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It is not yet on line, but those of us who get the dead-trees version of Atlantic Monthly can read an article by Eamonn Fingleton that attacks free trade. Fingleton says that he surveyed the ten most recent Nobel Prize winners in economics to ask whether we should be concerned about the large U.S. trade deficit.
Only one laureate, Gary Becker, of the University of Chicago, was prepared to endorse the...view that deficits pose no policy problem for the United States. Robert Solow, of MIT, said that deficits do pose a problem; Daniel McFadden, of the University of California at Berkeley, was less worried about the short term than the long term. Although the other seven were unwilling to comment publicly, several of them were clearly discomfited by the worsening trend in trade.
Fingleton attempts to imply from his "survey" that apart from Becker, economists agree with his view that trade deficits "displace American jobs." However, almost no respected economist would agree, and in fact recent economic performance in the United States clearly refutes the notion that a trade deficit leads to a net loss of employment.
The consensus among economists in favor of free trade remains strong. However, the political consensus is fragile. President Bush this week imposed tariffs on steel imports. This will cost jobs by making the U.S. economy less productive. It also sets a terrible example: if a popular President of the world's richest nation cannot resist special interest groups, we can expect very little from leaders of other countries.
Discussion Question. Economists view the U.S. trade deficit as a result of strong demand for U.S. assets, which raises the value of the dollar. If the dollar is over-valued, what risks does that pose?
Ever since Keynes articulated the "paradox of thrift," macroeconomists have expressed the concerns in this New York Times analysis that saving could be excessive.
"This is going to be an anemic recovery, and the increase in the saving rate is one key element as to why," said Stephen S. Roach, chief economist at Morgan Stanley. The firm expects the savings rate to jump to 2.9 percent by 2003, from 1.6 percent last year.
Wynne Godley also expressed this view.
The 90s expansion was powered uniquely and exceptionally by a huge fall in the net saving of the private sector... During this period the balance between the private sector's income and expenditure fell by 11.5% of GDP; in the third quarter of 2000, private expenditure exceeded income by an amount equal to 6.2% of GDP, never having exceeded it significantly at all during the previous 30 years or more...The private deficit will probably recover all the way back to its normal condition of surplus, implying a continued fall in private expenditure relative to income, withdrawing 4.5%-5%, up to $500bn (£342bn) from aggregate demand. But even if the private deficit were not to recover at all, my main conclusion would still stand because the US economy would remain deprived of the motor which drove it through the 90s.
This is known as "flow of funds" analysis in macroeconomics textbooks. This analysis has two components.
As a matter of accounting, net private saving (personal saving plus corporate profits minus investment) plus net government saving (taxes minus expenditures) equals net foreign investment (exports minus imports). This is the flow of funds identity.
If all of the other components are given, the higher the rate of desired private saving the lower the level of aggregate demand. Because actual private saving cannot exceed the amount that is determined by all of the other flows, an "excess" of desired saving reduces overall demand for output. This is the Keynesian equilibrium condition.
There are many problems with this textbook analysis. For one thing, there is no price adjustment. Excess saving does not lower interest rates or reduce the exchange rate. Thus, it has to reduce output.
My concern is with treating net private saving as an autonomous causal factor, while treating net foreign investment as given. In my view, what has been driving down net private saving and net foreign investment has been the trend toward investors having increased confidence in U.S. assets relative to foreign assets. When this trend levels off or reverses, there will be a decline in the value of the dollar, which will stimulate our exports and restrain our imports. There also will be a decline in U.S. stock prices, which will reduce investment and consumer spending. The dampening of domestic demand could very well be completely offset by a reduction in the drag on demand exerted by the trade sector. Thus, there could be a large swing toward increased net private saving without a collapse in overall economic activity.
Discussion Question. If investors start to favor foreign assets, then a drop in the value of the dollar will reduce the trade surpluses of Japan and Europe with the U.S. However, what will happen to domestic demand in Europe and Japan in that scenario?
The front page of today's Washington Post had an economically illiterate headline:
'Living Wage' Accord Reached
Montgomery Rule Would Aid Poor
The "living wage" bill will require any company that does business with the County to pay workers a wage about double the current minimum wage. This will hurt the poor, not help them.
The "living wage" bill is special-interest legislation on behalf of unionized public-sector workers. Like all special-interest legislation, it has absolutely nothing to do with aiding the poor.
If the Washington Post cares to express a different opinion on its editorial page, that is one thing. To pass it off as a news headline shows total economic ignorance.
Discussion Question. This example typifies the bias that conservatives complain about in the media. When liberal reporters and editors cover legislation that is favored by the left, they cannot distinguish propaganda from news. Are conservatives paranoid, or is this a real issue?
Bob Frankston blogs a classic put-down of the movie industry lobbyist Jack Valenti arguing for hardware restrictions to prevent copying.
If $200,000,000 movies are so important, then Valenti should ask Congress for a direct payment. It's certainly better than creating the necessary mechanisms to police the use of bits.
This is an instance of the problem I discussed in Asymptotically Free Goods. When something costs very little (copying and distributing digital content), the cost of excluding people from using the good can be astronomical. We will pay a huge regulatory tax on computers and consumer electronic products if they have to meet the anti-copying specifications of the movie industry. In Dan Gillmor's words,
The movie studios would turn powerful PCs into little more than expensive DVD playback machines, crippling PCs for other valuable uses.Instead, Frankston says, it would be cheaper to pay a direct tax to the government and have the government hand that money directly to movie creators.
Discussion Question. Could you actually develop a system in which movie companies were rewarded out of a central prize fund (perhaps based on the popularity of a movie), so that they did not have to worry about copying?
As noted here previously (see post 59 as well as post 102 below), a McKinsey study found that Wal-Mart made a major contribution to aggregate productivity growth in the United States. This raises an interesting issue for Europeans, as Virginia Postrel noted.
In Europe, anticompetitive retail policies are common, restricting real estate use, store hours and what can be sold by whom. Wal- Mart developed in a largely unregulated retail environment, so its big-box model can't be copied in much of Europe.
In Europe and Japan, governments love innovative technology, but they protect businesses from competition from those who might actually use the latest stuff. This restrains productivity growth.
Economists who focus on innovation as a source of growth are divided on the role of government. Looking at the process of research and its "public-good" character, some economists see a big role for government. On the other hand, looking at the role that competition plays in stimulating the use of innovation, other economists see a need for government to stay out. See 75 percent Mental.
Discussion Question. If competition is the key to producing improvement, should we be happy that the government took over airline screening?
Here is a debate over economic growth in which the two participants, Robert Wade and Martin Wolf, don't even agree on what it is they disagree about. Wolf writes
I would invite you to subscribe to the following three propositions. First, the biggest policy challenge is to accelerate economic growth in poor countries. Second, open markets in the north and FDI make an important contribution to such growth. Third, self-sufficiency is a foolish development strategy.
Wade responds
I agree with your three propositions and have never argued anything different...At the heart of our disagreement, I think, is the question about how far rich countries in general should go in using the power our superior resources give us (a) to set the rules of the market so that resource power is translated into market power, and (b) to use that power to the maximum when bargaining with people much poorer than ourselves.
Wade's point is that rich countries often demand strong concessions on trade from poor countries while making few concessions themselves.
Wolf replies
I do accept, however, that developing countries have sometimes been forced to accept inappropriate policies: the trade-related intellectual property agreement is an example. I also agree that the north should liberalise in favour of the south and that more aid, targeted on countries with governments that know how to use it, is a moral and practical necessity.Yet there is one fundamental matter, in this debate, on which we do disagree. Economic growth is, almost inevitably, uneven. Some countries, regions and people do better than others. The result is growing inequality. To regret that is to regret the growth itself. It is to hold, in effect, that it is better for everyone in the world (or within individual counries) to remain equally poor. You come close to saying just that. It seems to me a morally indefensible and practically untenable position.
Discussion Question. The environment of competition and adaptation that is conducive to growth does not lead to equality of income distribution. Does it improve the conditions of the poor as well as the rich, and if so, is that acceptable, or is equality more important than the absolute level of wealth?
Andrew ("Content is Not King") Odlyzko writes infrequently but insightfully about telecommunications. In this piece, he has may interesting things to say about the business outlook for various telecommunications services. In particular, he says,
for several years now wholesale prices for long distance voice calls in the US have been under a penny a minute (reflecting lower costs). Those costs and a competitive marketplace are not compatible in the long run with consumer prices that are 10 times as high. It was inevitable that for ordinary customers, long distance was eventually going to be provided by their local carriers on a flat rate basis.
The way I would put this is that long distance service is asymptotically free.
Are the stocks of local telecom providers overvalued? Odlyzko writes,
wireless carriers are valued at about $2,000 per subscriber (adding up stock valuations to debt). ILECs are valued at $2,000 to $3,000 per line, while cable TV networks are valued at $4,000 to $5,000 per subscriber. These valuations, much higher than the cost of replacing the assets of these businesses, all may very well be too high...What these valuations do is reflect the inertia in the system...Investors may be overestimating this inertia, and the ability of managers to exploit it profitably, but so far their faith has been justified.
Odlyzko offers the intriguing and optimistic hypothesis that as voice telephone traffic migrates to cell phones, the local phone companies (ILECs) will need to push broadband services in order to maintain revenues.
Discussion Question. People who give out their cell phone number as a contact number will have a hard time changing carriers. Will this lead to increased inertia (and profits for cell phone carriers) going forward, or are there countervailing factors?
(Update. Reader Brad Hutchings writes
With cell phones, I'd imagine that if there were enough consumer pressure and this were a state regulatory issue, cell phone number portability could happen in fairly short order.)
Kevin Hassett describes a surprising disconnect between productivity and profits.
Productivity, which normally tanks in a recession because firms hold on to workers when demand falls, has increased substantially over an entire recession. How remarkable is that? In the last seven recessions, productivity tanked. Not this time...But along with productivity increase comes a profound puzzle. While firms have deftly avoided carrying ridiculously high overhead costs and have improved the efficiency of each worker, they have, nonetheless, lost tons of money. Indeed, profits have dropped even more in this recession than they do in a typical recession.
The "late" economist Edward Yardeni (he changed jobs and now his web site is gone--it's like he died or something--email me if you know where he is) used to talk about the Internet economy as the competitive economy. He predicted that it would lead to firms having to compete so fiercely on price that improvements in productivity would not enhance profits.
Discussion Question. If increased productivity does not go into profits, what must be happening to real wages?
In Technology Review, my second-favorite magazine (Atlantic Monthly is my favorite), Michael Schrage talked with Robert Solow about a productivity study (see post number 59).
"By far the most important factor in [productivity growth from 1995-2000] is Wal-Mart," reports Robert Solow, the MIT Nobel Prize-winning economics professor emeritus who chaired the report’s advisory committee. "That was not expected. The technology that went into what Wal-Mart did was not brand new and not especially at the technological frontiers, but when it was combined with the firm’s managerial and organizational innovations, the impact was huge."...If you appreciate clever innovations, spend more time with inventors, entrepreneurs and venture capitalists. If you want to know which innovations will rewrite the productivity statistics, ignore early adopters and identify the Wal-Marts in key vertical markets.
What economists are finding is that new technologies only affect productivity when they are applied intelligently. While new technologies can come from research and the high-tech sector, the productivity improvements come from market competition in the low-tech sector.
Discussion Question. I once argued that state governments that want to stimulate innovation should not subsidize high-tech centers. Instead, they should open up the education system by allowing vouchers. The idea is that education could benefit like the retail sector from the pressure of competition. Should we allow someone to become the Wal-Mart of education?
Richard Epstein applies standard economics to a nonstandard issue.
about 79,000 people are awaiting organ transplants; about 5,500 die each year in part because price is not allowed to rise to bring supply and demand back into equilibrium.
Now there are glimmerings that all this might change. The American Medical Association's Council on Ethical and Judicial Affairs may ...propose, cautiously and on an experimental basis, a program that will allow the payment of small sums in the neighborhood of $300 to $3,000 for cadaveric organs in an effort to overcome the current acute organ shortfall.
Discussion Question. Paying people to donate organs sounds bad. Why is not paying them even worse?