Globalization: What Did Paul Krugman Miss?

This is a very nice short framework-for-thinking-about-globalization-and-the-world piece by Paul Krugman: Paul Krugman (2018): Globalization: What Did We Miss?

It is excellently written. It contains a number of important insights.

But.

I have, unusually, a number of complaints about it. I will make them stridenly:

First, Paul Krugman claims that, in Heckscher-Ohlin models at least, from the early 1970s to the mid 1990s international trade put only a little bit of downward pressure on the wages of American “unskilled” and semi-skilled workers. I think that is wrong. I think that from the early 1970s to the mid-1990s international trade, at least working through the Heckscher-Ohlin channels, put less than zero downward pressure on the wages of American “unskilled” and semi-skilled workers.

As I see it, it is important to note that “emerging markets” and “global north” are not static categories. Japan, Spain, Italy, Ireland were low-wage countries in the 1970s. From the early 1970s to the mid-1990s the relative wage levels of the then-current sources of America’s manufacturing imports were rising more rapidly than new low-wage sources of manufacturing imports were being added. The typical American manufacturing worker faced less low-wage competition from imports in the mid-1990s than they had faced in the early 1970s.

As I see it, where manufacturing workers came under pressure (and they did) it was not from increased low-wage competition from abroad but rather from:

  1. fiscal policy failures that produced the Reagan (and then Bush II) deficits as Republican governance redirected dollars earned by foreigners from buying our exports to buying our bonds
  2. managerial failures in Detroit (and elsewhere in the U.S.) and successes abroad
  3. technological failures in Pittsburgh (and elsewhere in the U.S.) and successes abroad

As I see it, yes, we could have protected Detroit and Pittsburgh from the consequences of their managerial and technological failings—but it would have been at immense cost for the rest of the economy, a very unfavorable benefit-cost tradeoff. And we should not have elected Republicans and given them the keys to the economic policy car: that rarely works. But given that we did give the Republicans the keys, and given Detroit’s and Pittsburgh’s managerial and technological failings, globalization from the early 1970s to the mid-1990s was a wonderful thing for America as a whole: it provided us with enormous benefits in every scenario, and in the unfortunate scenario we were dealt by the Reagan Democrats and the Big Three auto executives of Detroit, globalization greatly reduced the damage.

Second, I agree with Paul Krugman when he writes as though the “hyperglobalization” from the mid-1990s to the financial crisis was a big deal (which it was):

This huge surge… Containerization was not… new… [but] t took time for business to realize… [the] possibilities…. [Plus] a broad move… toward outward-looking policies…. China made a dramatic shift from central planning….

But I disagree when he writes that “hyperglobalization” was in some sense a threat to blue-collar Americans’ economic and social position:

It’s clear that the impact of developing-country exports grew much more between 1995 and 2010 than the 90s consensus imagined possible, which may be one reason concerns about globalization made a comeback…

Why? For reasons that Paul recognizes and summarizes:

A fairly novel form of trade… break[ing] up value chains, moving labor-intensive parts of the production process overseas…. The factor content of North-South trade hasn’t risen nearly as fast as the volume…

Let’s unpack this. In the age of widely-separated intercontinental value chains, we can see that there are actually more types of “blue collar” manufacturing jobs than the skilled-craft, semiskilled-assembly line, and unskilled traditional classification. Most importantly, we can see that the blue-collar jobs that are traditionally called semiskilled-assembly line are actually divided into two. The first are those jobs that require relatively literate workers with substantial experience and tacit knowledge who plug into sophisticated and highly productive divisions of labor supported by very productive communities of engineering practice. The second are those jobs that plug into those divisions of labor supported by those communities of engineering practice, but that actually do not require relative literacy or involve a great deal of tacit knowledge or experience—jobs that are doable by virtually everybody with the standard mental structure and eye-brain-hand loop of the East African Plains Ape, and that we thus call “unskilled”, even though they involve tasks that are currently regarded as very hard AI problems.

Before the coming of intercontinental global value chains, the distinction between these two types of semiskilled manufacturing jobs was of relatively little importance. Both paid relatively well for jobs requiring little formal education: both benefited from the requirement that workers be located near to engineers (and marketers, and executives) and from their participation in highly productive production processes, so both shared in the rents produced therein. But the truly unskilled portion—even though they were called “semiskilled” were not truly good jobs: they were boring, repetitive, and not very productive. An economy that could figure out a way to offshore those jobs would find that it had a global competitive advantage, and that would strengthen its truly valuable communities of engineering practice and ability to productively employ those relatively literate workers with valuable experience and tacit knowledge.

This was brought home to me most strongly in the years after the NAFTA debate. Opponents of NAFTA from Harley Shaiken and Thea Lee to Ross Perot had claimed it would be very damaging to the American automobile industry. Not so. And not just the firms executives, the shareholders, and the marketers were better off as a result than they would have been otherwise: the blue-collar workers with tacit knowledge and experience were better off as well from Detroit’s larger market share, and the truly unskilled portion—perhaps we should call them “polyester uniform”?—did not have jobs in the auto industry but had jobs about as good outside of it.

So, at least as I see it, the coming of “hyperglobalization” strengthened opportunities for U.S. workers without formal education to find jobs where their skills, experience, and tacit knowledge could be deployed in ways that were highly productive. What “hyperglobalization” did do was provide the top 1% and the top 0.1% with another lever to break apart the Dunlopian labor relations order, break the Treaty of Detroit, and redistribute the shared joint product from highly productive mass production backed by valuable communities of engineering practice upward in the income distribution. But there were many such levers in the U.S. from the 1970s to today. And “hyperglobalization” was, as I see it, one of the weakest and shortest of them. It gets blamed not because it was an important driver of the process, but because it allows one to blame others: brown people, yellow people, and, of course, the rootless cosmopolites.

Third, I quarrel with Krugman’s—and with Autor, Dorn, and Hanson’s (2013)—assessment of the China shock. Paul writes:

[While] trade deficits explain only a small part of the long-term shift toward… service[s]… soaring imports did impose a significant shock on some U.S. workers…. Fights over tariffs look very much as if they come out of a specific-factors world…. This is where the now-famous analysis of the “China shock” by Autor, Dorn, and Hanson (2013) comes in. What ADH mainly did was to shift focus from broad questions of income distribution to the effects of rapid import growth on local labor markets, showing that these effects were large and persistent. This represented a new and important insight…

Put me down as believing that, as I see it, Autor, Dorn, and Hanson’s focus on the stable absolute number of U.S. manufacturing jobs before the China shock of the 2000s and its drop as a result of the China shock is substantially misleading. One might look at the share of the workforce who have—and the share of those entering the workforce who get “good blue-colllar” jobs, in which we see not stability but rather a smooth decline in the proportion. One might look at individual towns, cities, and regions, in which case one sees patterns of regional industrial growth and collapse: the defense cycles, the collapse of New England textiles and leather, the rise of the Carolinas, the shift out of the Midwest to the falsely-called “right to work” states, plus the general desire of people after air conditioning to live in places where the winters are not so dire. It is not a new insight that such shocks to regional labor markets had effects that were large and persistent: anybody who had ever driven through Lowell or Fall RIver, MA knew that before Paul Krugman had published his first paper. It is, however, a very important insight.

Yes, the reduction in the share of the U.S. workforce in tacit knowledge and experience semiskilled blue collar jobs has been a big deal. But the overwhelming bulk of that is due to technology, not trade. Yes, there has been an additional reduction beyond technology. But the bulk of that has been a second-best compensation and adjustment for the disastrous Republican habit of running large budget deficits at full employment. Yes, the U.S. government should have done much more to support communities and workers who found themselves under the hammer. But for that blame the legacy influence of social darwinism on American politics: the U.S. government did little for Lowell or Fall River back in the day. And complaints about the failure to properly manage a process that is, globally, overwhemlingly positive-sum should be mailed to the address of the Reagan and Trump Democrats of Michigan, Pennsylvania, and Wisconsin, not to poorer brown and yellow people in Mexico and in China.

Moreover, from the perspective of the country as a whole and from the perspective of many of the communities affected, the China shock was not a big deal for local labor markets. Yes, people are no longer buying as many of the products of American factories as Chinese imports flood in. But those selling the imports are turning around and spending their dollars investing in America: financing government purchases, infrastructure, some corporate investment, and housing. The circular flow will it: the dollars are of no use outside the U.S. and so the dollar flow has to go somewhere, and as long as the Federal Reserve does its job and makes Say’s Law roughly true in practice, it is a redistribution of demand for labor and not a fall in the demand for labor.

And here is the kicker, as I see it: the types of people and the types of jobs funded by the imports of the China shock looks very much like the types of people and the types of jobs displaced from the tradeable manufacturing sector. Yes, some local labor markets got a substantial and persistent negative shock to manufacturing, often substantially cushioned by a boost to construction. Other local local labor markets got a substantial and persistent positive shock to construction. And on the level of the country as a whole the factor of production that is (truly) semiskilled blue collar labor does not look to me to have been adversely affected.

Until 2008.

Now we get to my fourth quarrel: the play is Hamlet. But where is the Prince of Denmark? Zero references to “recession”, “finance”, “financial crisis”, or “recession”. Yet, at least as I see it, the key thing that we missed about globalization was not its impact on factor prices in some Heckscher-Ohlin model or an shared rents in some specific-factors model but rather that when a big financial crisis and depression came “globaization”—and poor people elsewhere—would provide an excuse to distract blame. There was a lot of blame: Blame financiers who had no control over their derivatives books because they failed to manage. Blame financeirs who had control over their deiverative books but who thought, like Charles Price of Citigroup: “you have to keep dancing as long as the music is playing”. Blame Federal Reserve Chair Alan Greenspan. Blame Treasury Secretary John Snow. They were at the heads of the agencies responsible for controlling systemic risk when the vulnerabilities emerged. And they did not no—control it, that is. Blame Federal Reserve Chair Ben Bernanke. Blame Treasury Secretary Henry Paulson. They were at the heads of the agencies responsible for controlling systemic risk while there was still time to shore up the system—and they did not.

The Prince of Denmark here is the Greenspan-Snow shock, not the China shock. What we missed about globalization was not its impact on blue-collar semiskilled workers with experience and tacit knowledge and communities, but how it would interact with attempts to shift resoponsibility and blame off of the appropriate properties.

And then, of course, ther is 2010: Barack Obama’s declaration in his State of the Union Address that the time for bold action to boost employment was over:

We took office amid a crisis, and our efforts to prevent a second Depression have added another $1 trillion to our national debt…. Families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I’m proposing specific steps to pay for the $1 trillion that it took to rescue the economy last year…. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will…

I have never found anybody working in economic policy in the Obama administration who thought that this large a shift this quickly was a good idea. Some have admitted to believing that it was a meaningless rhetorical nothingburger—after all, it excepted “spending related to our national security, Medicare, Medicaid, and Social Security”, and you can do anything macroeconomic you want on the spending side in those categories. They were wrong. Others were strongly opposed. Others say that they were quiet, but certainly not boosters.

And, indeed it wasn’t a good idea.

If the Greenspan-Snow shock is the Prince of Denmark in this play, the idea that the crisis was over and the need for stimulative policy was at an end as of early 2010—call it the Obama-Geithner shock, perhaps—is King Claudius, or at least Queen Gertrude here.

And this gets me to my fifth quarrel with Paul Krugman here. As I see it, the most important thing we missed about globalization was how much it required support from stable and continuous full employment. That, I think, ought to have been the focus of his talk to the IMF.

It is now 81 years since John Maynard Keynes published:

Whilst… the enlargement of the functions of government involved in the task of adjusting to one another the propensity to consume and the inducement to invest would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it… as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative….

If effective demand is deficient… the public scandal of wasted resources… the individual enterpriser… is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros…. The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom…

True. Now as much as ever.

Reinvent: Determining Bargaining Power in the Platform Economy

Reinvent: Determining Bargaining Power in the Platform Economy: Our political system has been hacked by time, circumstance, chaos, and disaster…

…The failings of the electoral college, the fact that small states hacked the constitution in 1787, so we now have a world in which the minority in the Senate represents 175 million people, while the majority represents 145 million people, and the gerrymandering after the 2010 census are primary examples of this dysfunction.

Fixes for the economy?:

  • A 4 percent inflation target from the Federal Reserve, * Incentivizing businesses to invest in workers,
  • Reinvigorating the idea that technology should be used to augment workers, not replace them.

The possibilities for positive human flourishing from the platform economy are immense, provided the platforms actually work. Uber’s investors are currently paying 40 percent of Uber’s costs. What happens when these investors start wanting their money back? The platform economy moves bargaining power away from the service providers and from the customers, and into the hands of the platforms. This is a problem for both consumers and independent workers. What bargaining power workers will have will be correlated to the time and resources devoted to training them: when you walk, you disrupt a general production value chain, and it is expensive to figure out how to replace you, even if there’s someone else who certainly could do the job just as well. But if it is not very expensive, you have little power.

Nevertheless, here in California it is hard not to be a techno-optimist—especially if you are an curious infovore…says….”

Six Tax “Reform”-Related Appeals to Various People to Do Their Jobs for Their Country’s Sake—and Even, in the Long Run, Their Selves’ Sake

Gains from Trade: Is Comparative Advantage the Ideology of the Comparatively Advantaged?

And the video from October is up:

INET Edinburgh Panel: Gains from Trade: Is Comparative Advantage the Ideology of the Comparatively Advantaged?:


My notes and slides:

Ricardo’s Big Idea, and Its Vicissitudes

https://www.icloud.com/keynote/0QMFGpAUFCjqhdfLULfDbLE4g

Ricardo believes in labor value prices because capital flows to put people to work wherever those things can be made with the fewest workers. This poses a problem for Ricardo: The LTV tells him that capitalist production should take place according to absolute advantage, with those living in countries with no absolute advantage left in subsistence agriculture.

The doctrine of comparative advantage is Ricardo’s way out. For him, the LTV holds within countries. Countries’ overall price levels relative to each other rise and fall as a result of specie flows until trade balances. And what is left is international commodity price differentials that follow comparative advantage. Merchants profit from these differentials, and their demand induces specialization.

Thus Ricardo reconciles his belief in the LTV with his belief in Hume’s “On the Balance of Trade“ and with the fact that capitalist production is not confined to the industry-places with the absolute advantage. His doctrine reconciles his conflicting theoretical commitments with the reality he sees, as best he can.

By now, note that we are far away from the idea that “comparative advantage” justifies the claim that free trade is for the best in the best of all possible worlds. There are a large number of holes in that argument:

  • Optimal tariffs.
  • The fact of un- and underemployment.
  • Externalities as sources of economic growth, in any of the “extent of the market”, “economies of scale”, “variety”, “learning-by-doing”, “communities of engineering practice”, “focus of inventive activity”, or any of its other flavors.
  • Internal misdistribution means that the greatest profit is at best orthogonal to the “greatest good of the greatest number” that policy should seek.

Given these holes, the true arguments for free trade have always been a level or two deeper than “comparative advantage”: that optimal tariff equilibrium is unstable; that other policy tools than trade restrictions resolve unemployment in ways that are not beggar-thy-neighbor; that countries lack the administrative competence to successfully execute manufacturing export-based industrial policies; that trade restrictions are uniquely vulnerable to rent seeking by the rich; and so forth.

The only hole for which nothing can be done is the internal misdistribution hole. Hence the late 19th C. “social Darwinist” redefinition of the social welfare function as not the greatest good of the greatest number but as the evolutionary advance of the “fittest“—that is, richest—humans.

Hence “comparative advantage” takes the form of an exoteric teaching: an ironclad mathematical demonstration that provides a reason for believing political-economic doctrines that are in fact truly justified by more complex and sophisticated arguments. And, I must say, arguments that are more debatable and dubious than a mathematical demonstration that via free trade Portugal sells the labor of 80 men for the products of the labor of 90 while England sells the labor of 100 men for the products of the labor of 110.

But even if you buy all the esoteric arguments that underpin the exoteric use of comparative advantage on the level of national political economy, there still is the question of the global wealth distribution. Stipulate that the Arrow-Debreu-Mackenzie machine generates a Pareto-optimal result. Stipulate that every Pareto-optimal allocation maximizes some social welfare function. What social welfare function does the Arrow-Debreu-Mackenzie machine maximize.

It maximizes the social welfare function with Negishi weights. When individual utilities are weighted before they are added, each individual’s is waited by the inverse of their marginal utility of wealth. If the typical individual utility function has curvature that corresponds to a relative risk aversion of one, then Negishi weights are proportional to each individual’s wealth. For a relative risk aversion of three, Negishi weights are proportional to the cube of each individual’s wealth.

“Comparative advantage” is the market economy on the international scale. And the market economy is a collective human device for satisfying the wants of the well-off. And the well-off are those who control scarce resources useful in producing things for which the rich have a serious Jones.

Thank you.

2017-10-22 :: 673 words


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Dan Alpert, et al: Sales Factor Apportionment and International Taxation

November 29, 2017

The Honorable Orrin Hatch, Chairman
US Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Kevin Brady, Chairman
US House Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Ron Wyden, Ranking Member
US Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Richard Neal, Ranking Member
US House Committee on Ways & Means
1106 Longworth House Office Building
Washington, DC 20515

Re: Support for sales factor apportionment for international corporate taxation

Dear Chairmen Hatch and Brady, and Ranking Members Wyden and Neal:

We are writing to urge you to adopt a sales-based formulary apportionment (also called sales factor apportionment) regime for international corporate taxation as you proceed with your tax reform efforts. Solidifying the tax base should receive as much attention as setting the corporate tax rate. This is a once in a generation opportunity to improve the tax code. It should not be wasted.
Sales factor apportionment (SFA) is, in our view, the best way to tax all firms-domestic, multinational and foreign-fairly in an integrated world economy.

The current tax system has incentivized corporate inversions, profit shifting, recognition deferral and other notorious ills. It relies upon separate accounting of profits on a location by location basis so that multinational corporations (MNCs) strategically allocate earnings and costs in each location in which they operate. Though our current system purports to tax MNCs worldwide income, profit-shifting allows them to evade taxation on the basis of where their net income “lands” rather than where their gross income originates. The result is tremendous incentives to “earn”-i.e. to declare-income in low-tax countries. It is a classic race to the bottom causing the US corporate income tax base to erode at an alarming rate.

Tax competition between countries is highly incentivized by the current regime. While the effective US corporate income tax rate is estimated at 27%, it is mostly avoided by MNCs which are thus systematically advantaged relative to domestic US producers. Tax haven jurisdictions, where a large proportion of corporate earnings are reported, have very low effective rates between zero and five percent. Those countries include the Netherlands (2.3%), Ireland (2.4%), Bermuda (0.0%), Luxembourg (1.1%), Singapore (4.2%), UK Islands Caribbean (3.0% and Switzerland (4.4). Lowering the US corporate tax rate to 20% does not materially change the incentive to allocate profits to these “Cayman-style” jurisdictions.

 

Congress cannot confidently set a tax rate until it solidifies the tax base.

Profit-shifting continues to rise dramatically. In 2001, estimated profit-shifting by US MNCs to tax haven jurisdictions reduced corporate tax haven jurisdictions reduced corporate tax revenue by less than $15 billion. In 2012, that number rose to nearly $120 billion. In 2016, the number is at least $134 billion. These estimates do not include revenue loss from corporate inversions or profit shifting by foreign MNCs.

Domicile (country of incorporation) should not matter, but it does under the current tax system, creating troubling taxation distinctions. US domiciled MNCs use deferral to delay paying US taxes on overseas profits so long as they keep those profits offshore. Less sophisticated US companies pay taxes on all their profits. Foreign domiciled corporations doing business in the US pay taxes on a territorial basis. In other words, they pay taxes on profits actually recognized here. This territorial, versus worldwide, tax differences incentivizes corporate inversions – the practice of relocating a corporation’s legal domicile to a lower-tax jurisdiction, usually while retaining its material operations in the US and continuing to sell to US customers.

Ending deferral has been suggested as a solution. It would level the playing field between US domiciled companies that are primarily domestic versus MNCs. But it does not resolve the problem of inversions or profit shifting by foreign MNCs. The House bill includes a minimum tax of 10% on overseas profits. But the 10% domestic versus foreign earned profits differential maintains strong incentives to allocate profits offshore.

Redefining the source of income is, in our view, the key to correcting the current dysfunction. This is what the sales factor apportionment system, already in use by most US states, does. Corporations earn income from sales. Therefore income should be allocated based upon the destination of those sales. MNC income should no longer be allocated based upon the location of a a subsidiary that allegedly earned it. The location of sales is much more difficult to manipulate than the “origin of income” under the current system.

The US tax base for corporations would be calculated on the basis of a fraction of companies’ worldwide income. This fraction would be the share of each company’s worldwide sales that are destined for customers in the United States. The taxpayer, under SFA, is the whole unitary business, including all evasion-motivated subsidiaries over which the parent corporations exercise legal and economic control.

The SFA system we support is similar to the method used by many US states to allocate national income. These states adopted SFA to solve the difficulty of assigning profits, for state corporate income tax purposes, from national or international corporations to individual states. They faced an additional problem in that taxing based upon property or employees located in the state created incentives to move production out of that state. Using a sales-based taxation method solved this problem because locations of sales if far less responsive to tax differentials. Customers are far less mobile than the firm’s assets or employees.

What we are advocating is a change of the US corporate tax base that replicates the changes the states have made in relation to the nation. In effect, firms should be taxed on their access to a specific consumer market-from which they generate revenue—rather than on their cleverness at artificially allocating expenses and revenue in tax havens in which their subsidiaries “incorporate”.

By focusing upon sales as the measure of taxable economic activity, the SFA system does not rely upon or incentivize artificial legal distinctions among types of firms. Subsidiaries, branches and hybrid entities are all considered a unitary business for tax purposes-which, after all, is what they are. Whether a parent or a subsidiary is incorporated in the US or elsewhere makes.

 

No practical difference to production, sales or distribution. Hence it should make no difference to taxation.

An SFA system would improve America’s trade competitiveness because it provides domestic producers a further incentive to export. Profits from sales oversees would not be subject to taxation. Foreign producers who sell goods and services here would pay taxes on profits arising from the privilege of accessing our market. No corporate tax benefit would arise from moving a US plant oversees.
A recent study by the Coalition for a Prosperous America (CPA) found that SFA would deliver 34% more tax revenue from US corporations in 2016 at the current tax rate. CPA further estimated that a switch to SFA at a 20% rate would add an estimated $1.04 trillion uplift to tax revenue over the next 10 years. While these numbers would have to be verified by the Joint Committee on Taxation, there is no doubt that tax revenue can be substantially improved with a solidified tax base.

SFA has features that can bridge the partisan divide to establish meaningful corporate tax reform. It achieves the Republican goal of a territorial tax on corporate income and the Democratic goals of raising revenue. SFA will eliminate tax competition because the corporate tax rates in other countries become largely irrelevant. It will treat all types of firms the same.

It is for these reasons that we ask you to establish sales factor apportionment as the basis for corporate income tax reform.

Sincerely,

Daniel Alpert
Founder, Westwood Capital
LLC Fellow, The Century Foundation

Dean Baker
Co-Director
Center for Economic and Policy Research

Robert Hockett
Edward Cornell Professor of Law
Cornell School of Law

Marshall Steinbaum
Research Director and Fellow
Roosevelt Institute

Brad DeLong
Professor of Economics
University of California, Berkeley

Gabriel Zucman
Assistant Professor of Economics
University of California, Berkeley

Michael Stumo
Chief Executive Officer
Coalition for a Prosperous America

When Globalization is Public Enemy Number One: At the Milken Review

At the Milken Review: When Globalization is Public Enemy Number One: The first 30 years after World War II saw the recovery and reintegration of the world economy (the “Thirty Glorious Years,” in the words of French economist Jean Fourastié). Yet after a troubled decade — one in which oil shocks, inflation, near-depression and asset bubbles temporarily left us demoralized — the subsequent 33 years (1984-2007) of perky growth and stable prices were even more impressive… Read MOAR at Milken Review

Q & A: Should We Focus Our Attention on a Revitalized Public Sector and Social Insurance System?: INET Edinburgh

Edinburgh castle Google Search

Is a sufficiently revitalized social insurance state and public infrastructure and other public goods provision system what we really need? That is a very difficult and a very hard question.

Let me give a particular partial answer to it. My decision to give this partial answer is, I think, motivated in large part by my perception that the six of us here on this panel agree on too much. There is insufficient Dixit-Stiglitz variety up here on the panel for it to be in any sense optimal.

Therefore let me, for the moment, fly my rootless neoliberal cosmopolite freak
flag. Let try to push back a little against the idea that a better social
insurance state is all we need.

If you think about say the people of rural and semi-rural Kentucky, facing the continued long-term decline of their regional resource-based export industries and increasingly facing global competition for manufacturing industries in which their principal advantage within the United States was a relatively low real wage level, and if you ask “what could have been done to make their lives better over 2009 to 2016”, the answer would have been: Obamacare. Give them health insurance. Give them access to the health care system in a manner that does not require them to risk bankruptcy in order to see a doctor. The Democratic Party did that. And they turned out.

It is true that many of them have spent 2017 in wonder, staggering around, telling reporters that they really don’t think Trump will get rid of their Medicaid, or make their Exchange policy either unaffordable or so riddled with coverage holes that it is nearly useless. But they voted for Trump. And they will vote for Trump again.

Material standards of living—the opportunity to earn enough money so that you can purchase the things you need—is not really what is going on, is it? Making insurance affordable was a huge material standard of living win, wasn’t it?

Well, you may say, it is economic insecurity. But back up. In America the job-finding and job-separation rates are 3 percent per month. 20 percent of all workers change or lose or find new jobs each year. The US is a country with
high job turnover for a great many people. Yet that turnover, and the uncertainty that it generates, has never been a subject of particular extraordinary.

What does seem to be the subject of particular extraordinary concern are the concentrated region-industry shocks. We have had five of these since the 1930s:

  1. The southern textile shock, as production moved to Virginia and North Carolina, that generated the collapse of blue-collar factory employment in New England from the 1930s to the 1950s.
  2. The Reagan deficit shock that produced the overvalued dollar that devastated Midwestern manufacturing in the 1980s.
  3. The right-to-work shock, in which right-to-work states made a bid for
    manufacturing employment by promising to bust unions, from the 1980s to 2000s
  4. The 1980s oil price shock when Saudi Arabia upended the world configuration of energy prices.
  5. The China shock of the 2000s
  6. And note one non-shock: there was no NAFTA shock in the 1990s. Communities were not devastated. Workers displaced from previously protected apparel and furniture jobs found new ones. Manufacturing employment actually grew as the auto and other industries constructed transnational value chains. People transitioned relatively easily because the 1990s when NAFTA was implemented was a time that also saw a high-pressure economy, and so—despite warnings beforehand—NAFTA was not a huge source of political energy and upset at the time its implementation was affecting the economy.

Of these five shocks, three were due to international trade: the Reagan
deficit shock, the oil price shock, and the China shock. The right-to-work shock and the southern textile shock were internal to the United States.

What we really need is an analytical grammar: some explanation for why some
of these shocks produced powerful and awful and destructive resonances in
our politics, and others did not. They all—save NAFTA—were concentrated region-industry shocks. They all were driven by the workings of the market. They all devastated communities.

Q&A: What Can We Economists Do Right Now to Be Useful?: INET Edinburgh

What can we economists do right now to be useful, as far as policy is concerned?

I believe that we economists can do very little, right now, to materially affect policy. Joe Stiglitz is an economist. Joe Stiglitz was in fact the chief economist in the late 1990s. Joe Stiglitz then argued that TRIPS was a bad idea. It enriched not America but rather the holders of pharmaceutical patents. It did so at the cost of charging poor countries like Vietnam and Congo through the nose for intellectual property that was non-rival in some very basic sense, and for which the appropriate market price was zero. Joe Stiglitz lost that argument. USTR does not regard its mission as primarily that of promoting the health of the world or even the U.S. economy.

One thing we should be doing is laying the groundwork for some future day in which we can affect policy. We should be pushing very hard right now developing arguments for an expanded public sector—a public sector that will produce real marginal cost pricing for things that are non-rival, or perhaps liable only because of increasingly sophisticated and onerous layers of legal “protectionism”, but that somehow is not called “protectionism” because it is not concerned with movements of goods. Why it does not count as “protectionism” is a mystery to me.

At this point I want to incorporate-by-reference the entire works of Dean Baker, and then stop.

Ricardo’s Big Idea, and Its Vicissitudes

Ricardo’s Big Idea, and Its Vicissitudes

INET Edinburgh Comparative Advantage Panel

https://www.icloud.com/keynote/0QMFGpAUFCjqhdfLULfDbLE4g

Ricardo believes in labor value prices because capital flows to put people to work wherever those things can be made with the fewest workers. This poses a problem for Ricardo: The LTV tells him that capitalist production should take place according to absolute advantage, with those living in countries with no absolute advantage left in subsistence agriculture.

The doctrine of comparative advantage is Ricardo’s way out. For him, the LTV holds within countries. Countries’ overall price levels relative to each other rise and fall as a result of specie flows until trade balances. And what is left is international commodity price differentials that follow comparative advantage. Merchants profit from these differentials, and their demand induces specialization.
Thus Ricardo reconciles his belief in the LTV with his belief in Hume’s “On the Balance of Trade“ and with the fact that capitalist production is not confined to the industry-places with the absolute advantage. His doctrine reconciles his conflicting theoretical commitments with the reality he sees, as best he can.

By now, note that we are far away from the idea that “comparative advantage” justifies the claim that free trade is for the best in the best of all possible worlds. There are a large number of holes in that argument:

  • Optimal tariffs.
  • The fact of un- and underemployment.
  • Externalities as sources of economic growth, in any of the “extent of the market”, “economies of scale”, “variety”, “learning-by-doing”, “communities of engineering practice”, “focus of inventive activity”, or any of its other flavors.
  • Internal misdistribution means that the greatest profit is at best orthogonal to the “greatest good of the greatest number” that policy should seek.

Given these holes, the true arguments for free trade have always been a level or two deeper than “comparative advantage”: that optimal care of equilibrium is unstable; that other policy tools than trade restrictions resolve unemployment in ways that are not beggar-thy-neighbor; that countries lack the administrative competence to successfully execute manufacturing export-based industrial policies; that trade restrictions are uniquely vulnerable to rent seeking by the rich; and so forth.

The only hole for which nothing can be done is the internal misdistribution hole. Hence the late 19th C. “social Darwinist” redefinition of the social welfare function as not the greatest good of the greatest number but as the evolutionary advance of the “fittest“—that is, richest—humans.

Hence “comparative advantage” takes the form of an exoteric teaching: an ironclad mathematical demonstration that provides a reason for believing political-economic doctrines that are in fact truly justified by more complex and sophisticated arguments. And, I must say, arguments that are more debatable and dubious than a mathematical demonstration that via free trade Portugal sells the labor of 80 men for the products of the labor of 90 while England sells the labor of 100 men for the products of the labor of 110.

But even if you buy all the esoteric arguments that underpin the exoteric use of comparative advantage on the level of national political economy, there still is the question of the global wealth distribution. Stipulate that the Arrow-Debreu-Mackenzie machine generates a Pareto-optimal result. Stipulate that every Pareto-optimal allocation maximizes some social welfare function. What social welfare function does the Arrow-Debreu-Mackenzie machine maximize.

It maximizes the social welfare function with Negishi weights. When individual utilities are weighted before they are added, each individual’s is waited by the inverse of their marginal utility of wealth. If the typical individual utility function has curvature that corresponds to a relative risk aversion of one, then Negishi weights are proportional to each individual’s wealth. For a relative risk aversion of three, Negishi weights are proportional to the cube of each individual’s wealth.

“Comparative advantage” is the market economy on the international scale. And the market economy is a collective human device for satisfying the wants of the well-off. And the well-off are those who control scarce resources useful in producing things for which the rich have a serious Jones.

Thank you.

2017-10-22 :: 673 words


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Politics in the Way of Progress: Live Over at Project Syndicate

Live at Project Syndicate: Politics in the Way of Progress https://www.project-syndicate.org/commentary/populist-politics-block-development-goals-by-j–bradford-delong-2017-10: BERKELEY – There are 17 United Nations Sustainable Development Goals (SDGs), which aim to tackle problems including poverty, hunger, disease, inequality, climate change, ecological degradation, and many others in between. Clearly, 17 is too many. As Frederick the Great supposedly said, “He who defends everything defends nothing.” Similarly, those who emphasize everything emphasize nothing.

This points to the problem of forging goals through consensus: they can end up being a wish list for everything short of heaven on Earth. But, to be effective, goals should operate like turnpikes, which allow you to make progress toward a specific destination much faster than if you had taken the scenic route. The purpose of consensus building, then, should be to get us to the on-ramp, after which it becomes harder to make a wrong turn or reverse course… Read MOAR at Project Syndicate