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02/01/2009

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BO Bill

One.

I went to Circuit City today. When I walked in the door, the people at the entrance had a look in their eyes that I had not seen in a long time. There was a very large man at the cash register with two terrified children. His wife was twelve feet away, begging him to calm down. There was a slightly smaller, but nonetheless physically strong Circuit City manager, walking past me, away from the cash register.

The large man with the terrified children bellowed ‘If you are going to wear a Patriots jersey, wear it like a man.’ Then the manager directed an employee to call the police if the gentleman at the cash register said anything else. An Oriental employee from behind another counter straightened and yelled at the very large man, telling him that all of the Circuit City employees were losing their jobs too.

I sensed danger and could feel the after effects of high levels of adrenalin as I drove home. It aches.

Two.

The value of labor on the world-wide market is $3/day.

Three.

In the 1930s, the United States was the world’s largest EXPORTER. And, because of this, a trade war probably hurt the United States’ export-based economy. England was an importer, and during the entirety of the Great Depression, I believe that their economy only shrunk 5%. Today, the United States is the world’s largest IMPORTER. I doubt that foreign countries will stop buying our food, but if they did, it would lower prices at the supermarket.

Four.

I, for one, would not object if my government chose to drop out of, or deeply renegotiate, international trade agreements. I say return tariffs to historical levels of 30-40% to protect domestic industries.

Leigh Caldwell

I hope this provision won't get through, but even if it does not, I suspect a modified version might find its way in. Purchases may be restricted to goods from countries which are planning a fiscal stimulus of a certain minimum level. Provided the other countries impose a similar condition, leakage to non-stimulating countries would be prevented.

We should all know by now that this kind of policy is economically inefficient and increases conflict risk - but inevitably people are going to press for it regardless. Even Paul Krugman is getting in on the act.

Jack

There seems a certain numbness in what little discussion our trade policies receive. It's as if we have to be religiously devoted to absolute purity in free trade and anything less or the least bit nuanced is denounced as protectionism.

In our daily affairs we want to be able to trade freely; my services for your cash, or my cash for your product. But we want to sell our services at a price to cover our costs and overhead, and when we go to buy your product we don't want to get skinned. Further, as a wholesaler, I might be willing to sell direct at a lower margin, but have to be careful not to undercut my retailers.

Then, before getting to my main point, as Bill points out $3 is the price of labor in much of the world. We all understand "relative advantage" in economics that a nation like the US is hard to beat on agriculture, so the UK may be better off trading Sheffield steel for our wheat. I don't recall extreme differences in labor costs being part of the relative advantage concept, but that camel seems to have gotten its nose under the tent its occupation of the whole tent seems to be accepted as the norm.

But then there is a theory, much heard, during the NAFTA debate that "Mexico's wages will tend to rise" and soon, given some of their inefficiencies, we'd be competing on something of a level, or at least, leveling playing field with the great advantage that the Mexicans would be wealthier and buy our appliances etc. So far that hasn't happened, instead wages have fallen and poverty more widespread, but my guess is that they too have been clobbered by China and other even cheaper labor venues.

A personal aside; many years ago a spent a year long tour in Korea when it was still mostly flattened by armies having fought their way up and down the peninsula twice and with a little understanding of econ wondered how this nation of few natural resources would ever bootstrap its way out of $300/year level of poverty. It pleases me tremendously that with a little help from us they did exactly that at some 8% per year GDP growth for many years.

Likewise, I'm pleased as anyone would be that China, India and other once third world nations are making great strides. But China's growth seems so rapid that it's in many ways a detriment to their nation as we saw during the Olympics when the city had to be shut down so the athletes and tourists could breath. And we don't have to look far to see that they are and have been rigging their currency in a many that is precisely a "beggar thy neighbor" policy.

Internally they've other policies (No SS and no safety net) that are incentives to produce but not to spend. In Korea and much of Asia the Chinese are often the businessmen and are known as good businessmen and traders.

So my main point is that of at least being open to review our trade policies, bilaterally, in the case of economies as large as those of China, India and Japan.

Is it selfish or protectionist to consider some revision of our trade policies with the emerging nations? I don't think so as our soaring trade deficit is unhealthy not only for the US but for the world community and if our economy, still the largest importer and market in the world falters they go down with us.

Krugman's relevant article mentioned by Leigh:

http://krugman.blogs.nytimes.com/2009/02/01/protectionism-and-stimulus-wonkish/

As for "Buy American" there are a number of ways we can encourage our dollars to stay here longer w/o protectionist tariffs or quotas. I don't know the ratios and would like to see a study, but it seems that due to the domestic multiplier (4?) effect, that spending even $100 on energy conservation or alternatives such as wind and solar that saves even a dollar or two per year in oil/NG imports is a wise "Buy American" policy with no downside with dividends for global warming and delaying the problems (wars?) of "peak oil".

These are unusual times that seem to lend themselves to considering and revisiting all of our assumptions and the imagery of using a scalpel is far more appealing than the inflexible ideology of free trade vs protectionism.

mrdon

Right. We ought to shut the door on Chinese imports. And the next time the Treasury auctions off more U.S. debt does any sane person believe that the Chinese will continue to pop in and buy any of it. Someone out there is going to have to loan us the money that we are preparing to spend. Up until now the Chinese and Japanese have been among the largest purchasers of our debt. When the usual suspect stop buying the people who replace them will want higher returns that we have been paying.

In the end we will build these trade barriers which will result in runaway inflation. Then those of us who still have jobs may still have our wages, but they will be worth half what they were before we got brilliant and closed the import doors.

Reducing our dependence on imported oil by switching to wind and solar is a worthwhile idea. The problem in the short term is that nearly 3/4 of the investment we make in those technologies goes to the foreign countries where those things are manufactured. To be effective in reducing our need for imports, we need to stimulate not only demand for the technology, but to stimulate our ability to produce the technology at competitive prices on our own soil. To the extent that wind and solar has become competitive in this country, it has become competitive with equipment that is made with cheap labor overseas.

Anonymous

دردشة صوتية

Logseman

Bill, you might like to ask yourself if those heavy imports might have to do with the endlessly war-waging US policy of these last... 40 years.

Kyle

Professor:
Your perspective is interesting as always, and it's a little sad that most members of Congress did not learn the one piece of academic information conveyed through "Ferris Buehler's Day Off."

I comment only to note that it is not just low income workers who are struggling in this economic time. There have been something around 10,000 layoffs in the largest law firms around the country, and I, who graduated 10th in my class from a top 20 law school in 2003, who has a federal clerkship and trial experience, and who unfortunately had to resign my position (due to a family move) has not been able to find work for nearly 6 months. My friend, who was laid off by a tech consulting firm, also has been unable to find work for nearly that length of time. So it's not just factory workers, construction crews, and store clerks that need "economic stimulus". This depression has hit us all, and I'm relieved that the stimulus package contains spending on high tech infrastructure.

Richard

An additional problem with introducing protectionist measures during a recession is that "temporary" government programs have a way of becoming permanent, especially when strongly backed by a significant constituency.

I suppose an argument might be made that the comparative advantage principle of free trade does not apply in the same way, under conditions of high domestic unemployment. But if we were to further restrain international trade now, I think it would be difficult to reverse that policy when economic growth resumes, and our failure to take advantage of comparative advantage becomes a drag on the recovery.

Old Curmudgeon

I'm all for free trade, meaning reciprocal free trade, and all that good stuff. But just the same, I would like to have someone explain to me why -- legislation aside -- when the Koreans go out into the streets by the tens of thousands and riot in opposition to American beef imports, we should keep on buying their Hyundays, Kias and all that Samsung stuff when alternatives are available to American purchasers of cars and electronics at competitive prices?

Mark A. Sadowski

I think the most relevant part of the Paul Krugman article mentioned by Leigh and Jack is the following:

"My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole."

In fact, the latest forecast by Bard College suggests that the multiplier effect of a stimulus in the absence of international coordination or protectionist measures will be reduced by about one third as a result of an expanded current account deficit. In other words the estimates released by Christina Romer and Jared Bernstein on the effectiveness of the stimulus may end up being optimistic (in the absence of international coordination or protectionism):

http://www.levy.org/pubs/sa_dec_08.pdf

This also explains, I believe, why Timothy Geithner was apparently engaging in some "jaw-boning" with the Chinese over the value of their currency during his confirmation process.

As Krugman explains, the first best alternative is international coordination. But, failing that, there is a cogent argument to be made for protectionism in the short run (during the liquidity crisis). The problem is we might end up squandering all of the hard fought progress we have made in trade liberalization, and that is important for our, and the world's, long term growth.

Tom

Trade barriers will protect jobs, it's a given. The jobs protected will be the jobs linked to products and services sold within the country.

Trade barriers are always met with counter-trade barriers; reducing employment in market segments serving global markets.

Want to help the working family, those at the lower end of the economic ladder? Well,trade barriers will also result in higher prices for imported goods; let's see that would be food,clothing,oil, some medicines.

Tell me again, other than for self-centered interest groups, how trade barriers are a good thing?

gdgeiss

Requiring the use of US produced steel in infastructure projects that receive funding through the "stimulus" package (more like the pet porkbarrel package, if you ask me) is like all such proposals: only a benefit if you fail to assess the entirety of its impact.

It might add (or preserve) jobs in the directly related US steel making industries; but it will cost jobs at US importers of steel; companies that usually transport imported steel (dockworkers for instance); and perhaps exporters of US made products and services that won't be purchased as a result of the decrease in foreign demand related solely to the lost sales by foreign steel manufacturers (and related enterprises) even without any reference to "retaliatory" trade restrictions at all. And PLEASE stop already with this business that all this Country exports is food. We make and send all over the world all kinds of technically sophisticated stuff like computers, software, heavy automated mining equipment to retrieve the ores (not to mention pumps, compressors, furnaces, and turbines) used by foreign companies to make their steel, and, frankly, the ores themselves. For every one helped by protectionism, there's several hurt. [This is not a post on alternatives, but consider whether we might get more bang for our buck from allowing accellerated depreciation on newly purchased durable capital goods for all US manufacturing companies, big and small.]

As Tom points out there's just no way you can be confident that mandating the use of US made steel will have a net beneficial impact on the economy or employment overall.
Protectionism is not the way to address our unemployment nor our issues (very real and important ones) with the Chinese (and others) import and monetary policies.

Jack

Mark good comments as they take a crack at estimating the magnitudes of various courses of action, and that's what makes this discussing tough in the abstract. For example directly after mine suggesting a bit of pencil sharpening in our relations with China and others comes a "Right. We ought to shut the door......" And if as Mrdon suggests if we're so fearful that China might not lend us the money to keep running massive trade deficits and "selling off the back 40" we're already in a poor position that will be made poorer for continuing what we've been doing.

For me the the questions raised by years of trade deficits that are now 6% of our GDP are A. Have we become flabby and uncompetitive? or B. Are our overall trade agreements wrong, as I, and perhaps our new Sec Treasury suggest?

There is one more option, that of "it's temporary while China and others "emerge" and "will go away....... someday". I doubt it; the Chinas are today able to combine foreign investment and tech with low wages and a rigged currency and continue to erode our market share; all with the blessings and assistance of what we used to call "our" major corporations.

Luca

Sir, your analysis is refreshing and incisive. There has been precious little discussion of the real stimulative effects (or lack thereof) this spending plan may have. It seems more like a congressional dream-budget than anything else, with many items (a clean-coal plant in Illinois, for example) being given funding after previous evaluations had deemed these projects unworthy of it. It is a great folly to think that insulation from competition will make the economy more competitive; as you pointed out, this argument has less to do with logic than with political special interests.

PaulC

The simpler political argument is to note that lawmakers fear being embarassed when newspapers circulate stories about the percentage of US stimulus money that ends up creating foreign jobs, as they are when its revealed how much bailout money ends up as executive bonuses.

The reciprocity argument is too complicated politically.

It's fine if, in the short term, American lawmakers want to do their best to spend American taxpayer money to create American jobs.

It's probably also true that total country GDP would eventually be greater if the economy crashed unimpeded and then eventually recovered, unimpeded, as well-designed investment portfolios with higher volatilities will outperform well-designed investment portfolios with lower volatility, but the truth is that each human has a particular taste for volatility, and some form of social stability is more important that utterly maximizing GDP metrics.

Some "movement" free traders are so cerebral they become stupid. We don't need to "turn on" utterly free trade, all at once, today, even if in the "long-run" it will create more total global wealth. We did that once, and it just crashed, and people aren't happy about the volatility. It's perfectly acceptable to turn on freer trade, gradually, over time, sparing many workers the pain they would otherwise experience as wealth and jobs are re-located globally.

neilehat

The Smoot-Hawley Act as the paradigm of all tariffs, that is a bit of a stretch. As I understand them, tariffs can be imposed on either imports or exports. As an economic tool, they can be set up for the protection productive capacity (the Smoot-Hawley fiasco) and most of the time result in "Trade Wars". Or they can be set up as revenue source. As they were used in the early history of this Country prior to the Income Tax and other types of taxes to raise Revenue. With the advent of the Tax cutting mania, that began under Reagan, we have seen a significant decrease in all types of taxes, Payroll, Income, Corporate, Sales, etc, etc. and I won't even mention the current "free ride" granted to the upper ten percent of the income brackets. With the decrease in Revenue that has occured, States and Localities can now longer finance required infrastructure and service improvements and repairs. Resulting in vast budget deficits across the board, the same applies at the Federal Level.

With a looming Depression before us, the Government and People are now in a real bind when it comes to responding to it. In the past the Government could stimulate productive output and employment through "priming the pump" with government spending without drastically affecting the Budget by deficit spending (but was easiy replaced by taxes). With the loss of revenue through tax cuts, the Government has no choice but to go into massive deficit spending on a large scale.

So the solution is, raise taxes. Really? Dream on. So the only other alternative is to raise Revenue by imposing Tariffs. A type of alternative tax.

gdgeissg

A "tariff" on exports is called an excise tax. Those and tariffs were one of few available revenue sources for the nascent US, since personal taxes were forbidden in the Constitution.

The effect of tax rates on economic activity and, hence, revenues, is hard to track with any degree of precision since it's nearly impossible to isolate it from amongst numerous variables that directly and indirectly impact the issues.

Still, the idea of providing an economic stimulus by cutting taxes surely did not start with Ronald Reagan. Reduced tax rates are often suggested to have been one of the features that drove rising prosperity in the Roaring Twenties. JFK used the tactic with success, as did the already mentioned RR and, of course, George W. Bush.

One presumes that general Bush hatred prompts assertions that his 2003 tax cuts were a boon to the top 10% of American taxpayers at the expense of everybody else and responsible for the huge increase in the US budget deficit during his terms in office. IRS statistics show that the top 10% of taxpayers paid 62.6% of all individual taxes in 2003 before the cuts and 67.6% right after. This might be accounted for by the increase in the number of folks earning $200,000.00/yr from 2.4 million to 3.8 million (meanwhile those reporting AGI of $100,000.00/yr [some of them Long Island garbagemen] increased 39%). Individual tax revenues went up from $577B to $837B while tax revenues as a % of GDP were at 18.4%, which was above the 20, 40, and 60 year averages. Meanwhile the bottom 40% of taxpayers paid -4% of tax revenues after the cuts, in effect getting a subsidy.

In 1980 the marginal rate was 70% (it had been 91% before being lowered in legislation proposed by President Kennedy) and the top 1% of earners paid about 19% of tax revenues. In 2004, with marginal rates at 35% the top 1% paid 36%.

Bush's ruinous deficits were spending related, which went from 18.5% to 20.2% of GDP.

As noted earlier, tax policy does not exist in a vacuum and thru much of George W's terms interest rates were very low and borrowing funded consumer spending became an epidemic. A lot of that spending resulted in or from economic activity that produced taxable events, so it's not reasonable to put much stock in the theory that lower tax rates were a prime mover in growth of any kind (although the reduced capital gain tax seems to have had a pretty direct effect). I'm leery of any notion of great general stimulus effects from any personal income tax cuts unless marginal rates are essentially confiscatory before hand. That was the case with JFK's cuts and with Reagan's, but not George W's.

The utter failure of tax increases to ameliorate the effect of a recession/depression is seen clearly in the futility of Herbert Hoover's and, in fact, FDR's. Any tax increase (probably, although not certainly, on even just on the top 5-10% of earners) in bad economic times will likely only hurt the economy. If you want less of something, tax it. Right now, we don't need less of any kind of productive economic activity or the increase in prices that will result. Changing the motive for bad policy (like protectionism) does not transform it into good policy.

(All stats from a 2007 WSJ article citing IRS records and a Brian Riedl Heritage Foundation article, also 2007, citing IRS, OMB, and CBO sources, among other. Most contrary numers cited are quoted as per capita, which rising economic activity and population increases distort.)

Jim

Now let's see. Right now I can buy a pair of servicable shoes for about $30 with my depressed wages. But soon I am going to have a new job created by the federal government with inflated dollars, worth 1/800th an ounce gold,and my salary which will no doubt rise by a factor of 3 will allow me to buy the same pair of shoes made in America by union workers or imported and taxed by tariff for $100. Wow!!! What a deal.

Dad, when I grow up I want to be a black marketeer.

neilehat

Jim, A black Marketeer eh.? You do know, that's what trees and lightpoles are for.

"As a Prince it's better to be feared than loved."
-Machiavelli

SAM ADLER

I feel that countries who have the same enviormental and labor standards as the US I feel their should be trading retrictions for countries which do not pay eqivalent wages and are responsible for world pollution they should face monatary import restrictions. If you could make a better mouse trap for LESS. paying living wages and enviormrntal good citizenship I would not restrict their imports.

SAM ADLER

I feel that countries who have the same enviormental and labor standards as the US I feel their should be trading retrictions for countries which do not pay eqivalent wages and are responsible for world pollution they should face monatary import restrictions. If you could make a better mouse trap for LESS. paying living wages and enviormrntal good citizenship I would not restrict their imports.

Stan from Sugar Land

Wow,I think Dr Becker is right, but so many of the comments here are, in my opinion, reflective of the incredibly poor quality of US education - lot's of abstract BS but no real policy suggestions. Have you folks never had to answer to your investor for an investment that failed?
We got into this current mess because of too many overeducated MBAs from elite schools, who can't change a flat tire, trading useless paper, based on industries and values they didn't understand.
To get the economy on an upward trend, here is what I would suggest:
1.Reduce taxes on business to at least 10%, retroactive to 1/1/08 to get the money in the hands of job creators, I would prefer 0% but that will not happen.
2.Do away with the tax on income earned offshore by American companies and brought home to the US
3. Remove the restrictions for gas and oil drilling in the entire US and offshore, this will add 2-5 millon barrels per day over the next several years.
4. Build much needed coal and nuke fired electric generation or the cost of electric will increase 2-3 times in real terms or 4-5 in nomimal dollars over the next few years. One problem: nukes will have to be imported from Japan or France and I'm doubtful we have the engineers or skilled workers who can build a nuke.
5. Reduce regulation, could suggest much but space is limited.
6. Reduce government spending by 20%. Get a grip on local, state and federal social security, retirement and health cost commitments.
7. Do away with the minimum wage.

If we did the above, and, since the US has a serious shortage of good, competent labor, soon the Mexican government would be complaining about the US press gangs stealing labor from Mexico and bringing it to the US.

What's the chance of even one of the above being done by this administration? Slim and none, and slim ain't been seen in years and years! So we are a bankrupt country, headed for the scrap heap of history.

redmund sum

If you think by restricting imports from countries that "do not have environmental and labor standards as the US" these countries will quickly become good boys and adopt our "standards", think again.

This is a bad idea for several reasons:

1. We don't set the rules for other countries. That is why there are sovereign states – each makes its own rules of governance to fit its social and economic conditions.

2. If we restrict imports from other countries, they will retaliate against us. We might very well end up losing more than we gain.

3. Restricting imports have an immediate consequence of inflating prices. People who are at the lower strata of the economic system will suffer disproportionately.

4. What's makes you think that our environmental and labor standards are superior? I happen to think that we are overly and incompetently regulated, and some of these standards are very controversial even here. They are considered big hindrance to productivity and they raise the cost of doing business here, resulting in job losses.

This is not to say that we should not enforce necessary, proven, standards, such as non-contamination standards for food, efficacy standards for drugs, safety standards for machinery and vehicles, etc. Even on these, different countries may differ in their standards.

We, as Americans, at least some of us, have the unfortunate tendency to think that we have the best practice of everything, and the rest of the world should just do as we do. This is one reason why we are the "ugly Americans" in many foreign minds.

Of course we are good and virtuous as a country, and we are exceptional in a good many ways. Let's not forget that we are also a democracy. Democracies have room for very good things and very bad things!

Jack

Redmund: You seem to overlook miserable work rules and conditions along with those such as China playing us for a sucker via tweaking currency exchange in their favor.

We don't need to invade their sovereignty, but unless you think sweat shops and environmental degradation is the norm or the goal, we can and should exact moderate tariffs to remind them of the standards among civilized nations.

In my view it was a huge mistake and premature to have granted China MFN status........ though I did, partially, reluctantly, sorta, maybe, buy the fairy tale of them being good boys after we bought a lot of stuff from them. We gave them the whole bushel of carrots (carats?) and forgot we might need the switch once in a while.

BTW with our trade deficits soaring, do we A. have little with which to compete? or B. gotten our overall trade agreements a bit wrong?

redmund sum

Jack, As always, your comments are thoughtful and worthwhile. Would like to know more about you. Would you write to me at [email protected]

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