The Split over Trade Is Not Confined to Democrats

There has been attempt after attempt to portray the trade issue as an area where Democrats are deeply divided, and there has been much written about how Democrats will stifle trade and hurt the economy now that they are in power.

But the split is not unique to Democrats. As with immigration, Republicans are no less divided on this issue. First, the article about Democrats:

The Coming Democratic War on Free Trade, by Steve Chapman, Real Clear Politics: It's an elementary axiom of economics that if Person A sells something to Person B, it's good for each of them. Otherwise, why would they bother? It should follow that if Country A sells something to Country B, both again benefit. But Democrats have turned against that basic insight. They think if Americans buy something from abroad, it makes us worse off, and they want to protect us from such folly.

"Free," when modifying "trade," is a four-letter word on the left. Bill Clinton favored breaking down barriers to international commerce, but the idea has lost favor in the Democratic party... The American Prospect, a liberal magazine, reports with glee that "every single newly elected Democratic senator is a critic of free-trade orthodoxy."

Among the most vocal critics of open commerce is Sen. Sherrod Brown of Ohio, who ... vows not to vote for any agreement that doesn't impose strong labor and environmental standards on our trading partners. Brown reflects the views of labor unions... Demanding the imposition of American-style labor and environmental standards on poor nations is merely a ruse for rejecting trade liberalization altogether. ... Likewise with environmental rules. ...

Trade opponents retort that the job growth has been a hollow victory, because the rich are getting richer and everyone else is getting poorer. But the facts indicate otherwise. As economist Alan Reynolds notes in a new study for the Cato Institute..., the Census Bureau calculates that ... income has risen just as fast among the bottom 40 percent of households as it has among the top 40 percent. ...

Brown and others cling to the superstition that we can get rich by sealing ourselves off from the world and paying each other high prices for products made entirely in the U.S. of A. If they manage to erect new barriers to trade, we'll learn once again that protectionism is nothing but fool's gold.

Saying that '"Free," when modifying "trade," is a four-letter word on the left' is a misrepresentation. It's a misrepresentation because the same division appears on both sides of the political aisle, and because many Democrats favor free trade. More on this in a moment, but this is not the only argument the author makes that is misleading. For example, the author cites The American Prospect as gleeful that "every single newly elected Democratic senator is a critic of free-trade orthodoxy." But here's Robert Reich writing in American Prospect, and there are many more examples like this:

The New Domino Theory, by Robert B. Reich, American Prospect: ...Early next year, as part of its entry into the World Trade Organization, Vietnam will reduce tariffs on foreign goods and open its telecom and financial services sectors to foreign investment. But as things now stand, America won’t benefit from these measures because Congress won’t normalize trade relations with Vietnam. Why not?

Some right-wingers still regard Vietnam as a menace. ... Republicans from textile-producing states don’t want cheap fabrics from Vietnam. A majority of House Democrats think Vietnam’s labor standards are inadequate. ... But there’s reason to suspect there’s something more going on here than a vote against trade with that former communist nation.

Congress’s distrust extends beyond Vietnam, to other areas where global capitalism is expanding. Trade bills now pending with several poor countries in Africa, Asia, and Latin America are also in jeopardy. Don’t expect the next Congress to look on these trade deals more favorably. Many of the newly-elected members campaigned openly and vocally against free trade.

Whether it’s a renewed fear of foreigners, or fear of job losses to them, this nation seems to be turning inward. Sadly for us, as well as for millions of poor people around the world, America may be on the brink of a new Cold War -- with the enemy this time not global communism but global capitalism.

So, we have one of the founding members of American Prospect chastising both Republicans and Democrats for their anti-trade stances. He doesn't sound gleeful to me.

The author also cites Reynolds' work in an attempt to rebut that trade is responsible for inequality (which isn't even the argument many such as Krugman make). Reynolds' work which has been thoroughly debunked here and elsewhere, and the author does not bother to cite the widely accepted results in the area. And comparing the bottom 40% to the top 40% to evaluate changes in inequality completely misses the point anyway. That gives you a clear indication this is a political hit piece rather than an attempt at serious analysis.

Back to the split among Republicans on trade. A version of this has appeared here before, but a it's worth repeating:

Grand Old Protectionists, by Daniel Gross, Commentary, Washington Post: Since the midterm elections, concerned internationalists have fretted that the incoming Democratic Congress will curtail the nation's free-trade policies. In Slate, Jacob Weisberg identified the new breed of protectionist Lou Dobbs Democrats. "So is America headed for a bout of protectionist class warfare?" worried the Economist. "With the Democrats having won a majority in Congress, and disquiet over globalization growing, a party faction that has been powerless -- the economic populists -- is emerging," Louis Uchitelle wrote in the New York Times. Washington Post columnist Sebastian Mallaby, reflecting the consensus, concluded that "the two parties have opposing attitudes on the subject of trade: Republicans see it as a source of growth, Democrats as a source of inequality."

However, these arguments misunderstand the new politics of trade. It's not a left-right split. Since 2000, Bush Republicans have done as much as Democrats, if not more, to erect trade barriers and tariffs. ...[J]ust as free trade was a bipartisan project in the 1990s, this decade's anti-trade backlash has been bipartisan as well. Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.) share little in common besides a desire to slap huge protective tariffs on Chinese goods. And all by themselves, Republicans have done great damage to the cause of free trade in the past several years.

In March 2002, for example, Bush proudly signed "temporary safeguards" that imposed tariffs of 8 percent to 30 percent on most steel imports for three years. ... When the World Trade Organization ruled the tariffs illegal, and retaliatory tariffs were set to be imposed on goods produced in Florida and other politically sensitive states, Bush ended the so-called safeguards in December 2003.

In May 2002, ...[j]ust six years after President Bill Clinton signed the 1996 Farm Bill, which slashed agricultural subsidies, Bush jacked up federal payments by as much as 80 percent ... and offered new subsidies... He even revived ... subsidies ... that Clinton had killed. Bush's signing of this bill led the Economist to brand him just about the worst thing the magazine can call anybody: an anti-globalizer. ...

In fact, some analysts have blamed the failure of the Doha Round of global trade talks this year on the U.S. refusal to alter its expensive anti-consumer, anti-free trade farm policy. There's more. Earlier this year, Bush proposed dropping the absurd 54 cent-per-gallon tariff on imported ethanol, first enacted in 1980 (although he didn't recommend cutting the 51 cent-per gallon tax credit for domestic ethanol producers). The Republican Congress, filled with members from big corn-producing states, said no.

Even as lame ducks, Republicans in Congress haven't been unanimous voices for free trade. In mid-November, more than 60 Republicans voted against a proposed free-trade deal with Vietnam, ... embarrassing the president on the eve of a state visit. The Wall Street Journal noted that a vote had been delayed in part because Graham and fellow GOP Sen. Elizabeth Dole (N.C.) had put the bill on hold, pending measures protecting U.S. textile companies.

With the GOP base now shrunk to the Old Confederacy (sugar, cotton, peanuts) and the Great Plains (corn, wheat, soy), look for more of the same protectionism. ...

There's one other critical Republican failure when it comes to free trade. ... Free trade has exposed U.S. workers to global competition on an unprecedented scale. In recent years, wages have stagnated (despite massive increases in corporate profits and steady economic growth), jobs have become more insecure, and benefits ... are being wiped out. Is free trade the cause of all these woes? Not necessarily. Does free trade coincide with all these woes? Absolutely.

Rightly or wrongly, many Americans, even those who reap the gains of trade daily, identify free trade and globalization with their declining financial security. And the response of Bush and congressional Republicans has essentially been: tough. ...

This you're-on-your-own attitude has ultimately been more damaging to the cause of free trade than anything the Democrats could do. Yet, in coming months, we're sure to hear a great deal of talk tarring Sen. Harry M. Reid (Nev.) and Rep. Nancy Pelosi (Calif.) as the present-day incarnations of Sen. Reed Smoot and Rep. Willis C. Hawley, the sponsors of the disastrous Smoot-Hawley Tariff Act of 1930. By slapping massive tariffs on a vast range of imported goods, Smoot-Hawley helped turn a recession into the Great Depression.

But Smoot and Hawley were Republicans. And so was President Herbert Hoover, who signed that disastrous legislation into law. Today, the protectionist gene may no longer be dominant among Republicans, but it's still an important part of the GOP's DNA.

I'm in favor of free trade, but I understand that view is controversial (I can think of several Republicans who comment here who take me to task immediately whenever the trade issue comes up). Economists supporting free trade are being asked to justify this position in light of what appears to be evidence that some groups fare poorly under globalization. That is a fair request and I've tried to do that in the past and will continue to do so in the future, though I'm not sure it's convinced anyone opposed to globalization to change their views. The point here is not to answer all the questions that surround the trade issue, but simply to emphasize that the divisions that exist are not confined to a particular party no matter what some pundits would have you believe.

Comments

[brad setser]

The debate on trade would also be advanced if there was greater awareness that right now the US isn't trading US goods for foreign goods (or US services for foreign services) as the econ 101 argument on the benefits of trade assumes, but rather trading say $1450b of US goods and services and almost $800b in debt for maybe $2250b in foreign goods and services (my numbers are from the q3 bop release, annualized). So about 1/3 of US imports are offset by exporting financial assets (i.e. selling debt) to the rest of the world.

There isn't necessarily anything wrong with external deficits, tho in my view the US deficit is a reason for concern -- not a sign of US strength. It reflects low savings -- not a surge in investment in future export industries. I also suspect some of the furor over trade might die down if the goods for assets trade shifted into a goods for goods (and services for services) trade.

On the core point of this post, last I checked, Lindsey (Lindsay?) Graham of Schumer-Graham fame was a card carrying republican. Many southern republicans don't like free trade in agriculture (cotton/ sugar interests); many are also torn on free trade in textiles and furniture ...

[save_the_rustbelt]

I've arrived home and am catching up on a weeks' newspapers.

At least one factory in this immediate region of Ohio closed every day this week. Anyone wonder how Sherrod Brown got elected?

Ohio leads the nation in home foreclosures again this year, and not because a bubble burst.

The major benefits of trade are accruing to a very small slice of Americans. Economists and politicians are either going to have to admit the truth or be steamrolled by a populist rebellion.

[Emmanuel]

Globalization is the work of Satan, in conjunction with his acolytes the multinational corporations (and their lackeys the politicians). America is for Americans; it's time to draft Pat Buchanan for President in 2008.

Man, I've got this xenophobic protectionist shtick down. Mebbe I should run for office or sumthin. Ahm lookin' forward to dem big-haired interns too ;-)

[Peter Schaeffer]

Overall the Democrats are tougher on trade issues than the Republicans… But not nearly tough enough. The advocates of “free” trade are still preaching comparative advantage and production possibility frontiers in a world of exchange-rate protectionism (see Will Asian MercantilismMeet its Waterloo?) and massive trade deficits. The U.S. can now pay for half of its goods imports via goods exports. We have a Current Account deficit of 7% of GDP. But still we are told, no problem…

However, the article contains a statement that should shed some light on this topic, although I doubt the author intended it that way.

“...Early next year, as part of its entry into the World Trade Organization, Vietnam will reduce tariffs on foreign goods and open its telecom and financial services sectors to foreign investment. But as things now stand, America won’t benefit from these measures because Congress won’t normalize trade relations with Vietnam. Why not?”

The bolding is mine. Why exactly is the U.S. pressing Vietnam to open its telecom and financial service sectors to U.S. investment? Why is Robert Reich enabling this? If the U.S. was proposing to trade civilian aircraft, machine tools, and chemicals for Vietnamese textiles, a positive case could be made for the agreement. However, what is really on the table? The U.S. opens its markets to Vietnamese exports and U.S. jobs go down the drain. In exchange for their political assistance, U.S. bankers get juicy plums restructuring Vietnam’s financial system. How can American consumers pay for Vietnam’s products? How about borrowing at 29%?

Call it a lose, lose, lose deal for most Americans and win, win, win for the Rubin’s and Paulson’s of the world.

Brad Setser wrote a piece about this over at RGE Monitor. The title Are US trade politics really driven by the profits US banks hope to earn in China says it all. Of course, substitute Vietnam for China. Also see Is Steven Pearlstein right?. A quote

“Steven Pearlstein’s column “Public debt, private wealth” argues that surge in demand for US financial assets from emerging economies – and overwhelmingly from the governments of emerging economies, not private investors -- be they Asian central banks or oil investment funds – has had a profound impact on the distribution of wealth in the US. I agree.”

[dissent]

I finally found someone who put into words what my intuition has been struggling to tell me: Why Ricardo comparative advantage Doesn't Work Anymore. This quote relates to I.T. and offshore outsourcing:

Changes in the structure of the U.S. IT industry are being driven by corporations, which are intent on maximizing their own profits. In a nationally based economy, such as was the case in the 1950s and 1960s, profit maximization by companies tends to maximize national income. In a global economy, that is not the case. Instead, profit maximization promotes the maximization of global income rather than national income. Companies are happy to outsource because they earn the profits on outsourced production, but that does not maximize national income. This fundamental insight is not yet appreciated within Washington policy circles.

This from the Thomas Palley blog, link:
http://www.thomaspalley.com/?p=56

[slink]

peter s sharp shoots:

"However, what is really on the table? The U.S. opens its markets to Vietnamese exports and U.S. jobs go down the drain. In exchange for their political assistance, U.S. bankers get juicy plums restructuring Vietnam’s financial system"

direct hit a midships PS

too bad the uss wall street
won't sink just because
you hit it dead center

with the unvarnished truth

-----------------------

side show:

mark:

"this is a political hit piece rather than an attempt at serious analysis"

agreed

so why post it up ???

as a dart board screen saver ??

----------------------
bi partisan fragmentation
on trade ???

my guess it
hardly insures
even serious debate

internationalists

(translation:
MNCs and their useful
panglossian idiots )

nedd not over worry

sherrod brown is an eclair
and the populist wing
of the party of the people
is without the muscle
even to fully flap itself
let alone
lift the party
into a flight to the left

[Winslow R.]

"However, what is really on the table? The U.S. opens its markets to Vietnamese exports and U.S. jobs go down the drain. In exchange for their political assistance, U.S. bankers get juicy plums restructuring Vietnam’s financial system"

'Restructuring', 'juicy plums' is all a bit blurry, direct hit or not.

Why not educate the populace about the games that banks play? Their actions deserve attention.

[save_the_rustbelt]

Hey, record bonuses on Wall Street this year.

Clearly, our trade strategy is working as planned.

[Mark Thoma]

slink: "so why post it up ???"

Two reasons. First, I get tired of hearing I'm anti-trade, but on the more practical side, I didn't want to leave the Chait post on top becasue it doesn't relate in any obvious way to economics. Probably shouldn't worry about it so much, but try to keep some connection to econ in the top post (though not always successfully - sometimes there's just nothing else out there to post above it - and I'm constantly tempted to stray off topic).

But I wouldn't post it at all if I thought it had no value - I think this stuff needs to be rebutted every so often.

[Peter Schaeffer]

Winslow R.,

I would suggest following the RGE links as a starting point.

[yan]

I think the basic idea of free trade and comparative advantage is very simple and appealing but economists neglect so many nuances when it is applied to the real world.

There is the argument that countries should produce what they are relatively good at producing and export that to other countries. The problem between the US and China is that China has the comparative advantage in every type of manufacturing because of low labor costs. Other factors such as the transport of raw materials and capital are not an issue with modern transportation costs and open capital markets. The US economy thus retains a larger percentage of service jobs but not all services are exportable, some are intrinsically local in nature. This creates an imbalance if one country has a higher proportion of exportable goods and services than the other, in the US-China case leading to a structural trade deficit.

The other assumption in arguments favoring free trade is that an economy will create new sectors to employ the displaced workers and replace the exported industry. We have seen this with the transition from a manufacturing to a service economy. But is the creation of new sectors of the economy guaranteed and what is the pace of such creation? If the pace of trade liberalization gets ahead of the speed of creation of new economic sectors then then employment will contract. It isn't much consolation to those who may be unemployed when the economist says that the system will eventually reach equilibrium.

And this does not even address whether the desirability of the jobs in the newly created economic sectors is equal to or better than those that are being exported.

[jm]

In an environment in which Asian governments subsidize their exports through currency manipulation to the tune of hundreds of billions of dollars a year, how is the adjective "free" applicable to international trade?

My recollection is that the theoretical arguments that prove comparative advantage to ensure a win-win optimal allocation of resources depend implicitly on the prices of the traded goods reflecting the actual value of the economic inputs. When subsidies distort prices as greatly as they do today, why should we consider it a priori true that the resulting equilibrium is optimal?

If someone comes by and tells you that if you give them your lawnmower they'll mow your lawn free for the rest of your life, that will look like a great deal. But if after they've done it for a month or two they change their mind, well, unless you have some way to get your mower back, you're going to have to buy a new one and start doing it yourself again.

We've shipped a large fraction of our production base off to China, a land which has been a political basket case for hundreds of years. Contemplating the degree of kleptocracy we see among its current power elite, why should we think it won't soon fall once more into chaos?

If it does, how will we get our lawn mower back?

[jm]

Note that in the case of China, the analogy should be that we gave our lawnmower to the kleptocrats, and they promised that if we would pay them a dollar each mowing, they'd force their subjects to mow our lawn (and pay them a few pennies each time).

I think there is some risk their subjects may decide they're not really obligated to honor the contract, and that the leaders who got them into it can be replaced.

[ken melvin]

Dollar a day labor does not an even playing field make. If China wants to sell here, they should either pay their own a decent wage with decent hours and benefits or manufacture the product here.

[js paine]

mark

u convinced me

[evagrius]

I don't know. I keep thinking of people like Bill Gates and Steve Jobs, you know, "wunderkinds"- getting a little long in the tooth for that moniker but still imaged as such by the media.
What have they come up with to create a new economy for the U.S. so that free trade is really free trade?
Entertainment units?
Who cares about that when you ain't got food, or shelter, or clothes?
No...put the onus on those "brains" to come up with a technology, a product, no matter how cheap, that will make the Third World able to live better.
Why don't these guys and the others in so-called Silicon Valley come up with a product that isn't entertaining, doesn't wiggle, doesn't give you orgasms, physical or otherwise, but enables you to live, enables your children to live, and not only live but to prosper and be real humans, not on the edge of poverty but with dignity?
Job's new toy is just that- a toy.
Microsoft is just a toy.
These guys have the wealth to change reality to a great degree.
Instead of dedicating their wealth to that, another diversion from the great questions of life and death.

All the above may seem perpheral to the topic but, face it, free trade is supposed to mean trade; whadda ya got that I really need for what I got that you need?
Don't give me dollar bills- give me something to live for and I'll give you what you want.

[cm]

yan: In manufacturing, labor cost is part of the equation, but considering the degree of automation I'm not convinced it's even the largest. What about e.g. environmental, safety, and other regulation. Aside from hour or unit labor cost, there are things that you cannot legally compel domestic workers to do. Skipping installation and maintenance of scrubbing and filter equipment and cutting down on specialty waste procedures should also "help" a bit.

[Movie Guy]

Brad Setser raises important points in the comment section of the this post:

"The debate on trade would also be advanced if there was greater awareness that right now the US isn't trading US goods for foreign goods (or US services for foreign services) as the econ 101 argument on the benefits of trade assumes, but rather trading say $1450b of US goods and services and almost $800b in debt for maybe $2250b in foreign goods and services (my numbers are from the q3 bop release, annualized). So about 1/3 of US imports are offset by exporting financial assets (i.e. selling debt) to the rest of the world."

"There isn't necessarily anything wrong with external deficits, tho in my view the US deficit is a reason for concern -- not a sign of US strength. It reflects low savings -- not a surge in investment in future export industries. I also suspect some of the furor over trade might die down if the goods for assets trade shifted into a goods for goods (and services for services) trade."

[Movie Guy]

I am a supporter of fair trade policies and practices that include appropriate considerations for decent international labor standards, international environmental controls and compliance, realistic currency valuations, and any other comparative measurements as necessary to insure reasonably fair trade between nations. The absence of any formal standards is not an excuse to ignore common sense measures related to needed international standards. We can work with the UN and WTO to identify necessary minimum standards in short order.

As for free trade, there is no such thing. It's unfortunate that anyone, economist or not, bothers to cling to such a misrepresenting term.

[Peter Schaeffer]

MG,

I have been favorably impressed by Brad Setser's work and commentary over at RGE monitor. Parts of RGE monitor are gated. However, his blog is free as are the other two (Nouriel Roubini's Global Economics Blog and Economonitor).

[Peter Schaeffer]

Evagrius,

I won’t rise to defend Gates or Jobs, quite to the contrary as you will see. However, Silicon Valley has made a significant contribution to this nation’s well being. You can find detailed export and import statistics over at U.S. Trade Balance in Technology Products. Note that the U.S. ran a trade surplus in high tech goods until 2002. Of course, we now run a deficit. The current administration can wreck almost anything…

As for Gates, Microsoft is a notorious transfer pricing abuser. The following quote from Symantec's $1 billion tax bill; US IRS in pursuit of Irish tax haven beneficiaries should provide a useful insight.

“Last November, The Wall Street Journal wrote that "a law firm's office on a quiet downtown street [in Dublin, Ireland ] houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004."”

[Ninjaplease]

"Why don't these guys and the others in so-called Silicon Valley come up with a product that isn't entertaining, doesn't wiggle, doesn't give you orgasms, physical or otherwise, but enables you to live, enables your children to live, and not only live but to prosper and be real humans, not on the edge of poverty but with dignity?"

Hahahahahhaha!

Businesses are in business to reward shareholders. The third world doesn't have money to extract unless someone subsidizes the products from the first world.

But, as long as we can keep on sending out the "Non-value Add" jobs...

[baileyman]

"I'm in favor of free trade"

Anyone who uses the word "free" in this context should be required to state what they mean by it. "Free" can only be unfettered activity within a complex of rules governing activity, laws, institutions, economic constraints, etc. But "free" cannot mean absolutely unfettered. There are always rules to the game. So tell us what your rules are, please.

[Bruce Webb]

"It's an elementary axiom of economics that if Person A sells something to Person B, it's good for each of them. Otherwise, why would they bother?"

I left elementary school in 1966.

"It's an elementary axiom of economics that if Person A has a monopoly on food and Person B does not want to die of hunger, than Person B paying whatever he can be coerced to to not starve from hunger is good for each of them. Otherwise, why would they bother?" Hmm? To not starve?

Funny how those axioms fail at the limits. Some of these clowns haven't even left kindergarten. Becuase "mine!" is not a rational economic argument, no matter how satisfying it may be to those who have as opposed the those who have not.

[bakho]

This is a stupid argument. No modern economy can exist without trade. The rules are important.

A better discussion would be,
What rules should govern trade?
How much pressure should the US put on other countries to improve worker compensation and environmental protection?
How should the benefits of trade be used to offset the dislocation?
What rules are needed to protect ports from terrorists and invasive species?
When should tariffs (such as the Bush steel tariffs) be used?
What is legitimate support for industry and sectors for comparative advantage (Ag subsidies) and what is unfair?
How much of the profits of trade be given to corporate interests and how much should be redstributed?

Trade is a complex set of issues. To boil it down to a shouting match between two extremes is misleading. The "Democrats are against free trade" meme, is an attempt to distract the discussion from corporate profits and redistribution issues. Corporations want a "free hand" to maximize their profits by not having to compensate the dislocated created by liberal trade policies. By framing the argument as "for or against free trade" corporations hope to avoid discussion of how much of the corporate profits from trade should be used to help those dislocated by trade?

[slink]

bakho:

"The "Democrats are against free trade meme, is an attempt to distract the discussion from corporate profits and redistribution issues. Corporations want a "free hand" to maximize their profits by not having to compensate the dislocated created by liberal trade policies"

zap !!!!!!

[slink]

jm (or is it im ?? ):

"get our lawn mower back?"

we owe em a trillion dollars
are u
suggesting that doesn't cover
the fdi corporate amerika
has put in
over there?

but u sure got this right .....

"... the theoretical arguments that prove comparative advantage to ensure a win-win optimal allocation of resources depend implicitly on the prices of the traded goods reflecting the actual value of the economic inputs. When subsidies distort prices as greatly as they do today, why should we consider it a priori true that the resulting equilibrium is optimal? "

[Bruce Webb]

"The rules are important."

But, but, but! I got an Invisible Hand! No you cannot examine exactly how it is moving, and exactly how it is manipulating its fingers. Cause its Invisible. But it works. All of the time. Because a guy that wrote in a time when Phlogiston theory was in its prime and it was just obvious that light could not travel in waves if it was not riding through Ether (or Aether) said so.

Certainly Economics like Physics and Chemistry has moved far beyond its 18th Century Origins. But Smith and Ricardo are cited as authorities while even the most brilliant Chemists and Physicists of a century or so ago are regarded as geniuses limited by the data measurement and mathematical tools they had.

I never took Econ 101. Perhaps it shows (I hope). But from the outside it looks like Professor Miltie is channeling Mr. Smith by injecting a steady stream of Phlogostin into the Aether. All the while ignoring the fact that Akerlof took the air right of those tires,

Asymmetric information and pricing power. Who knew they mattered? Except for every salesman, marketer and advertiser that ever lived. Because what would people in sales and marketing know about money? After all they know nothing about multi-variate calculus.

Maybe I am wrong. But it really looks like some guys are using some pretty cutting edge 21st century high tech to soup up a 18th century horse carriage.

[yartrebo]

What I find sickening is what is thrown under the umbrella of 'free trade.'

Why do copyrights, patents, and trademarks count as free trade, even though they're obviously government enforced monopolies. Free trade, for better or for worse, would entail the abolishment of such laws.

Free trade would mean that there would be no region pricing (ie., for stuff like pharmaceuticals and media).

Instead the US actively pushes for these measures, which makes free trade look quite hypocritical in my eyes.

[calmo]

Well I am just a huge fan of Bruce Webb today. Ok, most days, but today I am in awe of Mr History.

[Bruce Webb]

Calmo "pissed" has two definitions: one American and one Irish.

Yep.

[John Thacker]

Free trade would mean that there would be no region pricing (ie., for stuff like pharmaceuticals and media).

Instead the US actively pushes for these measures, which makes free trade look quite hypocritical in my eyes.

Yes, but note that the US actively pushes for region pricing in such a way that makes things more expensive in the US and cheaper in poor countries. The US pushes for pharmaceutical policy that causes the US to underwrite the cost of drug research for much of the rest of the world. Hypocritical, perhaps, but in a charitable way.

[John Thacker]

Back to the split among Republicans on trade.

There certainly is a split among Republicans on trade. However, it is also true that in any given constituency, Republicans are almost always more free trade. Comparing voting results, particularly among Senators where two people represent the same state, one finds that the more conservative/Republican senator is almost always more free trade than the liberal/moderate/Democrat. Blanche Lincoln (D-Arkansas) is one of the few exceptions of a free trade Democrat.

Similarly the reverse generally happens on immigration, though not quite as exclusively. For the most part, a given Republican in an area tends to be more restrictionist on immigration.

None of this implies that Democrats representing generally free trade districts aren't free trade, or Republicans the reverse, or the analogous situation on immigration. However, it is certainly true that the vast majority of the Democratic Senate gains came with very anti-free trade Democrats replacing relatively pro-free trade Republicans. That's especially worrisome from a free-trade perspective. (The new Democratic senators and representatives are also fairly anti-immigration and socially conservative.) There are some states where any Senator is likely to be free trade, and the reverse for being anti-free trade. However, any seat switching from free trade to anti-free trade is a problem from a free trade perspective.

If Democratic Party strategists decide that running against free trade is a vote winner in swing states, and Republican strategists agree, it's a problem. I'm afraid that it's a lesson that people might take from the recent election, given who won.

[Meh]

John Thacker, I think previous comments have explained why this might be happening. "Free trade" is coinciding with declining incomes/security for lots of voters. There's an argument to be had whether free trade inherently leads to inequalities but irrespective of that debate, what's clear is that the political solution to "protectionism" is actually spreading the benefits of trade at least to 51% of the voting population.

[calmo]

So eva reduces Gates and Jobs to toy manufacturers and not wunderkinds that have cultivated our personal development.
Well personally (ok not all that developed...yet) I'm envious of such bold strokes that reduce the richest man in the world to Chief of Entertainment. Or maybe Game Decider
So good I'm ready to ignore the $200M that the Gates Foundation pledged and spent(?) fighting AIDS in Africa (before the US pledged a dime)...now that eva has set me straight.

[Ken Houghton]

Bruce - With due respects, you're tarring Mr. Smith unfairly. I didn't read The Wealth of Nations in Econ 101 (partially because I have the same grade in that course that you do), but I did read it.

Those who talk of the Invisible Hand as if there's a straight line from Adam Smith to Free to Starve appear never to have read the former, which makes many of your arguments.

I'm all for free trade if there is a true comparative advantage, and not just risk-shifting and ignoring externalities. Which means that pay, working conditions, and environmental maintenance has to be part of the equation before you get to "comparative advantage." (As I noted in bullet #3 here, China's economic growtheven without all the other caveatsis almost completely negated by the environmental damage done.)

There are real comparative advantages. My yard in NJ, even if its feet were acres, could not grow sugar or cotton or kiwi or papaya or mango productively. But comparative advantage has become just another name for risk-shifting, and those bills eventually come due.

[Bruce Webb]

Ken an excellent point.

That Smith wrote his work back in the 18th century doesn't eliminate its intellectual power. For that matter there is a lot of solid thinking and sound reasoning in Marx's Das Capital. But all too many people have drawn lessons from Smith and Marx who have not even invested a second in actually cracking the books they wrote.

I haven't read 'Wealth of Nations' from end to end, I have only dabbled in 'Capital'. Then again they are not publishing me on the Op-Ed pages of the WSJ where from all evidence the commentators got no closer to these works than the Illustrated Classics comic book versions.

[Lafayette]

“I'm all for free trade if there is a true comparative advantage, and not just risk-shifting and ignoring externalities. Which means that pay, working conditions, and environmental maintenance has to be part of the equation before you get to "comparative advantage."

Big little word, "if".

The predominant factor, regardless of your unwillingness to recognize it, is simply the ability to work.

As you can imagine, each individual has the fundamental right to work, just as you do, and that right is not subject to or constrained by the conditions stated above.

If the consequence is a competition which is disadvantageous to you … well, that’s life, isn’t it?

[Lafayette]

KH: "As I noted in bullet #3 here, China's economic growth—even without all the other caveats—is almost completely negated by the environmental damage done."

Rubbish, if I've ever seen any.

Do you really think a peasant starving in some farm in the boonies of China gives a fig for your or my environment?

It is a matter, often, of survival, even if the only alternative is a sweat-shop. And, plenty of Americans were forced to take that route long after America's had become an industrialed economy and long before the union movement could give blue collar workers a half-decent living.

Problem is, thier success went to thier heads. And, the pendulum has turned the other way.

[wjd123]

Countries engaged in free trade experience price-factor equalization: as price finds its equalization point so will the cost of labor and capital. High wages will seek an equalization point with low wages. That's bad news for high wage countries. It's also an economic axiom that free traders hardly ever mention.

You would expect that democrats who have passed so many laws defining and protecting workers rights and imposing rules and regulations on business interests in order to protect social interests would have more to say about price-factor equalization since it undermines standards. You would expect that both major political parties who have done so much to protect our environment would have more to say about it since pollution has no boundaries.

For instance, if China refuses to allow its workers free association the equalization point for wages will be lower than need be than if free association were a given in all countries that trade. And what sense does it make for us to insist that business meets standards to protect the environment if we don't insist on a standard for all our trading partners. Contamination like disease has no boundaries.

Aren't there some areas in the economic sphere where comparative advantage brings it into conflict with the moral sphere?

We have seen how easy it is for our representatives to remain ignorant of basic knowledge about Iraq. After four years of war many couldn't explain the difference between the Shites and the Sunnis. It's ready knowledge of which they seem willfully ignorant. Why learn more about a subject once your vote is cast.

I see this same willful ignorance in free traders. What incentive do they have to learn more, to rock their boat with economic axioms about price-factor equalization, when they have cast their vote and fill their campaign coffers with corporate largesse.

Free trade as practiced today will destroy for most Americans their bargaining power over work conditions along with their general quality of life.

[Lafayette]

evagrius: "Why don't these guys .. in ... Silicon Valley come up with a product that isn't entertaining, doesn't wiggle, doesn't give you orgasms,.... but enables you to live ... and not only live but to prosper and be real humans, not on the edge of poverty but with dignity?"

Good question. There are two aspects to the answer, I think.

The first is that computers were not “gadgets” at the onset. They were tools. They did enhance human productivity and the advent of the Internet has considerably enlarged perspectives in human communication. This forum is one such example.

The second aspect is the life-cycle of an innovation. The cycle of computer automation has largely passed that of purpose built applications to have become a commoditized product.

When commoditization happens, then all hell breaks lose. Profit margins are maintained by means of purpose-built applications by which protecting patent laws make their sale hugely profitable. But, product commoditization makes tumble those walls as inevitably competition rushes in and the uniqueness of an application disappears.

Still, the law of markets is immutable. It is deliver or die. So, the Jobs/Gates of this world must come up with “the next big thing” (In fact, Jobs’ subsequent company after Apple was called “Next”, which joined the museum or short-lived next great ideas in fairly quick fashion.)

As a consequence, computer product innovation mutates into gadgets that entertain, and become hi-tech commodities. Information Technology, as we-used-to-know-it, has also transitioned from hardware innovation to service rendering. The consequence of this is that hardware becomes commoditized with low margins and services become innovative with high(er) margins. (And, the internet makes the source of the service somewhat irrelevant because distance - from the client - no longer matters.)

This is the life cycle of many, many innovations. Cars were once for transporting the person/family and now they function principally as consumer symbols of middle-America – the bigger the better, the faster the better, the more opulent the better and finally, the more expensive the better. Their development no longer is determined principally by utility but more so by their social symbolism as conveyed by the owner.

Both of these aspects are particular attributes of a highly developed economy and society.

But, do they bring dignity? (And, I congratulate for using a word rarely applied in this forum.) No, but neither, in the context of today’s society are they either meant to or required to do so. Dignity is simply not the issue.

Why? Because in a hedonistic society, the pursuit of self-satisfaction not only outweighs but even negates the notion that what we have we must share (to assure a minimum of dignity for our fellow man/woman).

If people do not elect a political leadership that will assure a fair distribution of the wealth generated communally, then the individual is free to exploit utmost whatever personal notion of “the pursuit of happiness” that suits each and everyone one of them.

It is fundamentally a question of which "right" prevails upon the other, the right to full financial self-fulfillment or that of all citizens to live in decency and dignity (assured, if necessary at the bottom, by the state).

Europe is closer to the latter, the US to the former of the above. Finally, it not a question of "either/or" but of balance between the two.

[Lafayette]

wjd123: "You would expect that both major political parties who have done so much to protect our environment would have more to say about it (price factor equalisation) since pollution has no boundaries."

Bollocks. This was never an issue in the development of the US over the past hundred years, but it is now because "pfe" is costing the US (and Europe) jobs and pollution is harming our health?

That's real tough, welcome to the real world. That world is beyond the three-mile limit and it just doubled the supply of manpower available, thereby pushing out the supply curve and lowering labor costs. As for the pollution, have a look at the smoke-stacks of electricity generation plants as well as that pollution wafting in from across the Pacific from China.

The rules of the game are NOT decided by the US, but by free markets, the first and foremost of which is the market for labor.

If you want the US to become a protectionist nation, then you open a Pandora's box of ills. In doing so, the US will spark a reaction by which its products as well will be tariffed so as to no longer be competitive (even if they have benefited from a lower dollar).

Pray tell, do explain how that consequence "protects American jobs"?

[Alan Reynolds]

Mark, you comment on "Reynolds' work which has been thoroughly debunked here and elsewhere." Did I miss something? Did someone find fault with any (not many) of the statistics I have presented? Have any (not many) of the facts in my book "Income and Wealth" been partly (not thoroughly) debunked by anyone? It's not as if I have not been watching.

Chapman's facts are correct, though not the way I would have presented them.

[Mark Thoma]

In another edition of simple answers to simple questions:

"Did I miss something?"

Yes.

says...

As you can imagine, each individual has the fundamental right to work, just as you do, and that right is not subject to or constrained by the conditions stated above.

If the consequence is a competition which is disadvantageous to you … well, that’s life, isn’t it?

Spoken like a true retiree.

[Nijaplease]

Really now... That is funny

[Lafayette]

anonymous: "Spoken like a true retiree."

Put a pseudo on your banalities, so the world can recognize them for what they are.

[wjd123]

Lafayette,

When the common market became the EU it brought along with it standards that had to be met before membership. It protected economic morality, laws and regulations, by insisting that each member would have to accepted it and live up to it. EU investments went into countries seeking membership along with political changes--Franco had to go before Spain could become a member--until the transition could go smoothly. (Talk about how the EU is treating the membership of eastern European countries will have to wait for another day.) The EU is a modern example of an international free trade organization that protects standards.

For instance EU standards protecting woman against discrimination in the work place are higher than any of its member countries. Expanding rights is a way to transfer loyalties from national institutions to international institutions. Without such protection, standards become an economic liability. The poor remain poor and see no reason to support political agendas that support free trade, as is happening today in Central and South America. Pandora's box can't remain closed when free trade is influencing the political economy of nations.

Many of free trade afflictions only have international answers, which means international government. Once tariffs are toppled, corporations are free to seek their own interests over social interests if there is no international government with the power to impose enforcable sanctions to stop them.

We saw what happened during the Industrial Revolution. In the name of competition corporations fought to discourage any semblance of economic morality. Once they no longer have to worry about the threat of tariffs internationally they are once again in the name of competition working to keep social norms far away from the economic sphere. But we see in the EU that this condition isn't fated by the gods.

One reason I like to bring up price-factor equalization is my belief that the economic sphere is cherry picking its information about the effects of free trade. Much like Bush cherry picked intelligence information to get us into a war with Iraq.

If price-factor equalization is going to supress high wages and stunt the rise of low wages when countries like China deny labor the right to free association, workers have right to know about it instead of constantly being bombarded with the glorious growth produced by comparative advantage. As we see in the social unrest in South America growth means little to the poor if they don't share in its rewards.

[Lafayette]

wjd123: "Once tariffs are toppled, corporations are free to seek their own interests over social interests if there is no international government with the power to impose enforcable sanctions to stop them."

So, what you are suggesting is another Big Brother government to set the "standards of law, order and fairness" amongst nations.

Nice try, but unworkable. The integration of the EU cannot be linearly extrapolated to the world - which is why it is stopping at the Bosporus. The EU was a culturally homogenous long before it was economically so, and the intent (on the part of most Europeans) was to stop the strife that was a hallmark of its history for almost a millennium by becoming economically interdependent.

This latter notion applies for the next "world order" as well, but one need a Big Brother to obtain it. Even China, not yet that far exited from the dark ages, understands that its future is intimately linked to the rest of the world.

What America does not understand that its rightful place in that same world is not as Big Brother minding the children bickering amongst one another. Its role should be more avuncular and it could attend to solving the problems at home - serious enough as they are - before it resolves those of the rest of the planet.

The US is entering a new phase in which economic parameters (the paradigm, if I must use an abused word) have changed considerably. Uncle Sam has an industrial base that is anchored for the most part in labor intensive production at comparatively high wages. Anyone with an inkling for Riccardian logic knew it was ripe for the picking, and that is precisely what the Chinese have done.

Accustoming itself to the new rules is going to take some time for America and Americans. So, be patient. (Things are likely to get worse before they get better … and I’m neither an Austrian economist nor a retiree. ; ^ )

[Lafayette]

km: "If China wants to sell here, they should either pay their own a decent wage with decent hours and benefits or manufacture the product here."

Why in heaven's name should they do that? To please you? It is sheer stupidity.

China must create 100,000 jobs a day in order to accommodate new entries to the workforce, so it is going to price its labor out of the market?

Think again. They are not fools.

Besides, all of China's problems are by no means assured a resolution because it is cherry-picking low labor-rate high labor-intensive manufacturing in which to compete. Once these have been obtained, China will have to start thinking, "What next"? And, that is where it is going to stumble.

We worried the same about Japan in the 80's and early 90s ... for what? It too came between a rock and a hard place. That hard place for China is creating too high a level of expectations in a national population that capturing ALL global trade cannot possibly meet.

It will turn soon to developing an internal consumer economy that is self-sustaining and without dependence upon the US or Europe for sustenance. In fact, it has already begun.

[Lafayette]

MG: "The absence of any formal standards is not an excuse to ignore common sense measures related to needed international standards."

Oh, really? So, why has the US not adopted the metric system, which is a common standard throughout the world?

The answer to that question is pertinent to the remark above. Because it is easy to say that formal standards on an international level are "the way to go", but how to get there is altogether another and far more difficult question.

The US is going metric - inch by inch - and has been doing so for a quarter of a century. So, expect no better dynamism from "the world".

[Peter Schaeffer]

In my view there are several core trade issues that need to be addressed. Each of them ultimately pertains to one underlying question. Should the U.S. negotiate trade agreements in its national interest, or on behalf of some narrow set of special interests. Of course, the distinction isn’t 100% clear in all cases. However, I would define America’s national interests as maintaining the trade competitiveness and solvency of our nation, first and foremost. The next highest priority should be, in my opinion, maximizing the real income of most Americans.

This set of priorites gives rise to three questions. In each case, the current U.S. approach is contrary to the well being of our country. The questions are:

Why are we pressing foreign countries to open their markets to U.S. investment? It is not clear how our national interest is served by such policies. If Vietnam or China wish to liberalize their telecom and financial service sectors, that should be their choice, not one we press upon them. Moreover, what are we giving up when we make such demands? The U.S. does not have infinite leverage in any negotiation. Our national interest is served by promoting U.S. exports, not aiding foreign investment by multinationals.

Are we promoting outsourcing or actual trade? Going all the way back to NAFTA, there has been a strong hint that U.S. policy isn’t really directed towards export expansion. Instead the goal has been to create a legal framework where American corporations can close their U.S. operations and move to Mexico (or these days China). What national interest is served by these policies?

When NAFTA was enacted we were told that it would eliminate (or at least reduce) illegal immigration. In fact, illegal immigration has soared post-NAFTA. Has NAFTA brought a flood of jobs to the U.S.? Not exactly. The U.S. used to run a large trade surplus with Mexico. Now we have large deficits as far as the eye can see. Check out U.S./Mexico trade in car parts, for a specific example of how NAFTA worked against U.S. interests.

Will CAFTA work any better? I rather doubt it. Was CAFTA enacted to enable U.S. exports or U.S. outsourcing? We have the same issues with China as well. China has become the new “home away from home” for U.S. companies eager to move abroad. According to one report, 60% of China’s exports come from FDI (mostly non-American). What interests are served by these policies?

Are we addressing or encouraging non-tariff barriers to U.S. exports? In recent years, manipulation of exchange rates has become the dominant mean of rigging the global trading system. Martin Wolf of the Financial Times calls it exchange-rate protectionism. Note that even Ben Bernanke used the word “manipulation” in his written remarks (but not spoken) in China recently. Does the U.S. negotiate to end these practices or do we sotto voce encourage (or at least tolerate) them?

Clearly, the overvalued dollar (and undervalued Asian/emerging market currencies) facilitate outsourcing production from the U.S. The current recovery has been notable for remarkably poor job creation (and worse if you leave out the housing bubble). The linkage between below trend job growth and the overvalued dollar seems clear to me.

However, there are other connections as well. The overvalued dollar reduces inflation pressures in the U.S. This in turn allows more expansive fiscal and monetary policies than would otherwise be possible. This sounds good, and probably is in the short term. However, what happens when the U.S. has to pay its bills? And we don’t have a large enough tradable goods sector to do so?

The overvalued dollar has been sustained by massive capital flows from other countries including China, emerging markets, etc. These flows have reduced U.S. interest rates substantially (200 basis points by some estimates) and made the housing bubble possible. What happens when the housing bubble bursts? Lower interests have also reduced the cost of the Federal budget deficit. What happens when interest rates rise?

Clearly domestic interest group (homeowners, the current administration) do benefit, at least in the short term, from the capital flows associated with the overvalued dollar. Just as clearly, the U.S. is doing itself no favors with housing bubbles and ever rising levels of debt, public and private.

Quo bono? Investment bankers (Paulson, Rubin, etc.) who get lucrative deals in return for using their influence to defend exchange-rate protectionism? The administration that gets deficits on the cheap? In my opinion, the public interest strongly favors a cheap dollar even if it hurts the Goldman bonus pool and makes the deficit more painful. Trade competitiveness and maximizing the incomes of ordinary folks should be our highest priorities in trade negotiations, not afterthoughts.

[Lafayette]

PS: "the overvalued dollar (and undervalued Asian/emerging market currencies) facilitate outsourcing production from the U.S."

Overvalued with regard to what? Not the Euro. It is undervalued as regards a major trading partner and competitor.

Just look at the results reported by Boeing today. Two thousand five is the first year Boeing has outsold Airbus globally since 2000. With an overvalued dollar? No way, José.

Boeing is going to outsource production of aircraft from the US because orders increased?

Think again, you got it wrong.

[Peter Schaeffer]

Mr. Thoma,

In my view, “free trade” is one of the dogmas (religions really) of our time. It is something that right-thinking people are expected to embrace as a matter of faith without question. Deviations from the orthodoxy are decidedly unwelcome.

In this context, I am not arguing the merits or demerits of actual trade policy. The real point is the extent to which it has become an idée fixe. As such it paralyzes attempts at serious discussion and ostracizes anyone who dares to ask questions.

I never thought of trade this way until I read “The Opium Wars”. I was astonished too see the Opium Wars justified as exercises in “free trade”. Phrases like “Free trade is Jesus Christ and Jesus Christ is free trade” were apparently used at that time. Somewhat ominously, the Opium Wars were also a consequence of China’s trade policies including its (mandatory) trade surplus.

Agricultural subsidies are a modern example of the same thing. For all of the words employed to denounce them, you would think they were huge. In fact, U.S. farm subsidies amount to roughly 0.2% of GDP. It is common to hear claims that the woes of the thirld world are a consequence of U.S. (and other) farm subsidies. In fact, elimination of all U.S. (and other) farm subsidies would raise the GDP of Mali (a typical example) by 1%.

[Movie Guy]

MG - "I am a supporter of fair trade policies and practices that include appropriate considerations for decent international labor standards, international environmental controls and compliance, realistic currency valuations, and any other comparative measurements as necessary to insure reasonably fair trade between nations. The absence of any formal standards is not an excuse to ignore common sense measures related to needed international standards. We can work with the UN and WTO to identify necessary minimum standards in short order."

Lafayette - MG: "The absence of any formal standards is not an excuse to ignore common sense measures related to needed international standards."

Lafeyette - "Oh, really? So, why has the US not adopted the metric system, which is a common standard throughout the world? The answer to that question is pertinent to the remark above. Because it is easy to say that formal standards on an international level are "the way to go", but how to get there is altogether another and far more difficult question. The US is going metric - inch by inch - and has been doing so for a quarter of a century. So, expect no better dynamism from "the world"."

Lafeyette, it's good to know that the U.S. failure to adopt the metric system in all of its systems of measurement is the source of the problem with the lack of international labor standards, international environmental controls and compliance, realistic currency valuations, and any other comparative measurements as necessary to insure reasonably fair trade between nations.

There is always an excuse for not moving forward on the matters that I and others have raised. Now, its the lack of uniform adhereence to the metric system in the USA. Once that is "fixed" what will be the next excuse?

[Lafayette]

"it's good to know that the U.S. failure to adopt the metric system in all of its systems of measurement is the source of the problem with the lack of international labor standards, international environmental controls and compliance,"

You've misunderstood.

It is an example of the complexity to obtain international standards of any sort. And more so as regards those of the kind that you mention, which depend most upon a sense of moral decency that happens to be in dangerously short supply internationally.

Be content to get your way in the US, not exactly the most advanced nation in terms of social services for the indigent, protection of worker and children rights, basic health coverage for all, etc., etc.

[Peter Schaeffer]

Lafayette,

The large fall in the dollar has no doubt helped Boeing versus Airbus. The dollar may well be undervalued versus the Euro. However, it is still overvalued versus the world, particularly the RMB and other Asian currencies.

See Boeing Bounces Back Against Odds for some Boeing outsourcing information. A quote

“The first 787 is scheduled to roll out in July at Boeing's Everett, Wash., plant, where final assembly will be done. Boeing is outsourcing a record 70% of work on the Dreamliner, much of it to firms abroad. That means all of those highly complex parts must come together correctly and on time in Boeing's Everett plant for the company to deliver on time.

Its dozens of partners on the project include Alenia Aeronautica of Italy; Fuji, Kawasaki and Mitsubishi of Japan; Dassault Systemes of France; Saab Aerostructures of Sweden; and Rolls-Royce of Britain. New software by Dassault allows the far-flung work sites to be "virtually" linked so everyone works out of the same database in real time with one set of drawings.”

Note that the bolding is mine.

[Movie Guy]

Lafayette,

Fair enough.

I am just disappointed that we are not pursuing international standards on labor and environmental controls among other considerations. It's crazy not to include such consideration in multilateral and bilateral trade agreements in my opinion.

I wonder if global warming will wake up the trading partners on the environmental front. I am not fully convinced at this point.

I bet we would get off our collective butts if the Sun was to start dimming significantly. Well...maybe not.

[Movie Guy]

Peter,

Good point on Boeing's outsourcing. I was wondering if anyone was going to tackle the facts behind that issue.

[Lafayette]

PS: ", it is still overvalued versus the world, particularly the RMB and other Asian currencies."

Ya caint have everthin'. There will ALWAYS be a currency cheaper than the dollar, or the Euro.

With the global competition having risen remarkably over the past 15 years, a nation must be very careful of its competitiveness. That's going to be new to Americans. It is not new to Germans or Swiss or Italians who have had first to contend with the brute marketing force of American multinationals throughout the latter part of the last century and now find themselves contending with the cheap renimbi.

Shall I relate the number of European computer firms that no longer exist because they could not match the competitive offering of American multinationals?

Would you rather the reverse be true - and Europe starts competing hard on upscale markets that involve skills and competencies that affect middle-America with a cheap Euro. Be careful, that can happen.

For the moment, all this junk Chinese gadgetry is mostly produced with unskilled laborers of which China is in abundant supply. Remember none the less that China graduates thousands of university students. .

Do you want these students eagerly knocking on the door of American companies in China recruiting your replacement?

No? I thought not.

"Boeing is outsourcing a record 70% of work on the Dreamliner, much of it to firms abroad. "

Outsourcing can mean anybody and his brother. Find out how much of this is going to foreign countries before scare mongering.

Do you know who the major suppliers of aircraft seats are for Airbus? Two or three American companies. There are Americans working in Toulouse for Goodyear - which supplies aircraft tires from America. Or Pratt & Whitney who supply the jet engines.

So, if America wants to start a trade war, by instituting tariff barriers on imports, then batten down the hatches ... you aint gonna like the consequences.

[Lafayette]

MG: "I am just disappointed that we are not pursuing international standards on labor and environmental controls among other considerations."

I agree. The US is way behind the standards in terms of "international standards". You have a health care insurance program that leavs one sixth of America's workforce uncovered at any given moment. But, when in comes to weaponry, ah there the sky's the limit! Anything the Pentagon wants the Pentagon gets.

America refused to sign the Kyoto Agreement and is one of the major polluters of this planet. What do you plan on doing about it? Ask Schwartzy?

America has been sailing through the Clinton and Dubya years and it's as if the morning alarm just went off. There's a murderous quagmire in Iraq and American competitiveness is goint to hell in a handbasket.

Wakey-wakey.

[wjd123]

"Accustoming itself to the new rules is going to take some time for America and Americans."

Lafayette,

You can't have it both ways. First you claim that international government enforcing standards is impracticable, and then you claim the new rules will take some time to get accustomed to.

Where are the new rules in matters of economic morality coming from and how will they be enforced?

If you are thinking of the Invisible Hand sorting out free trade problems or corporate power being the decider, neither will work because they don't promote a balance of power which would lead to an equitable distribution of gains. One is too libertarian, the other too authoritarian. Both would promote social unrest. We saw this during the Industrial Revolution. Why repeat those mistakes again?

And don't forget many political economies have a long history of rules and regulations governing business. If business sees them as a hindrance to being competitive and moves to countries where it can escape them then the ability to impose economic morality on business is made harder.

Corporations will be in a position to play one country off against another for less regulation just like they play our states off against each other for tax breaks before deciding in which one they will locate. In both cases social needs are sacrificed to corporate interests.

It's easy to see how Mexico might be more inclined to sacrifice social needs such as clean air and water for jobs while the United States might be less inclined. That's one reason why trade agreements like NAFTA don't work. Agreements between countries with greatly divergent cultures and values can't be harmonized.

American workers have little objection to a NAFTA between the United States and Canada; it's including Mexico in the agreement that they object to. It causes more problems than it solves. That is why the EU expends so much effort at harmonizing political economies before admittance.

I can understand why some people think the economic sphere should be allowed to function by its own laws without interference from the moral sphere. Growth is supposedly maximize which they believe is good for everybody. But history has shown us what unregulated economic activity leads to: social injustice and social unrest. Best to find a way that works for everyone. That's not what we have with free trade as practiced today

Today's practices which lead to disharmony, and social unrest call out for international solutions which international governments can best provide. I'm not asking the United States to become big brother when it comes to trade, on the contrary, I'm asking that it gives up some of its sovereignty to international government. Nor am I advocating one international government but international governments to harmonize those political economies that can be harmonized.

I'm advocating free trade between those countries whose political economies can be harmonized and normal trade between those countries whose political economies can't be harmonized. Otherwise we will all be ruled by powerful corporations that must compete according to the laws of the jungle instead of laws of our own making.

[Lafayette]

wjd123: "First you claim that international government enforcing standards is impracticable, and then you claim the new rules will take some time to get accustomed to."

You’re confusing arguments.

There will not be an “international government” in our lifetimes and, yes, the rules of engagement as regard our global economy have changed.

The logic is simple: Within the past fifteen years there has been a doubling of the global workforce as the Iron Curtain descended along with the significant political changes in China. It is foolish not to understand, as a consequence, that the market for labor has been altered not only significantly but definitively.

One of the simplest lessons of economics is that when the supply of something is increased, its price must diminish. Labor is not an exception to the rule.

We can either lament this fact, and I do, or we can discuss what we should do about it. Those who feel that a protective barrier of cheap imports must be raised are returning to a Neolithic thinking that prevailed before the Great Depression of the 1930s. We all know what happened subsequently.

Globalization is a given. So, how do we respond to the challenge?

My suggestion: Undertake long-term solutions that will reduce unemployment by the creation of durable jobs. There is NO quick fix, so let’s forget that notion from the start.

What are these long terms solutions? Both the nature of what we produce and its “intrinsic value” must change and improve. Our economy must go upmarket in terms of goods and services. And, we need a talented, motivated workforce to do so.

There are basic needs that the state must assure. National/local security is not the only one. Basic health care is another. Most importantly is assuring that the workforce has state-of-the-art talents and skills to apply. No family should need to go into debt to assure a child an education or job skill training. Know-how is so important (to a dynamic economy) that obtaining it should cost the least possible and zero-cost if possible. Retraining should also be guaranteed throughout a lifetime of employment. Circumstances change and people must be prepared to change with them.

The market for both domestic and international goods/service is going to change, and as a nation America must change with it. This requires a focussed program on enhancing American production techniques/methods/engineering towards reducing labor-content and increasing productivity. Yes, this will diminish jobs for unskilled or semi-skilled labor, but it will create jobs for highly skilled production technicians.

The country needs to create incentives to keep jobs in America and this can best be done by reducing the cost of labor-input. If labor and capital produce profits, a reduction of labor costs will generate profits. BUT, the return to labor must remain incentivating, jobs have to be decently remunerating. This is means the drop in wage-rate must be compensated by an enhancement in profit-sharing to workers (and not just a select few at the top). Profits are not an INDIRECT consequence of labor-input but a DIRECT consequence of it. Profits should not therefore be returned ONLY to capital, but also to labor. In what proportion? Good question.

Finally, national production of goods/services should also concentrate on productivity enhancements. This does not mean only hi-tech innovation of processes, but also the way humans work together. This latter requires continual internal training and skills enhancement.

All this will take at least a decade, if not two.

[Ninjaplease]

"This requires a focussed program on enhancing American production techniques/methods/engineering towards reducing labor-content and increasing productivity. Yes, this will diminish jobs for unskilled or semi-skilled labor, but it will create jobs for highly skilled production technicians."

Nice theory, too bad automation isn't killing jobs--offshoring is. THe "Highly skilled production technicians" are actually rural people in the 3rd world soldering electronic components by hand.

I've seen it first hand, don't even try to tell me your theory--its not being practiced by anyone as they have no incentive to spend capital in the USA.

2007 is going to be a banner year for employee churn. After years of economic growth for the corporate elite, and years of losing / laying off employees while the work keeps piling up on those that stay, employees have finally gotten the message: the only way to get a fair raise is to jump ship:

I don't think I've ever seen this many degreed professionals in engineering changing jobs as I have just this month in my region, not new jobs being created, but old positions that are finally being offered--to other people--at much higher wages.

Offshoring has effectively killed domestic automation--government programs will not bring it back or any manufacturing.

Only tariffs will. Companies want to sell to people who have money. This is why so many factories are setup in China FOR THE SOLE PURPOSE OF EXPORTING TO THE USA.

Many others only export to the EU.

What percentage of total production in China is for their domestic market?

How can a domestic market EVER develop when the finished goods are worth a century of a Chinese production individual's wages?

I don't see a lot of Pakistani children wearing the Prada hand bags they assemble, because the target market is for the US and EU, not for the people who manufacture it.

It is AMAZING how inconceivable it is for some people that the USA renegotiate its trade deals.

We are the target market, if we were to install tariffs against Chinese production until working conditions, etc, are guaranteed--Production will come back at high speed to.... Mexico, or the next LCC--it will NEVER come back to the US.

But since we're all going to become product managers & artists then there's nothing to worry about-- we'll just magically generate 160 million product manager jobs.

[Lafayette]

wjd123: "If you are thinking of the Invisible Hand sorting out free trade problems or corporate power being the decider, neither will work because they don't promote a balance of power which would lead to an equitable distribution of gains."

The Invisible Hand was a description of the division of labor and its enhancement of mankind's ability to produce. Adam Smith was not considering, in it, a notion of fairness. Perhaps, however, he was thinking of the link between individualism and the collective good? I like to think so.

Why exclude fairness? Because Smith thought (perhaps somewhat naively?) that fairness was a moral virtue that a God-fearing (or God-believing) human would assume naturally as an evident truth.

Fast-forward to our age. Mankind has understood the advantages of the division of labor, but remains reluctant to assume fairness as a necessary quality of commercial transactions. The very nature of competitiveness negates the virtues of fairness. Either one wins or one loses, but rarely is the game necessarily fair.

Fairness is not an attribute of commercial transactions, which are the result of a negotiation between parties. Even in law, the nature of the fairness of markets is not considered; but only the fact that they should be monopolistic or oligopolistic – in which case they can be against the law.

So, let’s not fly too high the banner of fairness as regards the globalization of this planet.

Notwithstanding, as regards the repartition of corporate revenues between capital and labor, there I think the argument is strongly in favor of those who see the obvious disequilibrium. The return on labor is unfair comparative to the return to capital. And, there, like it or not, we enter into a Marxist puzzle. What is the fair share between the two?

In order to answer that question, we need to decide what is the “return to capital” and the “return to labor”. By labor, I do not mean just blue collar workers, but ALL personnel that contribute to the operation of a company.

I cannot understand the fairness of the top echelons being remunerated by not only wages but a share of capital returns. Why not all personnel? The same share per person? Of course not, but that all the peanuts should go to just the monkeys at the top of the pyramid is not a fair distribution of the profits.

The “return on capital” forcibly means to return of value to the ownership of the company, as determined by first debt and then by share ownership (of what remains). That we tweak that ownership to include everyone, but in different proportions according to their contribution to the success of the company … fine. But, that we should “give away” ownership by means of stock-options to only a select minority who work for the company, whilst the rest of the grunts have to pay for that ownership is inherently unfair.

I am assigning the notion of “fairness” where it should be - at the level of corporate profits (and the distribution of income) and not in the arena of international business, which is not its place.

When one looks at the "ethics of business" one must recognize that there is much work to be done to, first, define it and, secondly, implement it. Laws have a role to play, but moral decency as as integral part of corporate governance is far, far more important.

[Lafayette]

ninjaplease: "Only tariffs will. Companies want to sell to people who have money. This is why so many factories are setup in China FOR THE SOLE PURPOSE OF EXPORTING TO THE USA."

This is pure bullshit. Worse it is an indication of at total misconception of international business.

It does not even merit a rebuttal.

[Lafayette]

wjd123: "I can understand why some people think the economic sphere should be allowed to function by its own laws without interference from the moral sphere."

Ah-ha, finally common ground.

Neither can I, but there you have it. Americans can understand fairness in sports, but when it comes to corporate governance, the ethic is "winner takes all".

And, the winners are those at the top of the totem. That's "fair"? Not by any possible understanding of the notion of "fairness".

I repeat: All members of a company contribute to its success. Some perhaps more than others. But ALL contribute. So, the returns to the company (revenues and profits) should go to all. The hard part is defining who gets what percentage.

That the top get 95% and the rest 5%? No way, José.

The irony of all this is that if globalization is beginning to affect all salary levels in America, it is still those at the bottom that are most affected. A company that gets rid of top directors has them walk off with severance packages that assure them a VERY comfortable existence. But, those in the middle and certainly those at the bottom? What do they get?

Screwed.

[ninjaplease]

"This is pure bullshit. Worse it is an indication of at total misconception of international business."

Is it? What percentage of China's production is for domestic consumption?

[Lafayette]

np: "What percentage of China's production is for domestic consumption?"

Of what consequence is that percentage?

What percentage of Venezuelan petroleum is for domestic production?

[Callahan]

The Cato Institute, ... what a bunch of ... I won't say it, but you can guess.

Come to Michigan and talk the "free trade" bullshit, if you dare. Better be armed.

Listen to Lou Dobbs, listen to Bernie Sanders an Independant congressman from Vermont. Come to Michigan.

[Ninjaplease]

ninjaplease: "Only tariffs will. Companies want to sell to people who have money. This is why so many factories are setup in China FOR THE SOLE PURPOSE OF EXPORTING TO THE USA."

Lafayette: This is pure bullshit. Worse it is an indication of at total misconception of international business.

It does not even merit a rebuttal.

Ninjaplease: Is it? What percentage of China's production is for domestic consumption?

Lafayette: Of what consequence is that percentage?

What percentage of Venezuelan petroleum is for domestic production?

Your rebuttal is pure bullshit.

[Lafayette]

np: "Your rebuttal is pure bullshit."

Perhaps, but your answer to the question is non-existent.

[wjd123]

"One of the simplest lessons of economics is that when the supply of something is increased, its price must diminish. Labor is not an exception to the rule."

Lafayette,

That's why we need to balance the power between labor and management when labor negotiates for wages. A balance of power pushing up wages will encourage investment in labor saving devices. Without such motivation to invest, the need to remain competitive can result in lowering even further the wages of the weakest. That will result in a race to the bottom if labor is plentiful. In fact, if labor is plentiful enough, starvation wages can result.

Starvation wages is the Invisible Hand's way of solving an economic problem--the Invisible Hand that Adam Smith believed to be a necessary evil. If we could relieve that necessity, and we can to a great extent, Smith who was by profession a moral philosopher would be happy.

Without a balance of power the powerlessness of labor will drag down the equilibrium point of labor as price-factor equalization works it way through free trade economies.

I'm not denying necessity in the economic sphere nor am I setting up some arbitrary standard of fairness, what I'm any doing is setting up some rules and standards for trade where the harder edges of necessity can be softened and where the benefits of free trade can be more equitably distributed.

For instance an international standard affording labor the right to associate would encourage investment, raise the wage equilibrium point of wages in the price-factor equalization charts, increase GNP, and allow for greater subsidies for the poor.

And don't forget, I am not calling for one international government setting the rules of free trade. There is no point in setting up rules and regulations that countries can't afford. I want countries that join a particular international organization to be able to obey it rules and regulations, and I want the international organization to be able to enforce them.

How much free trade we have between these international organizations would depend on how much damage trade with them would do to our standards.

The prospect of more free trade would also be a carrot for political economies to change. International governments with the power to sanction would make change more than an empty promise.

Free trade as practiced today, the free trade of the WTO, offers little motivation for a country to change its political economy.

PS. I share your distaste for the huge compensation packages for CEOs. It offends my sense of proportionality, and its bad for society. Time and again we see people with great wealth acting as though they believe they are above the norms of society.

There are more MBA's available than ever, and price-factor equalization should be a free trade force to bring their compensation down. The reason it hasn't for those at the top is an imbalance of power.

By keeping labor naked management can add to a companies profit margins which they use through stock options and compensation boards to redistribute to themselves.

Compensation boards are used to find reasons to increase the CEO's pay. In return the CEO increases the pay of the board members. It's an incestuous relationship that stock owners can do little about, even if they wanted to, since they are not organized.

Congress could bring in the tax man in to make things more proportional, but congress is gradually becoming an enabler rather than a watchdog on rip-off artists.

[Lafayette]

wjd123: "That's why we need to balance the power between labor and management when labor negotiates for wages."

Agreed, but as I have stated, why just wages? Compensation should be based on a principle of Total Return to Labor Input.

Don't get hung up on the connotation of the word "labor". It does not just mean blue collar workers. It means everybody.

If management decided that it had a special privilege to share the profits MUCH MORE than staff, it's because they hoodwinked you into thinking they did. And, just because it is the custom, does not mean it is right.

Break down the wall "us-them" and make all people who work in corporation shareholders. Find a way of accepting remuneration just as they do, not only wages but stock options based upon negotiated criteria (performance in terms of productivity, for instance).

Why should staff have to pay for stocks (even at a 15% discount from market value) whilst management gets stock-options? I just do not see the sense of it. Why is their contribution treated, in terms of remuneration, differently from staff?

How is it that the intrinsic value of their labor should be estimated at 1000 or 10000 times more than the average in the corporation? Because they “take decisions”? Everybody in someway makes a decision every day. That management decisions have more intrinsic value than the floor-sweeper is obvious. What must be decided is how much more.

And it aint 100 or 1000 times more. This is "conventional wisdom", or the “going rate” and it should be chucked.

[Lafayette]

wjd123: "... the Invisible Hand that Adam Smith believed to be a necessary evil."

You may wish to believe that, but it is written nowhere. Not be Adam Smith, in any case.

[Lafayette]

wjd123: "International governments with the power to sanction would make change more than an empty promise."

There is no possible foundation in law for an international government. Governments are constituted as sovereign over a population and a land.

Even the UN has no article in its Charter that foresees an "international government". It only sees, by consultation and vote, that national governments act together on certain questions. Like the invasion of one member by another member. (E.G., Korea, Vietnam, Iraq.)

You seem to think that because the problem comes from abroad that the way to solve it is to have some "international government" stop it. That just aint gonna happen.

[wjd123]

"You seem to think that because the problem comes from abroad that the way to solve it is to have some "international government" stop it. That just aint gonna happen."

Lafayette,

What is the sense of explaining my position to you if your not going to accept it as written. When did I say that the problem of free trade came from abroad. I've maintained that the problem of free trade comes from the way it is practiced.

I've praised the EU's approach and condemed our approach as embodied in NAFTA. I've also condemed free trade as practiced by the WTO, an organization of which we are a member.

[wjd123]

"There is no possible foundation in law for an international government. Governments are constituted as sovereign over a population and a land."

Lafeyette,

I've given you an objective example of international government, the EU, adding to the civil liberties of woman. The sanction for violating their expandaded rights and EU law could be expulsion and a loss of the benefits of free trade. There is where international government has the power to sanction. A country can withdraw from the EU but it can't claim it doesn't have the right to sanction them. After all that's what countries agree to when the join the EU.

Here is another objective example. If the WTO says that we are in violation of free trade rules the offended countries have a legal right to sanction our trade.

[nkp]

Two Names: Heckscher and Ohlin.
Trade with China and India has exploded since the mid 1990s which primarily happened because
1) Their institutions improved to a level where foreigners were willing to provide access to their technologies through foreign direct investment and licensing agreements. Effectively equalizing the technological playing field as presumed in the standard model of trade: the Heckscher-Ohlin model.
2)Information technology made it possible for Western Companies to manage global operations and production networks in a manner sufficiently efficient to take advantage of favorable wages in LDC.
3) Trade barriers have come down.
This trade is primarily based on low wages in these countries and a huge overhang of poor rural labor looking for jobs(it's similar to what happened in the western world a 150 years ago, industrialization). It will be a LONG time before they hit the upward sloping part of the labor supply curve.

I think what we are seing now is a simple manifestation of the predictions of the Heckscher-Ohlin model:
A 1/3 increase in the effective world supply of labor,(especially low skill, but now more and more high skill) has the well known Stolper-Samuelson effects:
Return to capital increases
Return to labor falls. (Look for pressure on high-skill wages in the future because information technology enables services trade).
The HO model predicts that Trade is efficient and that there exists an allocation with TRANSFERS which makes everyone better off. It clearly predicts that absent these transfers trade is bad: for who: the low skill poor, especially low wage manufacturing workers.
All problems are exacerbated by the limited stock market participation for the least wealthy in the economy. These own no capital, and don't gain from the higher returns to capital.

The 80's and 90's inequality was due to Skill Bias, the 00's increase in inequality will be due...Yes, you guessed it: Trade. Because noone here will implement the necessary transfers.