Taking Sides on Trade

Not too long ago, perhaps feeling a bit lonely after the latest post in support of free trade, I thought of posting a question: Who besides economists and multinational corporations supports free trade? Outside of those two groups, does anyone else support relatively open borders? This Financial Times commentary looks at the divide between politicians and business on this issue:

America’s divided global outlook, by Chrystia Freeland, Commentary, Financial Times: Hank Paulson, ... Treasury secretary-designate, made business trips to 21 countries over the past 12 months... He has travelled to China about 70 times... Senator Schumer’s visit to China in March was his first official congressional trip abroad in a career in national politics that began more than one-quarter of a century ago.

The jet-setting financier and the stay-at-home senator are an admittedly extreme pair. ... But the contrast between the two also points to a divide in America today that helps to explain the country’s ambivalent response to globalisation: the US business elite has gone global, but the rest of the nation, including much of the political establishment, is lagging behind.

Outside the US, the time-worn caricature of the parochial Ugly American has been lent fresh vigour by the Bush administration’s proudly unilateral and often inept approach to the world in general and Iraq in particular. Like most conventional wisdom, there is something to this stereotype. Just one-third of adult Americans hold passports. ... Americans prefer to read books and watch movies about the US or ... about Americans... Foreign-language teaching for schoolchildren is abysmal, yet the political preoccupation of the moment is ensuring that immigrant children learn English and not that native-born Americans learn something else.

Even more discouraging is the reality that this narcissism extends to much of the country’s political leadership. This spring, when I sat on a breakfast panel with a charming and gregarious US senator tipped as a possible presidential candidate in 2008, he offered a detailed answer to a question on internet neutrality. But, in recounting a story of his own recent visit to Pakistan, he stumbled when it came to identifying the language of his village hosts, falling back on “not English”.

Where the Ugly American caricature falls apart is in the executive suites of the nation’s top companies. It is easy to mock the private jet culture of American CEOs, especially when those planes are pressed into service ... to visit golf courses or one’s personal Tuscan vineyard. But most of the air miles are being racked up travelling to the international offices and international clients of companies for whom the world has been flat for some time. The result is an American business establishment with incredibly sophisticated and personal knowledge about the rest of the world. ...

There is good reason why America’s bosses are generally more worldly than its pols. As Rick Wagoner, chairman and chief executive of General Motors, pointed out..., there is a big difference between being responsible to shareholders, whose preoccupations are increasingly global, and domestic voters, whose concerns may not be.

That may understate the pressures on US legislators... While still a young congressman, John F. Kennedy toured Europe, the Middle East and Asia, meeting foreign leaders and educating himself about their concerns. Politicians who do that today risk being accused of indulging in foreign boondoggles at the taxpayers’ or, worse, corporate lobbyists’ expense. In a tight election race, according to the former staffer of a congressman from the heartlands, it can be downright dangerous to travel abroad.

The result is a deep and widening rift between business people and the political herd on issues ranging from foreign investment into the US, to immigration, to America’s engagement with multilateral institutions. ...

I believe there is a big disconnect between the two sides on this issue, but it will take a lot more that simply sending congress abroad to bridge the difference. Update: More on immigration and jobs.

Comments

[anne]

Yes, yes, yes, American are too stupid and lazy to travel abroad unless they run Goldman Sachs, well, unless they are our bird loving ceaseless wandering savior Henry Paulson. Americans abroad, not us, never ever us, all those abroad sounding languages, oh dear, not for us.

http://www.nytimes.com/2006/05/17/world/asia/17travel.html?ex=1305518400&en=5fc6f221de8fbe44&ei=5090&partner=rssuserland&emc=rss

"In 2004, the last year for which there is complete information, 61.7 million Americans traveled abroad."

Duh.

[nyuk]

When a CEO travels to another country, seeking to create value for the shareholders, he is seeking to make use of the people and resources of that country in a way he cannot currently make use of the people and resources here.

Perhaps there, he can require longer work days, or pay very little, or pollute the air and the water, or all of the above. There may be other ways to exploit the location. To counter these complaints, some people would point to a rising standard of living for the people of that other country. I can't prove it, but I'm sure that shortly before the Cuyahoga River caught fire in Ohio in 1969, someone touted the rising standards of living for the people in that area.

How can any economist use the word "free" with any seriousness, especially when talking about trade?

[anne]

Actually that may have been Henry Paulson making 61.7 million trips, but who can tell? The idea that American legislators do not travel broad is comical, though Charles Schumer evidently prefers Manhattan. Setting who can spell China, and who not, to rest, Goldman Sachs management and shareholders may have all sorts of reasons for trading the night away, while workers who fear they may be badly effected by Goldman trading have a considerable right to fear. The question is how to trade and trade and protect American workers, and be sure Goldman will not.

Curious, I am all for trade but there is something about being preached to by the if-only-there-were-still-the-Raj British that is annoying :)

[save_the_rustbelt]

"...The question is how to trade and trade and protect American workers, and be sure Goldman will not...."

What Anne said!

PS: was Goldman one of the firms that settled with Spitzer for using fraudulent analysis to sell stocks? I packed up some files and can't find my list.

[crack]

I'm nominally pro free trade, but I think their are hurdles and problems that economists gloss over while preaching the mantra of comparative advantage.

This also ties with the sweatshop post from earlier. Knowing you are competing with workers whose alternative is mining a garbage heap tends to color your view of free trade.

[Bruce Wilder]

I think it is more than a little unfair to criticize a Senator (or anyone) for not knowing the language of a Pakistani village. Any official visiting the country will be greeted in, and will converse with the Pakistani elite in English, an official language and the language of business and government; the native language of the elite is Urdu, while Punjabi, the native language of half the population lacks official status.

On the other hand, maybe a Senator ought to know something about that background. But, first I would ask if he's fully aware that Pakistan is the principal rogue nuclear power in the world.

[Robert]

STR asked:

PS: was Goldman one of the firms that settled with Spitzer for using fraudulent analysis to sell stocks? I packed up some files and can't find my list.

That is an interesting question. Call it an "amazing coincidence", but the two "smartest" firms, with unarguably the best I.T. departments on Wall Street (Goldman Sachs & Morgan Stanley) miraculously failed to back up their e-mail records and thus could not provide the US Attorney's Office with the required records. Merrill Lynch, Citibank, and First Boston (the "dumb ones") all provided their records immediately including everything that was required to make them settle and perhaps unusually (if I am not mistaken)admit to the wrong-doing or at least conflicted interest. Goldman & Morgan paid a fine for poor record-keeping, administrative oversight or whatever it was termed and laughed all the way to the bank. "Failed to back them up" or "Inadvertently over-wrote their e-mail records"?!?!? Ha! Ha! Ha! And the dog ate my homework and the check's in the mail too....

[johnchx]

crack wrote: "Knowing you are competing with workers whose alternative is mining a garbage heap tends to color your view of free trade."

True enough. And the impulse to put in place some sort of protection against that competition in perfectly understandable. *Nobody* likes competition, when it is applied to them. The economists' claim is that competition is a pretty good thing anyway.

The "non-free trade" policies I sometimes see advanced seem too often to boil down to "let's make it illegal for poor people to compete with (relatively) rich people." Which I find dubious on both policy and moral grounds.

But I think the political economy of the "divide" on free trade is pretty well understood. Domestically, trade has diffuse benefits and distinct, visible costs. To find equally visible benefits, you'd have to look at...well..."sweatshops." Which would involve (a) acknowledging that making very poor people somewhat less poor is a good thing and (b) that foreign people count. Both of those are very hard sells. In the US, many of us seem to feel that a job we wouldn't want to do shouldn't exist. And, of course, taking the welfare of non-Americans into account in any way seems to be the kiss of death for a U.S. politician.

[anne]

John Chx, please continue :)

"And, of course, taking the welfare of non-Americans into account in any way seems to be the kiss of death for a U.S. politician."

Interesting and important comment, but I am not sure this would be so for an American political leader who was willing to teach that what Nigerian delta people need can be related to what Americans can gain from them. They have oil, we have technology from health care to environmental controls.

says...

anne very pepful ...
british raj ...yes the FT trans nat sycophants

i love it ...keep it up

and the line by crack

onabout the trash heep as sole opportunity cost

very slick
btw
crack sez
"I'm nominally pro free trade"

well i'm freely pro nominal trade

says...

john chx

its not a matter
of affluent amerikan jobholder selfishness

whats at the core here
would hardly
be repaired by a dose
of
high wage altruistic income sacrifice

some of us aren't thinking
high wage yankee vs low wage emergee

maybe we object to the trans nats
makin' out either way
when i hear trade talk
i for one
think first and foremost
about
those freebooting
structural sociopaths
out there trying to scarf up more opporunities
for private gain
those board room directed
globe trotters
who mediate the whole
de facto planetary job transfer system
and
with but one guide
their own private set
of stockholder driven
requirements to profit max
"and we mean ....this quarter butch "

[anne]

Crack was surely powerful, while Slink is always incisive :)

[anne]

http://www.nytimes.com/2006/05/23/world/asia/23manila.html?ex=1306036800&en=c02fc086ec68391d&ei=5090&partner=rssuserland&emc=rss

May 23, 2006

Eking Out a Living, of Sorts, From a Mountain of Muck
By SETH MYDANS - International Herald Tribune

MANILA — Some people in her old village look down on Teresa Janoras, who traveled to Manila 30 years ago to find a better life and has earned her living digging through garbage ever since.

"They say it's smelly," said Ms. Janoras, who is now 46 and supports a family of five as a scavenger. "They say we've come all the way here to Manila just to work in the garbage."

But garbage has been good to her, she said in her little house, adorned with mismatched curtains she pulled from the refuse.

"Think about it," she said. "We don't have bosses. We live a free life. Here, your only concern is survival, your daily needs, and the dump can take care of that."

Ms. Janoras is usually deep in the garbage for 11 hours, and on her best days she can earn a bit more than $3. "If I get lucky one day, we eat well," she said. "But sometimes we have to make do with just rice and fish paste."

A sparrow-thin woman who has lost most of her teeth, Ms. Janoras is one of 150,000 people who scavenge or recycle the 6,700 tons of garbage produced each day in Manila, something of a symbol of the poverty and urban collapse of this vast city.

A quarter of that garbage is simply dumped in fields and fetid rivers and in the polluted bay, according to the Asian Development Bank. The city's 10 dumps are overflowing, but no alternative sites have been found.

Ms. Janoras's workplace is the most famous of the dumps, Payatas, a 100-foot-high mountain of garbage that collapsed six years ago and buried more than 200 squatters.

Since then, the mountain has been graded to a gentler slope and the squatters have been moved outside a bright yellow security fence. Signs read, "No ID, no entry" and "Children under 14 not allowed."

From time to time, loudspeakers play a catchy inspirational tune whose words, heard on top of the garbage mountain, thread a line between tragedy and hilarity.

"Filipino, you're a Filipino!" the song goes. "Show the world what you can do. The Filipino is unique. Don't be afraid, be proud. I'm a Filipino. We're Filipinos." ...

[anne]

Seth Mydans is a stunning journalist of many years in southeast Asia. The article, which I wondered for a while whether to post, should have been posted, and should be read in its entirety.

[James Kroeger]

I don't have any problem at all with completely open borders so long as Congress acts to create a modest domestic labor shortage by increasing spending on public investments. That way it is possible for America to experience fully the benefits of Free Trade while at the same time creating such a demand for labor that wages are driven up by market forces.

Nope, wouldn't have any problem with that kind of Free Trade (Open Borders) at all.

[t11]

Unfortunately our elites seem to view the rest of us as markets for their products. If you apply this model, then you favour open borders for immigration (a bigger market) and open borders for things you can sell into other elites markets. But heaven forbid if our elites have to compete.

If you want an example of a market effected by open borders look at the changes in Football (Soccer) between past and previous world cups. Open borders has improved the fortunes of the poor African nations and homogenized the top game of the major nations. The pecking order remains the same though.

[anne]

T11, please explain the interesting soccer analogy further :)

[Steve Waldman]

Oh, Mark. You've inspired a rant.

Free trade, or the first few hits are free?

[save_the_rustbelt]

"Failed to back them up" or "Inadvertently over-wrote their e-mail records"?!?!? Ha! Ha! Ha! And the dog ate my homework and the check's in the mail too....

Robert:

Thanks, this means GS was even more dishonest and duplicitous than the other firms. Swell.

[Ninjaplease]

Was GoldmanSachs IT department located in India?

[calmo]

Maybe it does come down to this line from john c.

*Nobody* likes competition, when it is applied to them. . [So much for those free market idealists: the realists know that you restrict market competition to advance your cause and then, maybe, society's --ask Gates. We like competition as long as we win --not as big as Godzilla maybe, but we bambis don't like Godzilla competition. It is said we like fair competition.]

But within a firm we compete cooperatively (co-what?)[No stab in the back when it comes to my job evaluation.] to maximize the firm's profit, yes?
Ok, we used to.
Alright, there were divisions of labor and a pecking order of working together efficiently to get that Model A to market. Joint and reciprocal job evaluations are performed throughout this hierarchy to ensure that this efficiency is maximized.
The firm is one big happy competitive family always improving as those productivity stats attest.
Ok, maybe not so happy as all that (and who am I to compete against this MBA view which is accompanied by a salary several times mine and a brown nose to match?).

Does this issue 'free (from what exactly? people) trade' arise now because the profit sharing is not happening? There is no reward for the workers other than the treat of not exercising that threat of losing your job.
'The race to the bottom', a derogatory phrase to summarize the First World (worker's) experience was/is met with a somewhat balancing Global experience as peasants learned skills (were exploited) and became workers (for managers). It was/is thought that globally, standards of living (measured chiefly by the goods and services produced by non-peasants) rose in this arrangement (trans national capitalism). For their standards to improve, ours may have to decline somewhat -is the managers view.
Maybe.
Easy for the managers who supervise this 'race' since they are on the pay scale track that is rising, not falling. Their views are paid for, self-serving and self-sustaining (and so need contain no thought, no need to entertain other thoughts not so self-serving).

[t11]

Sports are often interesting places to observe economics as there is lots and lots of public data readily accesible.

Years ago the European leagues allowed only three foreigners per side. The world cup at that time was interesting for the reason you had players and styles who had not played competing.

Now, the top European sides can hire who they like. This means the top players all play each other regularly. What has happened is you no longer have country specific styles at the top - there is an international game - kind of like fusion cuisine.

What is interesting is the pecking order at the top is the same. But at the bottom and mid levels, the African nations have benefited from having their stars play for the top European teams.

The game is not better or worse than 40 years ago - just different.

[t11]

Further to the soccer analogy, the BBC ran a series of articles how the popularity of European football in Africa is killing the local leagues as people spend money watching pay per view Man U vs Liverpool rather than supporting local professional leagues.

Brazil did not become a great football nation watching watching the SPanish play. They developed their own leagues and teams. In a similar vein, Africa will not fully develop their soccer if tehy simply send their gifted to Europe.

[lonesome moderate]

I watch very little TV news so perhaps I'm missing out, but my impression is that the political elite in this country, and President Bush in particular, has done very little to try and sell the benefits of free trade to the American public in the last few years. While it is indeed true that the benefits are "diffuse" and therefore hard to sell, it's hard to believe that there's nothing concrete that they can point to and say "this is why free trade is good."

[t11]

So Professor Thoma, the reason people don't like free trade is we realize that America became rich not by free trading, but by closing markets and import substitution. The late Jane Jacobs, so despised by economists, nailed it in Life and Death with her history of how the American City states became rich. IF the American City states followed the advice of free traders, America would not be rich today. America would likely still be a colony!!

SO there are plenty of good historical examples of when protectionism has worked, just as there are good examples of when trade has worked. Apparently social science theory are not absolute like physics. Economics is more an art than science, but too many economists apply their ideas like engineers but without the succesful results.

[Winslow R.]

James article:

It ought to be clear by now that unemployment is the source of all economic evil. Unfortunately, those who make a living on Wall Street and in the banking industry disagree. They tend to insist that Inflation is the Great Economic Nightmare we must avoid at all costs even if we must tolerate chronic unemployment in order to do so. The Federal Reserve Board of Governors fully agrees. That is why The Fed consistently acts to maintain a modest-to-severe Labor Surplus in the economy. The Fed can always be counted on to "slow the economy down" whenever it threatens to perform well enough to eliminate all unemployment.

Great article James, though it approaches book length.

[anne]

T11, thank you so much, that was excellent. What an interesting and nice development metaphor or model for us to think through :)

[reason]

t11,
I don't think you are quoting Jane Jacobs quite correctly (I have just read a lot of her books). The import replacement she is talking about occurred spontaneously. The real issue is exchange rates - import replacement must be cost effective. Exchange rates today are clearly not realistic from an international trade perspective.

I argued elsewhere that maybe the real issue is suburbanisation and the resultant propagation of commoditisation as against customisation. What cities allow is specialisation of products to narrow market niches. It is these narrow niche products that trigger the import replacement process, not mass market tradeables.

The sameness of surburbia counts against this. Jane Jacobs argues in the Economics of Cities that innovation is intrinsicly inefficient but is encouraged by diverse Urban environments. If this was not the case then the great metropolitan areas would not exist since they are so costly. If a metropolitan area stagnates then its only method of recovery is for costs (first rents then wages) to fall.

Walmartisation is the enemy not free trade.

[calmo]

This bit:
While still a young congressman, John F. Kennedy toured Europe, the Middle East and Asia, meeting foreign leaders and educating himself about their concerns. Politicians who do that today risk being accused of indulging in foreign boondoggles at the taxpayers’ or, worse, corporate lobbyists’ expense.

struck me as seriously off base. Seriously leaving out w (worse than forgetting Poland people) and his famous incuriosity, his preference for American hash on his tour (don't make me laugh) of China, and his role model generally as one of those "Politicians".
They look bad touring around the world because w doesn't tour outside of Texas. And the MSM, who are in charge of managing taxpayer's sentiments (until recently apparently), back this runt and not those who are not afraid of real education (which of course MSM wouldn't recognize if it hit them straight between the eyes).
I do notice that this sense of 'education' is not the one discussed here in connection with landing a job that pays for serious skills.
Would the education that the CEO's acquire from their touring be cultural in the same sense of those young travellers who are out to see a chunk of the world before settling down? Would they in fact pick this culture up by osmosis even if they were not interested in doing so? [Does one have to get the surgeon's finest tweezers to distinguish the cultural nuances between an (English speaking only) American CEO and his branch plant managers?]

[anne]

http://www.nytimes.com/2006/04/26/books/26jacobs.html?ex=1303704000&en=6aafe7bde2a4775c&ei=5090&partner=rssuserland&emc=rss

April 26, 2006

Jane Jacobs, Social Critic Who Redefined and Championed Cities
By DOUGLAS MARTIN

Jane Jacobs, the writer and thinker who brought penetrating eyes and ingenious insight to the sidewalk ballet of her own Greenwich Village street and came up with a book that challenged and changed the way people view cities, died yesterday in Toronto, where she moved in 1968. She was 89.

She died at a Toronto hospital, said a distant cousin, Lucia Jacobs, who gave no specific cause of death.

In her book "The Death and Life of Great American Cities," written in 1961, Ms. Jacobs's enormous achievement was to transcend her own withering critique of 20th-century urban planning and propose radically new principles for rebuilding cities.

At a time when both common and inspired wisdom called for bulldozing slums and opening up city space, Ms. Jacobs's prescription was ever more diversity, density and dynamism — in effect, to crowd people and activities together in a joyous urban jumble.

Her critique of the nation's cities is often grouped with the work of writers who in the 1960's shook the foundations of American society: Paul Goodman's attack on schooling; Michael Harrington's stark portrait of poverty; Ralph Nader's barrage against the auto industry; and Malcolm X's grim tour of America's racial divide, among others. And it continues to influence a third generation of students.

"Death and Life" made four basic recommendations for creating municipal diversity: 1. A street or district must serve several primary functions. 2. Blocks must be short. 3. Buildings must vary in age, condition and use. 4. Population must be dense.

Ms. Jacobs's thesis was enlarged by her deep, eclectic reading. But most compelling was her description of the everyday life she witnessed from her home above a candy store at 555 Hudson Street, near 11th Street.

In that description, she puts out her garbage, children go to school, the dry cleaner and the barber open their shops, women come out to chat, longshoremen visit the local bar, teenagers return from school and change to go out on dates, and another day is played out. Sometimes, odd things happen: a bagpiper shows up on a February night, and delighted listeners gather around. Whether neighbors or strangers, people are safer because they are almost never alone.

"People who know well such animated city streets will know how it is," Ms. Jacobs wrote. "I am afraid people who do not will always have it a little wrong in their heads, like the old prints of rhinoceroses made from travelers' descriptions of rhinoceroses."

Robert Caro, the historian, said in an interview yesterday that Ms. Jacobs was far from the first urban theorist to stress the importance of neighborhood and community. "But no one had ever said it so brilliantly before," he said. "She gave voice to something that needed a voice."

Some critics used adjectives like "triumphant" and "seminal" to describe "Death and Life." Others, not a few of whom with an ax to grind, were less kind. Lewis Mumford, the critic and social historian whom Ms. Jacobs eviscerated in the book, suggested in a review in The New Yorker that she had displayed "aesthetic philistinism with a vengeance."

The battles she ignited are still being fought, and the criticism was perhaps inevitable, given that such an ambitious work was produced by somebody who had not finished college, much less become an established professional in the field.

Indisputably, the book was as radically challenging to conventional thinking as Rachel Carson's "Silent Spring," which helped engender the environmental movement, would be the next year, and Betty Friedan's "The Feminine Mystique," which deeply affected perceptions of relations between the sexes, would be in 1963.

Like those two writers, Ms. Jacobs was able to summon a freshness of perspective. Some dismissed it as amateurism, but to many others it was a point of view that made new ideas not only thinkable but suddenly and eminently reasonable.

"When an entire field is headed in the wrong direction, when the routine application of mainstream thinking has produced disastrous results as I think was true of planning and urban policy in the 1950's, then it probably took someone from outside to point out the obvious," Alan Ehrenhalt wrote in 2001 in Planning, the magazine of the American Planning Association.

"That is what Jane Jacobs did 40 years ago," he said....

[Blissex]

«And the impulse to put in place some sort of protection against that competition in perfectly understandable. *Nobody* likes competition, when it is applied to them.»

Or taxes! And it is especially the rich who dislike both competition and taxes, because they are not stupid :-).

«The "non-free trade" policies I sometimes see advanced seem too often to boil down to "let's make it illegal for poor people to compete with (relatively) rich people." Which I find dubious on both policy and moral grounds.»

On moral grounds sure, but on policy grounds it is quite arguable.

«But I think the political economy of the "divide" on free trade is pretty well understood. Domestically, trade has diffuse benefits and distinct, visible costs.»

Ahhh, but this is quite a misleading summary, a very misleading summary indeed.

If trade only had diffuse benefits there would be no lobbying for free trade, it would be a hard sell, because it would just be a good cause with no money and pressure behind it, and opposed by those who suffer the costs.

But curiously such is not the case, a small detail that somehow escapes the attention of some people.

Perhaps, just perhaps, trade's domestic impact also includes very distinct, visible benefits for some small but influential groups of rich people, and these domestic beneficiaries then lobby furiously for free trade in most goods, services, labour, capital, because they make a lot of money out of that.

First, free trade has very distinct and strong impacts, which can be summarized as:

* Raises income for almost everybody across all countries, in the long term (several decades).

* Distributional impact in favour of capital in relatively capital rich countries, in the short/medium term.

* Distributional impact in favour of labour in relatively labour rich countries, in the short/medium term.

But then free trade in labour, capital, goods and services is never absolute, and to use the ''free trade'' moniker without qualification is a common trick.

It is a trick because ''free trade'' really means ''free trade for some and not for some others'', because there are significant parts of the economy that are not subject to international competition, for various legal or practical reasons, therefore there are significant distributional impacts also between the protected and unprotected sections of labour and capital.

Sure, trade in goods and labour means that the prices of clothes and tools go down, and salaries also go down, but houses and rents and health care and education tend to more than proportionally rise, because they are not traded internationally, and because demand from immigrants makes them relatively scarcer.

In the end it is not surprising that more than 100% of the benefits from free trade can captured by capital and protected labour; not by chance the compensation of labour has failed to keep up with (even low) price inflation, even if GDP has been growing in real terms.

In part because the low-salaried people who are the biggest direct losers from free trade tend to spend a much larger proportion of their income on prices shielded from international competition than the winners, those who own real or financial assets.

Examples:

* Retired local government employee with 401k and who owns his home and has another a flat rented out: free trade is awesome! My 401k is doing good, I have a secure, fully indexed income, not subject to international competition, the value of my houses, not traded internationally, is going up, the capital gains on my home are untaxed, and the rent on my flat is also going up on the pressure of a lot of immigrants, car and HiFi prices are getting better all the time thanks to international trade.

* Young EE graduate from a state college from a working class background: free trade sucks, I am competing with a lot of EE graduates abroad as my services can be traded internationally, and with a lot of immigrants for temp McJobs, as generic workers are trading internationally, rent is going up all the time as I cannot rent from India or China, I can't afford even the lower prices for cars and computers that come in from India and China, and I am not even going to inherit a house from my parents.

«In the US, many of us seem to feel that a job we wouldn't want to do shouldn't exist. And, of course, taking the welfare of non-Americans into account in any way seems to be the kiss of death for a U.S. politician.»

Well, many people vote more according to their wallet than to their heart. But so do those that provide campaign contributions. And free trade is a sacred cow in the USA...

The free trade coalition in the USA are whose who derive their income from capital and capital gains, and this includes also that 70% of voters who own houses, not just company CEOs and hedge fund managers. That is sort of unbeatable.

[Blissex]

«It ought to be clear by now that unemployment is the source of all economic evil. Unfortunately, those who make a living on Wall Street and in the banking industry disagree. They tend to insist that Inflation is the Great Economic Nightmare we must avoid at all costs even if we must tolerate chronic unemployment in order to do so.»

Well, there are people who benefit from inflation and those who benefit from unemployment.

However high inflation does lead to serious economic inefficiencies... So it is sort of bad for everybody. Unemployment instead is only mostly bad for those unemployed and/or without assets.

Anyhow, if one agrees that «unemployment is the source of all economic evil» that applies to mexicans and indians too, and free trade in good/services and labour/capital has substantially increased their employment, with large gains in numbers of people employed, across the world.

Still, it looks like to me that the Federal Reserve and the ''markets'' look primarily at restraining low-end-wage inflation. High end wages and profits have been on a for a long time and nobody worries about their inflation impact.

The top 1% of earners have increased their share of a growing national product from 5% to 15%, but nobody is worrying about the inflationary impact of that, as long as the real compensation of the bottom 40% are falling... :-)

[James Kroeger]

Winslow R: "Great article James, though it approaches book length."

Thanks, Winslow. I thought that maybe some who visit/contribute here would be able to appreciate it. I don't know what to do about the length; there is so much that needs to be said that is relevant.

Think there's a chance that any of the economists who visit here could ever be persuaded to take the time to read it? And thoughtfully reflect on its points?

[James Kroeger]

However high inflation does lead to serious economic inefficiencies... So it is sort of bad for everybody. Unemployment instead is only mostly bad for those unemployed and/or without assets.

I wonder if you could be persuaded to elaborate on the inefficiencies you refer to. I think I may be able to offer a compelling counterargument.

I most definitely disagree with your statement about unemployment. Even the wealthy suffer a high price when there is unemployment, whether they realize it or not. I present quite a few of the reasons why in the article Winslow mentioned above, if you are interested.

[anne]

James Kroeger, well argued essay and comments for us to think about :)

[t11]

Thanks for the article Ms. Anne. And thanks for the comments Mr. Reason. Your comment about the cost effectiveness of import substitution is a critical point. But I do not believe in the spontaneous creation of import substitution. That would be too complicated, leaving too much to chance.

[Nelson]

Kroeger,

First of all, I think you underestimate our own situation. Our standard of living is generally better off than it was 50 years ago. Our unemployment rate IS low (4.6% in May '06, http://www.bls.gov/cps/) and our inflation rate is also low.

Communist countries have a goal of increasing employment, but can you honestly say they are better off than we are? I think you overvalue government. Many countries try to drive down unemployment though government work, but it seems like the harder they try, the worse off everyone in that country becomes. Economic efficiency is what drives the wealth of nations. Government intervention on a scale you propose would drive down that efficiency, not increase it.

[cm]

Nelson: In Europe (and I believe originating in Germany), they have the concept of a "two-thirds society" that is applicable here.

The essence is that the larger part of the population is rather well off and enjoys a rising living standard, at least in measurable economic terms, with and at the expense of a substantial underclass.

One can go to any length quibbling about the proportions, but then this is a conceptual term. One aspect pertaining to the recurring discussions here is that the averages appear to look good, but all is not well.

I don't want to elaborate further here, but you can check it out on the search engines.

[James Kroeger]

Thanks, Anne. And thank you for your always-relevant, always-engaging contributions...

[anne]

http://www.calvorn.com/gallery/photo.php?photo=6593&exhibition=7&u=99|9|...

Baltimore Oriole at Nest
New York City--Central Park, The Pool.

Thank you, James, and the same; and do keep writing and souding like Franklin Roosevelt :)

[Winslow R.]

James, to address inflation concerns I'd like to see you explore pegging the minimum wage after adjusting it to some 'livable' level. I believe the status quo needs a carrot before they would even consider full employment.

http://www.cfeps.org/ has written quite a bit about a plan to fully employ while stabilizing prices.

http://www.cfeps.org/pubs/wp/wp39.html

We had full employment and stable prices during WWII while throwing away massive amounts of real wealth. Why not have full employment and stable prices during times of peace while working optimally to create real wealth?

[Winslow R.]

I'd also add the Krugman 'babysitting' example can be used to clarify how an employer of last resort could stabilize prices.

DEFLATION
If a coupon crunch occured and Alejandro ruled, the babysitting for one hour would be reduced to pay of 1/2 coupon. To avoid further deflation, the government could provide 1/2 coupon to anyone willing to clean streets. As the number of coupons in circulation increased, the number of people cleaning streets would decrease as they could get 1 coupon for babysitting.

INFLATION

If too many coupons were in circulation, the baby sitting rate might temporarily increase to 2 coupons. At 2 a coupon rate, no one would be street cleaning for 1/2 coupon and eventually the lack of new coupons matched with continous desires to save would lower the babysitting rate back to 1 coupon.

As the 'crunch' was caused by 'savings' of coupons we would expect a constant oscillation around an inflation rate of zero. As everyone is fully employed even during deflation and the hardship minimized.

[James Kroeger]

Winslow, I'm glad that the CFEPS is pushing for full-employoment and that they are looking at policy specifics. I think that I'm more of a theory type of guy than a policy guy, but I do have some impressions about some of the specifics of the Employer of Last Resort policy they propose.

My impression is that the ELR seeks to minimize the concerns that orthodox economists have about inflation by proposing a form of strict "wage controls" on those who earn only the minimum wage. I haven't had a chance to ponder this idea fully yet, but I must say that I think it would be a lot less complicated if money supply managers would simply set absolute limits on the amount of dollars that banks can lend (in particular loan categories) in a given time period. Such credit controls would make it impossible for inflation to 'get out of hand.'

With this kind of approach, it would be possible to reduce the amount of money that is being borrowed for 'pure consumpion' (I include residential housing in that category) while still allowing for an optimal level of true business investment. Spending projects would simply be 'put on hold' until funds became available to lenders.

The more I think about it, the more potential problems I'm seeing in the idea of the government 'hiring off the bottom.' The local government office is going to give the people who come to them a job...doing what? I think I really just like the idea of using the government's demand for labor to 'influence' wages, generally. No price setting is needed.

I imagine you're right about the status quo needing a carrot before they would even consider full employment. That and a whole lot more. The bias that most economists currently have against inflation is so strong, I think it might take something of a revolution within the discipline in order to change status quo perceptions, especially among those in banking and finance.

Of course, I'm enthusiastic about CFEPS's focus on eliminating unemployment and their attempts to provide reassurances to those concerned about inflation. I'll give it some more thought before arriving at a final position on their proposal.

[Blissex]

«In Europe (and I believe originating in Germany), they have the concept of a "two-thirds society" that is applicable here.
The essence is that the larger part of the population is rather well off and enjoys a rising living standard, at least in measurable economic terms, with and at the expense of a substantial underclass.»

Another aspect of this is the ''insider/outside'' job market...

The term ''2/3 society'' may have originated in Germany, but the plan was devised in Britain, when a conservative government was told that homeowners and card owners almost always vote conservative.

What has happened is that now in many countries 70% of the voters own real estate and many of those also have fairly secure government and blue chip jobs, and are middle aged or older. That's your 2/3.

The remaining 1/3 has a lot of immigrants (like in Germany, lots of those are Turks) who can't vote, and poor, often dark or brown skinned assetless citizens who don't vote. Woe to them, in a democracy the voting majority rules, in their own interests (or rather, for low interest rates, low capital gains taxes, exemptions from taxes and means testing for asset owners).

[cm]

Blissex: Ascribing underclass status "only" to immigrants or minority groups is not accurate. While they are certainly overrepresented, a large part of the underclass are locals of "mainstream" ethnicity.

Ethnicity correlates with discrimination, neglect, and denial of opportunity, but it's by far not the only, and perhaps not even the major, dimension. I'd venture that the existing socioeconomic background of the family, and the associated micro-geographic stratification of regions (e.g. city districts or what in the US are called "neighborhoods"), is more significant. But I agree with a strong enough degree of correlation it's difficult to tell apart.

[Winslow R.]

I haven't had a chance to ponder this idea fully yet, but I must say that I think it would be a lot less complicated if money supply managers would simply set absolute limits on the amount of dollars that banks can lend (in particular loan categories) in a given time period. Such credit controls would make it impossible for inflation to 'get out of hand.'

I'd argue that it is not lending that causes inflation but 'wasteful spending'. Asset cycles, wars, etc. can create wasteful spending which credit controls could limit somewhat. My concern would be lending is not limited by banks as there are plenty of nonbanks (GMAC, Ford credit, etc) that provide financing. Nonbank loans exceed bank loans by at least 2 times.

The difference between the two is the FDIC backing of banks that can lead to government bailout of 'wasteful' loans creating inflation of the money supply. When a nonbank fails, no new government money is created and any asset inflation will dissappear as asset prices fall.

To limit asset cycles, I believe CFEPS advocates allowing short-term interest rates to fall to zero and allow long-term rates to stabilize at some market level above that. Government stimulus would be provided through spending on an ELR.

My concern is it may put many financial intermediators out of business, as the carry trade was greatly reduced by smaller fluctuations in inflation. May not be such a bad thing.

It could be argued we are heading this direction anyway with all the financial instruments used to hedge risk and damp cycles. Though it seems there are still significant fluctuations that could be smoothed.

I'll give it some more thought before arriving at a final position on their proposal.

I look forward to reading it.

[becky]

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