprehensive program of direct political intervention into the market,
government officials can steadily reduce the opposition of businessmen
to the transformation of the market into a bureaucratic, regulated, and
even centrally-directed organization. Bureaucracy replaces
entrepreneurship as the principal form of economic planning.
Bureaucrats can use the time-honored pair of motivational approaches:
the carrot and the stick. The carrot is by far the most effective
device when dealing with profit-seeking businessmen.

Those individual enterprises that are expected to benefit from some
new government program have every short-run financial incentive to
promote the intervention, while those whose interests are likely to be
affected adversely "” rival firms, foreign enterprises, and especially
consumers "” find it expensive to organize their opposition, since the
adverse effects are either not recognized as stemming from the
particular government program, or else the potential opponents are
scattered over too wide an area to be organized inexpensively. The
efforts of the potential short-run beneficiaries are concentrated and
immediately profitable; the efforts of the potential losers are
dispersed and usually ineffective.

If true, the notion discussed here that the media will portray the same economy as better if a Democrat is in the office and worse if a Republican is in the office may be as good a reason as any to vote Democrat.  Then the media will get off the current silly "worst economy in forever" meme and maybe the presure on the goverment to step in with some sort of silly, ill-considered, and long-term destructive intervention will be reduced.  Viva gridlock and divided government!

The NY Times is working to help the left coalesce its strategy for the upcoming elections, and it is pushing the notion that Wal-Mart represents everything that is wrong with the economy and that the Wal-Mart effect (supposedly holding down wages to augment profits) has caused real wages and middle class earnings to stagnate.

I have been addressing some of this piecemeal, but it also occurred to me that something is different over the last two decades that radically effects average wages - that is, immigration.  This is not the "immigration drags down other people's wages" argument, something that most economists have debunked.  But since immigrants, legal or not, are new in the labor force, have fewer skills, and don't always have good English skills, their wages are lower.  My guess is that these lower immigrant wages bring down the average, and are one reason for apparent stagnation of wages.

The solution to this would be to do a time-series study - don't look at the average, but look at the same people and see what happened to their wages.  My sense is that most everyone in the pool is experiencing improving wages, but the fact that new people are entering the pool at the bottom of the wage ladder keeps the average wages for the whole pool flat.