Thursday, April 9, 2015

Why the US and Its Trading Partners, Including the Developing World, Benefit from Trade

A student in one of my classes suggested that globalization has reduced American workers' wages.  That is not the effect of globalization. Rather, globalization raises wages even when plants leave the country.  When plants leave the country, new jobs replace the lost jobs, and they tend to be jobs at which US workers are better at doing and are more productive at than they were at the old jobs. 

For example, emerging American jobs are described in US News ( ). US News  suggests that health care, social assistance, professional services, and construction will represent half of all new jobs.  It ranks these as the best jobs for 2020:

1. Computer Occupations: 859,833
2. Health Diagnosing and Treating Practitioners: 443,611
3. Other Management Occupations: 196,199
4. Financial Specialists: 184,312
5. Business Operations Specialists: 183,574
6. Sales Representatives, Services: 178,859
7. Engineers: 177,581
8. Information and Record Clerks: 177,194
9. Advertising, Marketing, Promotions, Public Relations, and Sales Managers: 168,646
10. Supervisors of Sales Workers: 164,610

The jobs that have left the United States have been, with exceptions, manufacturing jobs that are not as high paying as many of the jobs on this list.

The result is that productivity rates have not declined over the past seventy-five years.  What has happened is that productivity rates have gone up in line with historic trends, which means that wages should have gone up, but wages did not go up. They have been stagnant since 1970, and during the Obama administration they have declined even more. At various points they have fallen as low as the 1964 level.

If plants' exiting the US was depriving US workers of productive work, then workers' productivity rates would be declining, but productivity rates haven't been declining.  Since 1970 American workers' productivity rate has gone up about 80%, in line with historic trends.  What is different is that real (inflation-adjusted) wages have not gone up.  That is among the largest transfers of wealth, from workers to share owners, in the history of the world.

As well, that violates one of the basic principles of economic rationality, that marginal wages equal the value of the marginal product, or the price of the product in a competitive market.

That productivity has gone up and stock values have gone up but wages haven't gone up means that there has been interference with the ability of workers to assess their own value and to demand fair compensation from their employers.  The reason that wages go up with productivity is that workers bargain for higher wages.  If they don't bargain, it's because they don't understand the value of their own productivity.  This bargaining occurred from 1800 and earlier to 1970. It seems to have ended around the same time that President Nixon ended the Bretton Woods monetary agreement, and the US went back to a pure paper currency not legally backed or constrained by gold bullion reserves.

The claim that the forty-five-year decline in wages is due to globalization also overlooks the underlying rationale for trade and globalization: the theory of comparative advantage.

To see why globalization makes US workers richer, it is useful to understand the concept of comparative advantage, which you know from your economics classes. The idea and the classic example come from David Ricardo, the nineteenth century, British economist who first realized that free trade is a case of win-win bargaining.  In other words, trade will not occur if both parties aren't made better off.  If a country is made better off by trade, productivity rates go up (or, vice versa, higher productivity enables a country to trade).

To see why countries become richer because of free trade, Ricardo used the example of a two-country world with two products. In country A, China, it takes one hour to produce an apple and two hours to produce an orange. In country B, the US, it takes three hours to produce an apple and four hours to produce an orange. In this example (not in real life), the US is the poorer country because it takes more time to produce both goods.

Example of Comparative Advantage

Without Trade                             
                                                 China                                     US
Apples                                    10 Apples                          3 1/3 Apples                                 

Oranges                                    5 Oranges                        2 1/2 Oranges

In China, an orange is worth two apples (because one apple can be produced in the same time that one half an orange can be produced.  Conversely, in China an apple is worth half an orange. (It takes one hour to produce an apple but two hours to produce an orange.) 

 In the US, an orange is worth 4/3 of an apple (because one apple can be produced in the same time as three quarters of an orange). Conversely, in the US an apple is worth three quarters of an orange. (It takes three hours to produce an apple but four hours to produce an orange.)  

Notice that although the US is poorer country in this example only (for it takes three times as long to produce an apple and twice as long to produce an orange), apples are worth ¾ of an orange in the US while they are worth ½ an orange in China.  That is, the Chinese can get a better price for apples in the US.  At the same time, oranges are worth two apples in China, but they are worth 1 1/3 apples (4/3) in the US.  As a result, Americans can get a better price for oranges in China (2 apples in China versus 1 1/3 apples in the US).

Thus, it pays both countries to trade, and the result will be more wealth for both countries. Taking the example of the US, the less productive country, let’s say that all of the production time is dedicated to the product at which it is relatively efficient.  (Notice that China is more efficient in producing both products, but what matters is the within-country relative efficiency.) Since the US is relatively efficient at apples, the production would then look like this:

Production with Trade
                                               China                               US
Apples                              13 1/3 Apples                   0 Apples
Oranges                              3 1/3 Oranges                5 Oranges

Result from Trade Can Benefit China, US or Both, with Neither Worse Off, and One or Both Better Off

A. China benefits, US Does Just as Well (US rate for apples)
                             China                                                  US
Apples                 10 Apples                                     3 1/3 Apples
Oranges                5 5/6 Oranges                              2 1/2 Oranges

B. US benefits, China Does Just as Well (China rate for oranges)
                             China                                                  US
Apples                   10   Apples                                  3 1/3 Apples
Oranges                   5   Oranges                                3 1/3 Oranges

Friday, March 27, 2015

It Is Time to Ask That Offensive TV-and-Cable News Be Turned Off in Public Spaces

The Corsair was a journal based in New York and published in the late 1830s and 1840s.  On February 15, 1840 it attributed the expression “never discuss religion or politics with those who hold opinions opposite to yours” to John Stager. This probably wasn’t the first time the expression was published, so its origins are obscure (H/t Barry Popik).  I first heard the expression in fifth grade, when my teacher, Mrs. Lane, mentioned it to our class. My parents frequently discussed politics, but they probably would have been better off following this advice, for the subject was, especially for my mother and sister,  a constant source of irritation and upset. 

Recently, I was exercising at a local gym and someone had turned on CNN on a big television at the head of the room. The television hangs from the wall in an elevated position, so it is difficult to maneuver. As I listened to CNN, the tone and nature of their reporting seemed to me not to constitute news, or even an approximation of news.  Rather, it constituted Democratic Party opinion and propaganda. 

It is time for those of us who do not agree with cable television’s viewpoint to ask that television news not be shown in public spaces. It is tendentious, biased, rude, one-sided, and offensive to those, probably half the public,  who disagree with its pro-big government opinions. There is no reason for this offensive material  to be shown in public, for many alternatives are available.  I asked that the gym play different channels in the future, and the next time I was there no news network was playing. 

My plan is to ask that cable news be turned off wherever it is playing in public. There is no reason for me to be subjected to big-government propaganda.

Thursday, March 26, 2015

A Bush in Hand Equals Lizzy against Bush

The Boston Globe has run an editorial that Elizabeth Warren should run against Hillary in 2016 in the Fascist Party primary. I agree.  There's a chance that Americans might reject another Obama-style, far-left fascist, so Warren would have a better chance of losing than Hillary, the more moderate fascist. Of course, if Lizzy the lizard wins, she will hasten the collapse of the Washington leviathan, which is just as good.  At the same time, it's not clear that the Republicans will offer anyone better.  A bush in the hand is not much better than a lizard in the bush, or something like that.  Bring her on.

Thoughts on the Mugwumps

I just sent the following email to a colleague who was talking about the Mugwumps. The Mugwumps were a group of elite Republicans who switched sides and voted for Grover Cleveland in 1884.  The name derives from a bastardization of a Native American word for chief, but the above cartoon suggests a different interpretation.

I don't consider them moderates. They switched party because of strong political belief, specifically in rational government. They were laissez faire Republicans, and many had been abolitionists. There was nothing moderate about them even though they switched sides.

The confusion many people have about today's two extremist parties leads to the mistaken impression that if you don't favor either party you are in between.  The crank TV newscaster Bill O'Reilly makes a similar claim.  He is moderate because he splits the opinions of the two big parties.  

The two parties are close, and they are both extreme in their support for big government. By historical standards, today's America occupies the extreme Whig end of the spectrum, and that's true of both parties. Only an extremist can call two parties that both advocated lending as much as $29 trillion to Wall Street to be moderate.  Today's America is an extremist, authoritarian state. There is no Aristotelian mean here.

This is the email to my colleague:

The first book I read on the Mugwumps was Nancy Cohen’s Reconstruction of American Liberalism 1865-1914, which is an intellectual history that gives a good overview. You can piece together a libertarian perspective from it.  See .

The third book I recommend is a little different. It is Burton Bledstein’s Culture of Professionalism: The Middle Class and the Development of Higher Education in America. . It traces the creation of professionalism in a host of fields.  Professionalism was intimately connected to the Mugwumps’ interest in civil service reform. The impetus for rationalization led directly to Progressivism. Once the commitment to organized professions took hold, it was a small step to building legal standards and regulations for the professions.  That, in turn, was linked to the development of universities. Hence, big government, the organized professions, and universities have always been linked.

The institution of the modern university in 1876 via the founding of Johns Hopkins came near the heart of the Mugwump era, which was in 1884, during the election of Grover Cleveland.  I don’t think historians have a clear understanding of why the Mugwumps opposed James Blaine and turned against their own Republican Party to support Cleveland.  [My colleague] may be right that there was a laissez faire impetus, but showing that would require a new, or at least clearer,  historical treatment of it.  Among the interesting Mugwump figures (see Cohen) were EL Godkin, David Ames Wells, and William Graham Sumner.

I also don’t believe that historians have a clear understanding of the role of the greenbacks in stimulating the expansion of industry in the Civil War era and what the economic effects were on bondholders, so the post-1873 gold deflation, which harmed other asset holders (likely Western and Southern farmers as well as stockholders) and generated Populism and Bryan (and which Friedman calls “the crime of 1873” in an article that was published in the Journal of Economic History), may have been a reaction to the post-Civil War inflation. Godkin writes about his anger at the effects of inflation on redistributing wealth to Jay Gould and others. 

One question that no one has asked is whether there was a relationship between Wall Street and Bryan or the Populists.  Mark Hanna, a high school friend of John D. Rockefeller,  was, of course, McKinley’s close adviser. On the other hand, it may be that the election of McKinley (as propped by Wall Street) was not really opposition to silver, but rather it may have been preemptive and done in the hope for the central bank that was recommended fourteen years later, in 1910, by the same Rockefeller (with Morgan and Kuhn Loeb) interests.  It is unlikely that there is much public information on something like this.

In any case the 1896 election had an opposite dynamic from what today’s pro-inflation banking community offers, and I suspect that something is not being said about who the Populists were and, more importantly, who their opponents were.  Was a central bank being quietly considered by ‘96? 

The same is true of the conflict within the Democratic Party between Bryan and the Bourbon Democrats,* of whom Cleveland was the chief representative. Wilson had been a Bourbon Democrat, and I think that he voted for a third party, the Gold Democrats, in 1896.  His connection to Morgan is mentioned in my paper on colleges, and I suspect that his signing of the Federal Reserve Act came from his relationship with Morgan.  An interesting point in the biography of Frank Vanderlip is that Wilson dropped him as a friend, and Wilson would have nothing to do with Vanderlip once Wilson was elected. Wilson did not want to seem to be linked to bankers.  I wonder who thought up that plan of action.  Wilson went from voting for gold in 1896 to refusing to have to do with bankers so he could propose the Federal Reserve Bank.  As a result of secrecy, it may be hard to get data. But was the opposition of the banking community to silver a strategic one?

*Wikipedia: Bourbon Democrat was a term used in the United States from 1876 to 1904 to refer to a conservative or classical liberal member of the Democratic Party, especially one who supported Charles O'Conor in 1872, Samuel J. Tilden in 1876, President Grover Cleveland in 1884–1888/1892–1896 and Alton B. Parker in 1904. After 1904, the Bourbons faded away. Woodrow Wilson, who had been a Bourbon, made a deal in 1912 with the leading opponent of the Bourbons, William Jennings Bryan; Bryan endorsed Wilson for the Democratic nomination, and Wilson named Bryan Secretary of State. The term "Bourbon" was mostly used disparagingly, by critics complaining of old-fashioned viewpoints.