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.


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.

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

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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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.

The Benefits of Free Trade: Time to Fly My Neoliberal Freak Flag High!: Hoisted from March 2016

Hoisted from March 2016: The Benefits of Free Trade: Time to Fly My Neoliberal Freak Flag High! I think Paul Krugman is wrong today on international trade. For we find him in “plague on both your houses” mode. On the one hand:

Paul Krugman: Trade and Tribulation and A Protectionist Moment?: “Protectionists almost always exaggerate the adverse effects of trade liberalization…

…Globalization is only one of several factors behind rising income inequality, and trade agreements are, in turn, only one factor in globalization. Trade deficits have been an important cause of the decline in U.S. manufacturing employment since 2000, but that decline began much earlier. And even our trade deficits are mainly a result of factors other than trade policy, like a strong dollar buoyed by global capital looking for a safe haven.

And yes, Mr. Sanders is demagoguing the issue…. If Sanders were to make it to the White House, he would find it very hard to do anything much about globalization…. The moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious. In this, as in many other things, Sanders currently benefits from the luxury of irresponsibility….

But on the other hand:

That said… the elite case for ever-freer trade, the one that the public hears, is largely a scam…. [The] claims [are] that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone. Yet… the models… used by real experts say… agreements that lead to more trade neither create nor destroy jobs… make countries more efficient and richer, but that the numbers aren’t huge….

False claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict…. A back-of-the-envelope on the gains from hyperglobalization — only part of which can be attributed to policy — that is less than 5 percent of world GDP over a generation…. Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….

And, Paul summing up:

Why, then, did we ever pursue these agreements?… Foreign policy: Global trade agreements from the 1940s to the 1980s were used to bind democratic nations together during the Cold War, Nafta was used to reward and encourage Mexican reformers, and so on. And anyone ragging on about those past deals, like Mr. Trump or Mr. Sanders, should be asked what, exactly, he proposes doing now.… The most a progressive can responsibly call for, I’d argue, is a standstill on further deals, or at least a presumption that proposed deals are guilty unless proved innocent.

The hard question to deal with here is the Trans-Pacific Partnership…. I consider myself a soft opponent: It’s not the devil’s work, but I really wish President Obama hadn’t gone there…. Politicians should be honest and realistic about trade, rather than taking cheap shots. Striking poses is easy; figuring out what we can and should do is a lot harder. But you know, that’s a would-be president’s job…. [But] he case for more trade agreements—including TPP, which hasn’t happened yet—is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things.

So I guess it is time to say “I think Paul Krugman is wrong here!” and fly my neoliberal freak flag high…

On the analytics, the standard HOV models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.

But the map is not the territory.

The model is not the reality.

An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple the net gains from trade over those from HOV models alone, and so create many more winners.

Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North.

And what are the best ways to diffuse Global North technology to the rest of the world?

Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.

So I figure that, all in all, not 5% but more like 30% of net global prosperity—and considerable reduction in cross-national inequality—is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big number and a deal: $4 trillion a year, and perhaps $130 trillion in present value.

As for the TPP, the real trade liberalization parts are small net gains. The economic question is whether the dispute-resolution and intellectual-property protection pieces are net gains. And on that issue I am agnostic leaning negative. The political question is: Since this is a Republican priority, why is Obama supporting it without requiring Republican support for a sensible Democratic priority as a quid pro quo?

That said, let me wholeheartedly endorse what Paul (and Mark) say here:

As Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking…

On Marc Levinson and His “The Box That Changed the World”: Hoisted from the Archives

Shenzhen Skyline 2015

Hoisted from the Archives: The Box That Changed the World (July 25, 2006): It is 40 feet long, 8.5 or 9.5 feet high, and eight feet wide.

It carries up to 29 tons in its 2,000 cubic feet of recommended available space – goods worth roughly $500,000 (or more) when sold at retail.

It, and what it carries, can be transported in a month anywhere in the world where there are suitable harbors, railways, locomotives, flatcars, truck tractors, diesel fuel, and roads.

It is the modern cargo container, and it is able to move non-fragile, non-perishable goods from any modern factory with a loading dock to any modern warehouse anywhere in the world for about 1% of retail value.

Indeed, it can be transported for a marginal cost of perhaps $5,000 – less than the price of a first-class airplane ticket, as Marc Levinson, author of the excellent The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, puts it.

All of this has happened since 1960 or so. Back then, the costs of international trans-ocean shipment for most commodities could easily amount to between 10% and 20% of retail value. The cargo container has changed everything.

When my family bought a German-made washing machine from a warehouse store in San Leandro, California, more of its cost was absorbed in the ten minutes the saleswoman spent telling us about it than in the entire journey from the factory in Schorndorf, Germany, to the loading dock in San Leandro, or in forklifting it from the loading
dock to its place in the serried ranks of washing machines which filled that corner of the warehouse. In the end, it cost to us of getting our washing machine to our front door was about eight times the cost of the machine’s voyage from the German factory to the warehouse where we purchased it.

The world is certainly not “flat,” as the New York Times columnist Thomas Friedman believes. But, in an economic sense, it is extremely small for non-perishable, non-fragile goods. Every modern factory with outgoing volume large enough for container traffic and a suitable loading dock is next door to every modern warehouse with similar features.

Yet it is not the whole world that is so small, but only that part of it that is attached to the global container-handling network. Areas that lack the necessary infrastructure are still far away from the global trading system that carries high-end German manufactured washing machines from Westphalian factories to California warehouses for just a penny a pound.

For example, if your electricity is unreliable, so that you can’t count on being able to pump the diesel into the truck tractor, you are not attached to the network. If the volume of your production is too small to fill 2,000 cubic feet of space headed for a single country, you are not attached to the network.

Likewise, if the money to fix your roads was embezzled, so that nobody wants to risk their tractors on them, you are not attached to the network. If your courts function so badly that few outsiders are confident that what you say is theirs really is theirs, you are not attached to the network. If nobody has yet noticed what your workers can produce, you are not attached to the network. If your entrepreneurs cannot build organizations at container-scale without attracting politically well-connected extortionists, you are not attached to the network.

For any poor segment of the world economy, getting attached to the global container network is an immense opportunity. But it is an opportunity that requires that everything – infrastructure, scale, public administration, governance, and foreign knowledge of your production capabilities – work just right. And if you have not first built up the social networks that enable your workers and their bosses to know what kinds of manufactured goods would generate high demand in the rich post-industrial core of the world economy, it doesn’t matter even if you are attached to the global container network.

Many have written about how telecommunications technology is bringing about the “death of distance.” Indeed, nowadays, you can talk to anybody, anywhere. But it is the cargo container that appears to have brought about a more effective and – so far – more significant “death of distance.” For, in a commercial sense, at least, the goods we ship across oceans still far outweigh the words we chatter around the world.

Must-Read: Kevin Drum: NAFTA and China Aren’t Responsible for Our Steel Woes

Must-Read: Kevin Drum: NAFTA and China Aren’t Responsible for Our Steel Woes: “Donald Trump stood in front of a pile of scrap metal yesterday in Pittsburgh and blasted both NAFTA and the accession of China into the World Trade Organization…

…He was positively poetic about how his trade policies would affect the steel industry…. There’s no question that the American steel industry has suffered over the past three decades, thanks to cheap steel imports from other countries. But this began in the 1980s and had almost nothing to do with either NAFTA or China…. Do you see a sudden slump in US steel production after NAFTA passed? Or after China entered the WTO? Nope…. It started with Japan and South Korea in the ’80s and later migrated to other countries not because of trade agreements, but because Japan and South Korea got too expensive. And it’s not as if no one noticed this was happening. Ronald Reagan tried tariffs on steel and they didn’t work. George H.W. Bush tried tariffs again. They didn’t work. George W. Bush tried tariffs a third time. No dice.

For all his bluster, when it came time for Trump to lay out his plan to ‘bring back our jobs,’ it was surprisingly lame. It was seven points long but basically amounted to withdrawing from the TPP and getting tough on trade cheaters. This would accomplish next to nothing…. The bottom line is simple: If we want access to markets overseas, we have to give them access to our markets. Donald Trump… [could be] promising to build a huge tariff wall around the entire country. He’s not willing to do that because even he knows it would trash the US economy. So instead he blusters and proposes a toothless plan. Sad.

Must-Read: Dani Rodrik: Innovation Is Not Enough

Must-Read: Dani Rodrik: Innovation Is Not Enough: “Who can seriously doubt that innovation is progressing rapidly?…

…Technological diffusion can be constrained on both the demand and supply sides of the economy…. In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing, and retail goods [where] technological innovation has had comparatively little impact to date…. The two sectors in the United States that have experienced the most rapid productivity growth since 2005 are the ICT… and media… with a combined GDP share of less than 10%…. Techno-optimists… look at such numbers as an opportunity: There remain vast productivity gains to be had from the adoption of new technologies in the lagging sectors. The pessimists, on the other hand, think that such gaps may be a structural, lasting feature of today’s economies…. On the supply side… when the technology requires high skills… its adoption and diffusion will tend to widen the gap between the earnings of low- and high-skill workers. Economic growth will be accompanied by rising inequality, as it was in the 1990s.

The supply-side problem faced by developing countries is more debilitating. The labor force is predominantly low-skilled. Historically, this has not been a handicap for late industrializers, so long as manufacturing consisted of labor-intensive assembly operations such as garments and automobiles. Peasants could be transformed into factory workers virtually overnight, implying significant productivity gains for the economy. Manufacturing was traditionally a rapid escalator to higher income levels. But once manufacturing operations become robotized and require high skills, the supply-side constraints begin to bite. Effectively, developing countries lose their comparative advantage vis-à-vis the rich countries. We see the consequences in the ‘premature deindustrialization’ of the developing world today. In a world of premature deindustrialization, achieving economy-wide productivity growth becomes that much harder for low-income countries. It is not clear whether there are effective substitutes for industrialization…

Must-Read: Ben Thompson: Apple in China

Must-Read: Ben Thompson: Apple in China: “Apple… with its model of status-delivering hardware differentiated by software locked to its devices…

…has been uniquely successful in the world’s most populous country. [And] for many years Apple’s model freed them from the usual hoops that most Western tech companies have had to jump through to get a piece of the irresistible Chinese market. For example:

  • Microsoft spends $500 million a year in China, mostly at its Beijing R&D center (its largest outside of Redmond), and has promised to up that total after a recent antitrust investigation
  • Cisco pledged to invest $10 billion in China last year after being increasingly frozen out from Chinese purchases after the Edward Snowden revelations
    Qualcomm, after settling an antitrust case, formed a $280 million joint venture with a provincial government that included technology transfer
  • Intel has promised up to $5.5 billion to transform a chip plant that it originally said would be two generations behind to become cutting edge; a few months later the company formed a joint venture with two local firms in direct response to Chinese concern about reliance on foreign companies in the chip industry. That follows a previous $1.5 billion investment in two other chipmakers partially owned by the Chinese government
  • Dell adopted a new strategy last fall predicated on partnering in China to the tune of $125 billion over five years, forming a joint venture with the Chinese Academy of Sciences, and deep partnerships with Kingsoft Corporation for work in the cloud ‘fully supporting and embracing the China ‘Internet+’ national strategy.’

The Internet+ strategy is a plan to integrate the Internet with traditional industries, but its introduction has gone hand-in-hand with an increasingly strong preference for Chinese technology from Chinese firms. Thus the partnerships, joint ventures, and investment. And yet, until now, the most successful American tech company in China has operated mostly without interference…

Must-read: Dean Baker: “The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor”

Must-Read: Dean Baker: The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor: “Roger Cohen gave us yet another example of touching hand-wringing from elite types…

…about the plight of the working class in rich countries…. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world. In Cohen’s story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain ‘liberty’ (he means the market) in order to protect it. This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That’s just the way it. Cohen is smart and hard working, that’s why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world’s poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don’t become fascists.

We all should be glad that folks like Cohen support a stronger welfare state, but let’s consider his story… imagine that mainstream economics wasn’t a make it up as you go along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries…. Rich countries lend poor countries the capital they need to develop… [run] large trade surpluses with the developing world. In effect, the rich countries would be providing the capital that poor countries need to build up their capital stock and infrastructure, while still ensuring that their populations are fed, housed, and clothed. We actually were seeing a pattern of development largely along these lines in the early 1990s….

This pattern was reversed in 1997 with the U.S.-I.M.F.’s bailout from the East Asian financial crisis…. The countries directly affected began to run huge trade surpluses in order to accumulate massive amounts of reserves. Other developing countries also decided to go the same route in order to avoid ever being in the same situation as the countries of East Asia. From that point forward developing countries like China and Vietnam ran enormous trade surpluses. This implied huge trade deficits and unemployment for manufacturing workers in the United States and to a lesser extent Europe…. Cohen is giving us this impressive display of hand-wringing…. It’s very touching, but in the standard economics, it was hardly necessary. The standard economics would have allowed the pattern of growth of the early and mid-1990s to continue…. The fact that the textbook course of development was reversed, with massive capital flows going from poor countries to rich countries, was due to a massive failure of the international financial system…. The fact that manufacturing workers paid this price, and not doctors, lawyers, and other highly paid professionals, was by design….

It’s touching that folks like Roger Cohen feel bad for the losers from the process of globalization. But the story is that they didn’t just happen to lose, his friends designed the game that way.

Must-read: Lorenzo Caliendo et al.: “Trade and Labor Market Dynamics”

Must-Read: Lorenzo Caliendo et al.: Trade and Labor Market Dynamics: “We develop a dynamic trade model…

…where production and consumption take place in spatially distinct labor markets with varying exposure to domestic and international trade. The model recognizes the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model without estimating productivities, migration frictions, or trade costs, which are usually di¢ cult to identify. We calibrate the model to 38 countries, 50 U.S. states, and 22 sectors and use the rise in Chinaís import competition to quantify the e§ects across more than a thousand U.S. labor markets. We find that China’s trade shock resulted in a loss of 0.8 million U.S. manufacturing jobs, about 50 percent of the change in the manufacturing employment share unexplained by a secular trend. We find aggregate welfare gains but, due to trade and migration frictions, the welfare and employment e§ects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.