Category: Equitablog

Should-Read: External benefits from the development of communities of engineering practice developing around successful labor-intensive manufacturing export industries has been a standard road to economic development since… well, since the days when the mechanized textile industry located itself in the (lower wage) English midlands because London and Amsterdam both had higher-wage things to do with their labor. The problem is that China may well be the last country for which this is possible. So what next for our hopes for development and convergence?

Edward Hadas: Review: Dani Rodrik gives economists a better name: “Straight Talk on Trade: Ideas for a Sane World Economy… this easy-to-read and sometimes loosely connected collection of columns and essays…

…Rodrik rejects the methodological goal of finding one true model for each and every economic variable. He explains that models are always simplifications, leaving out factors that do not seem to be important. But the key factors which influence, say, unemployment rates or technological development are not the same in every time and place. Since the facts change, the models should too. As Rodrik says, “There is virtually no question in economics to which ‘it depends’ is not an appropriate answer”. Rather than search for an explanation which always works, economists should become experts at determining what model is appropriate under which circumstances….

All of the great successes of economic modernisation – from Japan in the 19th century to China under Deng Xiaoping – grew by exporting as freely as they could while sharply restricting imports. Conversely, no poor country has become rich by opening itself totally to the world market. That pattern suggests a useful stylised fact – freedom in trade is not always good for everyone. Over the years, Rodrik has developed this insight in several ways. He argues that workers harmed by new trade patterns have a legitimate complaint. He also bemoans the destabilising effects of cross-border flows of financial capital….

Rodrik’s latest claim is more controversial – and more depressing. He coined the phrase “premature de-industrialisation” to describe the increasing difficulty of economic development. Thanks to the relentless advances of technology, it will no longer be easy to follow the path to wealth pursued by Asian countries, which used low-skilled workers to build up successful export industries. Worse, since protectionist policies are prohibited by international agreement, “few poor countries now have the opportunity to develop simple manufactures for home consumption”. Rodrik argues that in the future, development will have to rely more on services. Since those require far more skills and stronger institutions than manufacturing, fewer countries are likely to succeed….

Rodrik’s readers might appreciate a bit less gloom. “Straight Talk” is pessimistic about the future growth of developing countries, the pace of technological innovation, the strength of democracy and the resilience of China. Rodrik’s basic thesis is that it is hard to prosper in “a global environment that threatens to turn even more hostile”. The travails of the European Union and the rise of demagogues in countries from Turkey (where to Rodrik was born) to the United States (where he has lived for decades) support and understandably colour his views. But as a specialist in development, he might have mentioned some of the seriously good global news – the almost universal increase in life expectancies, the decline in deaths from war or the spread of life-changing mobile phones…

Should-Read: Larry Summers: America’s tax plan is not worth its name: “The US administration’s tax plan… a mélange of ideas put forth without precision or arithmetic…. The claims of Steven Mnuchin, Treasury secretary, Gary Cohn, director of the National Economic Council, and Kevin Hassett, chair of the Council of Economic Advisers, are some combination of ignorant, disingenuous and dishonest…

…We know enough to know that a tax reform plan along the lines of the administration’s sketch will not substantially increase growth, will blow out the budget deficit and will make America an even more unequal place…. The most rapid growth in gross domestic product that the US has seen took place in the 1950s, 1960s and 1970s when top tax rates were nearly twice as high as now…. What about the budget deficit? In order for tax cuts to pay for themselves, as Mr Mnuchin sometimes asserts, they would have to massively spur growth…. It is unlikely they will have any important effect on growth….

Finally, there is the question of fairness. Those secure in their beliefs do not, as Mr Mnuchin did, seek to de-publish studies by apolitical civil servants. There is very little doubt among serious economists that the immediate impact of corporate tax cuts would be to help corporations and that the vast majority of corporate shareholding is concentrated among those at the top of the income and wealth distribution….

This week the world’s finance ministers and central bank governors will gather in Washington for the annual International Monetary Fund-World Bank meetings. These meetings used to be a time when the US urged other countries to respect the laws of economics and arithmetic in formulating economic policies. This time the lecturing should go in the opposite direction. The international community should make sure that US officials have a very uncomfortable week. Just possibly, that will be enough to get the administration economic team to consult their consciences as well as their Twitter accounts.

Should-Attend: Tim O’Reilly and Heather Boushey: Future of Work and What We Can Do About It: Conversation: “What’s the outlook for workers in an economy increasingly dominated by intelligent machines and the global elites who own them?…

…Join the Washington Center for Equitable Growth and tech entrepreneur and author Tim O’Reilly for a discussion of the ideas presented in his newly published book, WTF?: What’s The Future and Why It’s Up to Us. In a conversation with Equitable Growth Executive Director and Chief Economist Heather Boushey, the founder of the eponymous firm O’Reilly Media will explore how new technology networks and platforms are shaping the future of work and what that means for economic inequality, how we live, and the choices we make….

Thu, October 12, 2017 :: 5:00 PM – 7:00 PM EDT :: The Liaison Capitol Hill :: 415 New Jersey Avenue Northwest :: Washington, DC 20001

Must-Read: Using technology and, more important, social institutions to build and deploy tools in ways that augment labor, rather than substitute for labor:

Wolfgang Dauth, Sebastian Findeisen, Jens Südekum, and Nicole Woessner: The rise of robots in the German labour market: “Robots have had no aggregate effect on German employment, and robot exposure is found to actually increase the chances of workers staying with their original employer… http://voxeu.org/article/rise-robots-german-labour-market#.WdHelWvyXW8.twitter

…Robots are much more prevalent in Germany than in the US or elsewhere outside Asia…. Usage… and now stands at 7.6 robots per thousand workers compared to only 2.7 and 1.6 in Europe and the US, respectively…. Moreover, Germany is not only a heavy user but also an important engineer of industrial robots…. We regress total local employment growth on… robot exposure…. The raw correlation between robots and growth is even positive… strongly driven by the automobile industry….

We calculate that one additional robot replaces two manufacturing jobs on average…. But those sizable losses are fully offset by job gains outside manufacturing…. Robot-exposed workers… have a substantially higher probability of keeping a job at their original workplace…. Robot exposure causes notable on-the-job earnings gains for high-skilled workers, especially in scientific and management positions….

We believe that those empirical findings reflect a key feature of industrial relations in the German labour market – the manufacturing sector is still highly unionised, and blue-collar wages (especially) are typically determined collectively with strong involvement of work councils. It has been frequently argued that German unions have a strong preference for maintaining high employment levels, and are willing to accept flexible wage setting arrangements, such as opening clauses, in the presence of negative shocks in order to keep jobs…

Should-Watch: Vivienne Ming: Applied Neuroscience and Ramping Up Human Potential https://www.youtube.com/watch?v=MUHXoPS0fm8:

Should-Read: This is still the best thing on the gross and net effects of NAFTA. Read it!

Mary E. Burfisher, Sherman Robinson, and Karen Thierfelder: : The Impact of NAFTA on the United States: “The mainstream forecasts during the NAFTA debate were basically correct…” http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.15.1.125

…NAFTA has had relatively small positive effects on the U.S. economy and relatively large positive effects on Mexico. The only blemish marring this otherwise exemplary use of economic analysis in a policy debate was the occasional use of mercantilist arguments that attempted to infer the effect of trade liberalization by applying simple multipliers to projected bilateral trade balances. Such methods are inappropriate for the analysis of the benefits and costs of trade liberalization, and were criticized during the debate….

A debate over the effects of removing trade distortions should not discuss the aggregate trade balance. Regional trade liberalization primarily affects resource allocation, production, and trade patterns. While regional trade agreements may affect bilateral trade balances, a country’s aggregate trade balance is determined primarily in asset markets. The only way a regional trade agreement can affect a country’s aggregate trade balance is if it signals a country’s commitment to an open development strategy and therefore raises investor confidence. In this
context, NAFTA probably affected Mexico’s aggregate trade balance and helped ameliorate the effect of the peso crisis on capital flows. However, there is no discernible effect of NAFTA on the U.S. aggregate trade balance….

Realizing benefits from any trade agreement (or indeed, from any technological change) necessarily involves shifting resources across sectors, which in turn will involve adjustment costs, especially for labor. While the amount of adjustment required under NAFTA was small relative to normal labor turnover, the Clinton administration anticipated labor dislocation and extended Trade Adjustment Assistance. Globalization appears to be speeding structural changes in many economies, and there is clearly scope for developing policies that facilitate and smooth the adjustment process….

Free trade agreements can accelerate domestic reforms of policies that distort prices… can serve as a building block towards multilateral liberalization…

Should-Read: This, from the extremely sharp James Kwak is—if I may say so—itself unfair.

The claim that Barack Obama had a filibuster-proof majority in the Senate is especially so.

Yes, Obama made a lot of mistakes. Yes, his bonding with a let’s-calm-down-and-not-do-anything-rash Tim Geithner who had no clue about the situation was very damaging. Yes, the Democrats had 60 votes in the Senate for six months. But that wasn’t Obama’s filibuster-proof majority: that was Max Baucus, Ben Nelson, Blanche Lincoln, Tom Carper, and Joe Lieberman’s filibuster-proof majority. This is not uncommon: the present Senate majority is not Donald Trump’s or Mitch McConnell’s; it is John McCain, Susan Collins, and Lisa Murkowski’s majority:

James Kwak: The Importance of Fairness: A New Economic Vision for the Democratic Party: “A central shortcoming of the party is that, on economic issues, it has nothing to say to people trapped on the wrong side of our country’s growing inequality divide… https://baselinescenario.com/2017/06/15/telling-a-better-story-a-new-economic-vision-for-the-democratic-party/

…Hillary Clinton won the “working class” (household income less than $50,000) vote, but by a much smaller margin than Barack Obama in 2012 or 2008—despite Donald Trump’s ardent efforts to alienate African-Americans and Latinos. Some people voted for Trump because of racism or misogyny. But Clinton was also flattened by Trump among voters who feel their financial situation was worse than a year before or who think that life will be worse for the next generation. She lost the Electoral College in the “rust belt” states of the Upper Midwest, whose economies have never fully recovered from the decline of American manufacturing. The Democratic Party was once the party of working people. So why is it increasingly becoming the party of well-educated, socially tolerant, cosmopolitan city-dwellers? Because, in an age of stagnant median incomes and a disintegrating social safety net, Democrats have no economic message for the many people who are struggling to make ends meet, to pay for college, to stay in a home, or to save for retirement….

While Republicans say, “Free markets solve all problems,” Democrats respond, “Free markets solve most problems, but markets sometimes fail, so sometimes they need to be judiciously regulated to produce efficient outcomes.” This may be more accurate, but it undermines Democrats’ appeal to people who have not benefited from overall economic growth—because they have the wrong skills, live in the wrong place, got sick at the wrong time, or otherwise got unlucky. The second problem is that economism lite doesn’t work, at least not anymore….

The failure of overall economic growth to benefit the middle and working classes is not solely or even primarily the Democrats’ fault. The villain in that story is the Republican conservatives who weakened unions, undermined the social safety net, and slashed taxes on the rich. Globalization and competition from low-wage countries were another factor. But since the onslaught of the conservative revolution, Democrats have played defense by claiming the space once occupied by moderate Republicans. Recall the pivot to deficit reduction in 1993, welfare reform in 1996, the capital gains tax cut of 1997, the commitment to free trade agreements from NAFTA to TPP, and the bipartisan commitment to financial deregulation that helped produce the devastating financial crisis of 2008. Barack Obama temporarily had a filibuster-proof majority in the Senate, and yet his principal accomplishments were an economic stimulus bill that was more than one-third tax cuts; a health care plan modeled on Mitt Romney’s Massachusetts reforms; a technocratic financial reform bill that neither reduced the dominance of the megabanks that caused the 2008 crisis nor, judging from subsequent experience, deterred them from serial lawbreaking; and a financial system rescue that kept the big banks (and their executives and shareholders) afloat while they fraudulently foreclosed on millions of homeowners….

One of the central themes of my book is that economism is an ideological worldview: a lens through which we see the world, which affects the way we interpret reality and serves the interests of certain groups. Logically, it can only be overthrown by another worldview. And so the book ends this way:

Millions if not billions of people today hunger to live in a world that is more fair, more forgiving, and more humane than the one that we were born into. Creating a new vision of society worthy of that collective yearning—one that goes beyond the false promises of economism—is the first step toward building a better future for our children. That is the story that remains to be written.

What the Democratic Party needs is an economic message that: addresses the real problems that many Americans face on a daily basis (instead of callously insisting that “America is already great”); and resonates with their very real frustrations and anxieties….

Investment bankers and hedge fund managers work hard for long hours… make millions, tens of millions, or hundreds of millions of dollars…. Hotel housekeepers, retail store cashiers, fast food restaurant employees, and migrant agricultural workers also work hard for long hours. They often make less than twenty thousand dollars per year. Many work multiple jobs to make sure their families have enough to eat. Homebuyers who were overly optimistic or who didn’t read their mortgage terms carefully are kicked out of their homes, their savings obliterated and their credit shredded. The banks and law firms that foreclosed on them, using false affidavits robosigned by fictional executives, escape with nominal monetary penalties…. For-profit universities entice students to take out thousands of dollars of loans, then fail to give them the education they need to get a job…. University executives and shareholders enjoy large bonuses and rising stock prices.

Children born to well-off families have the full attention of two highly educated parents from birth. They go to private pre-schools from age two and then to economically segregated elementary schools where they are surrounded by equally fortunate peers. Their afternoons are filled with organized sports, music lessons, and other enrichment activities. Children born to poor families are often raised by only one parent who did not finish school and works long hours to make ends meet. They make do with haphazard child care arrangements until entering kindergarten at an underfunded public school, already years behind grade level.

This is the world we live in. There is a word for this world: unfair…

Should-Read: Joan Williams: Equitable Growth in Conversation: “Elites have what are called entrepreneurial networks—wide circles of acquaintances that are often national, or even global… https://equitablegrowth.org/in-conversation/equitable-growth-in-conversation-joan-williams/

…Working-class and poor people typically have place-based clique networks of family, neighbors, and friends they’ve known forever. Nonelites rely on these clique networks to protect them from their disadvantaged market position, by providing childcare, elder care, and help with things such as home repairs. So, for moving to make sense, nonelites need not only to find a better job; they need to find one that’s so much better that they come out ahead, despite the fact they now have to pay for childcare and elder care because no family is close enough to help out.

Another reason nonelites are reluctant to move is that their social honor is not portable….

Another important point: If you’re working class, the people in the communities you’re moving to have the same kind of dense place-based networks you have—and they’re going to make sure that good jobs go to people in their networks, not to you. This is just the kind of erasure of the realities of people’s lives on the ground that, if I can say this respectfully, economists are so good at…