Cafe Hayek: Why Modern Mercantilists Such as Paul Craig Roberts and Lou Dobbs are Mistaken

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April 17, 2006

Why Modern Mercantilists Such as Paul Craig Roberts and Lou Dobbs are Mistaken

Don Boudreaux

Paul Craig Roberts believes that Americans' standard of living is threatened by the world's growing prosperity, improved education, better governance, and greater fluidity of capital and resources to move in search of higher returns.

This alleged cause of U.S. economic decline is so bizarre that you're forgiven if you question my interpretation of P.C. Roberts. But in my latest article at Tech Central Station I quote from the 2004 New York Times op-ed that P.C. Roberts co-wrote with Senator Charles Schumer. You judge.

Oh -- in this TCS essay I also explain (more concisely than I do here) why P.C. Roberts and his intellectual cohorts such as Lou Dobbs and Sen. Schumer are wrong about free trade. P.C. Roberts, Dobbs, et al., seem to be on a mission to resurrect mercantilism's beggar-thy-neighbor fallacy.

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Tracked on Apr 22, 2006 2:20:12 AM

Comments

I suppose it depends it you want the U.S. to have a middle class.

The Bush administration apparently does not.

(But retiring from Exxon is not all bad if you have had the CEO job.)

After about six months of $3 gasoline and higher interest rates Americans will have had their fill of the new prosperity.

But we can buy cheap stuff at Wal-Mart, so that makes it better.

Balance, we need a little balance before we all working as waiters and sales clerks.

Posted by: save_the_rustbelt | Apr 17, 2006 9:30:06 AM

Save the Rustbelt,

There is absolutely no evidence in history, and no reason in theory, that what you fear will come to pass. Read solid works of economics -- works that contain not only theory but empirical data and history -- works such as Johan Norberg's In Defense of Global Capitalism; Douglas Irwin's Free Trade Under Fire; and Martin Wolf's Why Globalization Works. These books (and many others) contain not anecdotes and are based not on long-discredited half-theories.

Your fears and assertions simply -- and thankfully -- won't stand the test of solid thinking, of empirical investigation, or of time.

Posted by: Don Boudreaux | Apr 17, 2006 9:46:31 AM

rusty:

What is this "disappearing middle class" phenomenon to which you refer? When did it start?

When I compare 2010 and 2000 household incomes from the census, will I see something markedly different from what I found when I compared the 1990 and 2000 data here:

http://yargb.blogspot.com/2006/03/gini-or-brickbat.html

...?

It seems that the middle class couldn't have started to disappear until after 1999. Is this all about Bush administration policies on outsourcing?

Can you tell me what the fourth graph in that post will look like when I compare 2010 to 2000?

Before you answer, remember that both median and mean real net compensation were higher in 2004 than in 2000 (source: SSA), as was the 2003 median wage (source: Economic Policy Institute).

Posted by: Morgan | Apr 17, 2006 10:32:07 AM

Comparative advantage does not have to be international. The fiction of imports and exports is a product of state oriented economic thinking.

Dobbs and Roberts probably never paused to consider that the comparative advantage of domestic regions with different capacities of production led to the prosperity of the United States. I've never heard them say that the rule of law and free flow of capital within our borders has impeded prosperity.

Posted by: Mickey Klein | Apr 17, 2006 10:59:46 AM

Mickey:

Presumably the outsourcing of agriculture to the Midwest and California caused immense damage to New England.

Posted by: Morgan | Apr 17, 2006 11:06:50 AM

The capital of New England was poorly expended on agriculture. The land and climate are both comparatively poor, especially for large scale export production. Instead, New England has found far greater propserity as a port center and metropolitan zone (this shift also allowed it to be the center of the American industrial revolution).

Meanwhile, agricultural production moved to the Midwest and the center of California, leading to a booming American agricultural industry. America has a far greater food production due to this shift.

If New England had been able to put strong protections on its agriculture then they would still be scratching feeble crops from the cold rocky ground.

Posted by: Mickey Klein | Apr 17, 2006 11:15:59 AM

KLEIN is right about New England Ag.

The opening of the Erie canal put the New England farmers out of Business.

That is why if you drive through New England you see all those old stone walls
build before 1800 running through the second growth forest. New England now has more forest then it did in 1776.

But, all the farmers daughters went to work in the new textile mills that created the next wave of New England prosperity.

But this ended about the time of the depression when all the shoe and textile industries started moving south for cheap labor. New England suffered almost a 50 year depression that did not end until about 1970, even though the 1970 recession was especially hard on New England. But over this period most of the workers losing the old good jobs never got a good job again. It is very similiar to what the current midwestern manufacturing workers are now experiencing when they lose high paying jobs and go to work for $10/ hour at WMT. -- I am not blaming WMT for this or making any judgements about WMT with this comment.

By 1970 the old textile and shoe industries had become so small that they were no longer a drag on the New England economy.
Moreover, the new high tech, financial management, health care and education industries had emerged and become significant enough that they generated a new era of prosperity in New England.

But there was a major transition period as the old industries died and the new industries emerged. this is what Don's analysis ommits. The loser are not the same as the winners and the transition can last for years and years. The old industrial midwest is now experiencing something very similar to the near 50 year depression New England experienced in the middle of the last century.

And to tell the downsized midwestern industrial workers that it is all worth it because their grandchildren will have a great future in some new, unknow industries
hardly alleviates the pain they are suffering. this pain is real and it is what is generating the protectionist pressures Don is rightly complaing about. But trying to claim that this pain does not really exist is a losing political strategy.

Posted by: spencer | Apr 17, 2006 2:54:02 PM

In my best blog post ever, I wrote about how the U.S. is moving from an information economy to a marketing economy:

http://www.halfsigma.com/2005/06/from_informatio.html

This is bad news for people who make good money doing information jobs. Just as the blue collar workers got screwed when we moved from a manufacturing economy to an information economy and the manufacturing jobs moved overseas, this time the white collar workers are getting screwed.

While I agree that free trade creates a net benefit, it's possible for all of the benefit and then some to accrue to foreigners. Hypothetically speaking, let's say free trade creates a benefit of +5 to China, +2 to shareholders of American business, and -4 to the American worker. It's a net benefit for sure, but not one the American laborer is happy about.

Can a country prosper in the long run with an economy based only on marketing? No one can say they know the answer because such an economy has never before existed.

Posted by: Half Sigma | Apr 17, 2006 3:53:26 PM

Spencer:

>New England suffered almost a 50 year depression that did not end until about 1970

Does that mean that if I look up state level incomes pre-1970, I'd find that New Englanders were poorer than Mid-Westerners?

Census with median incomes of the states at that time: http://www.census.gov/hhes/www/income/histinc/state/state2.html

In 1959, in 1999 dollars, here is some New England vs. Mid Western median family income numbers:

New England states (defined:http://en.wikipedia.org/wiki/New_England )

CT: 33,622
MASS: 30,620
RI: 27,285
NH: 27,515
ME: 23,790
VT: 23,873

Average of the states: 27,784

MidWest (defined: http://en.wikipedia.org/wiki/Midwest )

IL: 32,055
WIS: 28,931
MICH: 30,542
KS: 25,850
IND: 28,306
OH: 30,127
IOWA: 24,747
MIN: 30,542
SD: 20,753
MIS: 25,030
ND: 22,115
NEB: 23,736

Average of the states: 26,894

-- so, in one of the years where NE was supposed to be in an economic recession, the median income was actually higher in those states than in the booming, so prosperous Midwest.

Not a thorough analysis, of course, but prove me wrong. Find some stats to back up your analysis.

Posted by: liberty | Apr 17, 2006 4:38:21 PM

Half sigma, good comment, but why think in terms of borders?

Let's say that all the marketers just happen to live in the U.S., and all the manufacturers live in say China. How is that different than all the marketers living in California, and all the manufacturers living in Texas?

I always find it weird that we limit ourselves to "borders", especially in a somewhat free-market global economy.

Posted by: Mcwop | Apr 17, 2006 6:49:07 PM

Half Sigma - is that the best you've got? There are more IT jobs in America today than at the height of the dot-com boom. See "Remember outsourcing?" - March 2 on this blog.

Posted by: ben | Apr 17, 2006 7:09:16 PM

Read the article on Dobb's Disciples. Good article, but it lacks something us common-folk (read:non-economists) can sink our teeth into.

What we need is are a few good ol' anecdotes. What examples do we have that show us that global free trade really does work?

The anti-free-traders use anecdotes all the time; why can't we have a few of our own?

Help me out here. Need some good, solid, SIMPLE! ammo for those Easter-dinner-family discussions with UAW-grandparents.

Posted by: Joe | Apr 17, 2006 7:51:16 PM

Read the article on Dobb's Disciples. Good article, but it lacks something us common-folk (read:non-economists) can sink our teeth into.

What we need is are a few good ol' anecdotes. What examples do we have that show us that global free trade really does work?

The anti-free-traders use anecdotes all the time; why can't we have a few of our own?

Help me out here. Need some good, solid, SIMPLE! ammo for those Easter-dinner-family discussions with UAW-grandparents.

Posted by: Joe | Apr 17, 2006 7:52:05 PM

Joe,

Consider WalMart. They "outsource" by hiring cheap labor. They also buy most of their products overseas - eg China. Now there is some contraversy as to how this is for China - much evidence says good (http://www.time.com/time/archive/preview/0,10987,1074120,00.html), some says China still uses a sort of Gulag for some of the work, which would make it bad (and illegal for Walmart, which was promised certain standards). But in any case - how does it work out for America?

Walmart must keep its costs very low in order to compete in its market and keep expanding. To keep these costs low, it must hire at just a few dollars an hour. If it was forced to pay those workers twice as much, it could only hire 1/2 as many and still expand as it does. They are happy in China to have the work at that rate. If WalMart couldn't outsource, they would have to pay 3x as much to hire American workers (unless you want to work for $2.50/hr). The what would happen? WalMart would not be able to sell so cheap (so Americans money wouldn't go as far), WalMart would not be able to keep expanding (1.3 million Associates work in the US at WalMarts) - so they would not hire nearly as many managers (Seventy-six percent of store management starts in hourly positions) or truck loaders at $9/hr to start, with many raises or associates (at $9/hr to start, with many raises) and the stock that they give to employees would not rise so quickly and be such a nice bonus.
http://walmartfacts.com/

So, outsourcing those low-pay jobs actually creates a lot of jobs here at higher levels and means cheap goods for all of us to buy (also adding to competition on other stores, lowering prices across the board).

Posted by: liberty | Apr 17, 2006 8:33:19 PM

Joe,

Posted by: liberty | Apr 17, 2006 8:36:42 PM

The best anecdote is to remind people what jobs were outsources before, such as toiling in the fields or making t-shirts in sweatshops. Both were fields employing millions of Americans before they moved oversees.

The people left behind did not become unemployed or poor, they adapted to newer economic forms and became wealthier. The best counter to the argument our jobs are going away is to tell people about the jobs that went away before.

Posted by: Mickey Klein | Apr 17, 2006 11:20:03 PM

I like to use the one Steve Landsburg uses in Fair Play ( he credits this srory to James Ingram) it can be found here http://www.homeport.org/~wotw/landsburg/chapter.htm.

Posted by: DJB | Apr 17, 2006 11:56:41 PM

Sorry, here
http://www.homeport.org/~wotw/landsburg/chapter.htm

Posted by: DJB | Apr 17, 2006 11:58:48 PM

Liberty, I have a question regarding your New England median income stats, and your Midwest income stats, at the time, the people in the midwest might have had a lower cost of living then do the people in New England at that time(and still possibly in some areas, today). Do you know any more about the cost of living and how it relates to median income then? If it is anything like it is today, its by far cheaper to live 30 minutes outside of Kansas City then it is to live 30 minutes outside New York.

Posted by: Robert | Apr 18, 2006 12:44:02 AM

Robert,

That's a good point, but few people in New England live 30 minutes outside of New York. Comparing the most expensive part of New England with one of the Midwest's most affordable cities doesn't seem valid to me.

Consider a more reasonable comparison: Chicago vs Boston. According to Realtor.Com's salary calculator, the current cost of living in Chicago is about 6% higher than that for Boston. I have no way to know if that ratio was different 47 years ago. But I can see from Liberty's data that the median family income for Illinois was about 5% higher than that for Massachussetts.

Posted by: John Dewey | Apr 18, 2006 9:40:06 AM

John Dewey,
As long as you still got the point in the fact that there could be some differences in the incomes between the two geographic regions. I know it matters today, for some of the more expensive regions of this country generally have some of the more wealthier types(nominally speaking). Also, the data that I looked at was the Midwest average not just one particular state. 47 years ago Detroit was the nations 5th largest city in population, now it is much lower then that. I would be curious to see what the costs came out to 47 years ago though.

Keir

Posted by: Robert | Apr 18, 2006 10:47:07 AM

Larry Summers, may he rest in peace, makes this trenchant point:

"Mercantilist economics is hard-wired into the brain. Abe Lincoln captured the basic intuition of almost anyone who has not thought hard about the question when he said that he didn't really understand that much about international trade, but it seemed to him that if he bought a coat from an American, he had a coat and an American had a dollar, and that if he bought a coat from a foreigner, he had a coat and a foreigner had a dollar, and it seemed to him better to do it the first way."

Dobbs et al are making the same point.

Question: What is the most effective debater's counter to the Lincolnian propostion?

Posted by: djd | Apr 18, 2006 1:17:36 PM

The problem with the Lincoln proposition is that the prices are wrong. The whole point is that the foreign coat is cheaper. The difference between the American coat and the foreign coat is a surplus which can be invested or used to buy even more goods and services (American or otherwise).

Posted by: Swimmy | Apr 18, 2006 1:44:07 PM

"The problem with the Lincoln proposition is that the prices are wrong. The whole point is that the foreign coat is cheaper."

Is it necessary for the coat to be cheaper? If we only consider absolute advantage, then we might only import the foreign coat when it could be produced cheaper elsewhere. But if our opportunity cost for producing the coat is higher than the opportunity cost of the other nation, we should still import the coat even if it is more expensive. Isn't that what comparative advantage is all about?

Posted by: John Dewey | Apr 18, 2006 2:05:09 PM

No, the point of comparative advantage is that the coat from the other country will necessarily be cheaper (if they have comparative advantage), as the price of the locally produced coat reflects the greater opportunity cost of producing it.

To my mind there are really two questions here. First, will globalization result in a change in the way income is distributed such that overall human welfare is reduced despite the fact that total income is increased? Second, is restricting international trade the best way to deal with this problem if indeed it exists (or will exist in future)?
I think you can make something of a case for the first proposition (see for example p32 of Leamer's review of 'The World is Flat'), but for the second I would have to say that some sort of redistribution of wealth (such as a negative income tax for the poor) is less distorting than restrictions on trade.

Posted by: bbartlog | Apr 18, 2006 4:45:46 PM

DJB -
I read the links to Fair Play that you provided. They have the advantage, at least, of providing a clear outline of the deep gulf between me and Ingram. Specifically, he finds it morally repugnant that I would weigh the welfare of Americans more highly than that of foreigners in deciding American trade policy.
In the case of trade (unlike immigration) I think that free trade is pretty much without exception good for Americans, so much so that identifying any strange edge cases where it isn't so would not be worthwhile except as a theoretical exercise.
However, there are plenty of other policies where the universalist and the patriot must necessarily disagree, so I'm afraid Ingram and I will simply never see eye to eye.

Posted by: bbartlog | Apr 18, 2006 5:25:25 PM

I have a question, slightly off topic. How much of the continued trade deficit could be the result of high growth rates in a lot of emerging economies where dollars are used, offically or unofficially, as local currency? It seems to me that this must surely be in effect to some pretty large extent. If this is the case, even if it's hard to track accurately, isn't it pretty easily dealt with by monetary policy, which is why the dollar remains strong while all those dollars get sent to different places?

Am I wrong? Or am I right, but the effect is too small to account for much?

Posted by: kebko | Apr 18, 2006 9:05:40 PM

hello kebko:

I'm no expert in international trade accounting, but I think that US currency held overseas is tracked by the BEA:

http://www.bea.gov/bea/newsrel/intinvnewsrelease.htm

See line 41 of table 1.

Interestingly, the increase of $14 billion from 2003-2004 is much smaller than the reported amount of currency remitted to Mexico by people working in the US (about $30 billion). Maybe those remittances aren't all currency, or maybe the bulk finds its way back to the US.

In any case, it doesn't look like the increase in currency held abroad comes close to accounting for the trade deficit.

Posted by: Morgan | Apr 19, 2006 1:04:19 AM

If there were only two countries, England and France, and there were only two goods, cheese and wine, and France produced both at a lower price than England (price in my example implies quality-adjusted), and formerly closed borders became open in a free trade agreement, what happens to 1) the price of both cheese and wine? 2) And who produces which?

The answer is that ultimately France will produce all the cheese, or all the wine, and England the other. The price for both will go down in both countries.

Imagine you are the best software writer in the world, and the best electrician in the world. Imagine that there is also only one other person in the world, and it is easy enough to believe. Now, instead of you doing all your own programming and electrical work, and the other guy doing all of his, you both choose to specialize. You ultimately figure out between you that if you do A and he does B, that you both get more done than if he does A and if you do B. This is how comparative advantage can work with one "side" doing both more cheaply than the other if they didn't specialize, and both benefit by trading instead of being protectionist. Obviously neither person will be so stupid as to do both jobs while the other does neither.

In a multi-country world, with billions of people, it becomes a lot more complicated. Nevertheless, if the US is more productive in everything per worker than India is, and we are unless you count India-specific cultural items, we can and will still have trade, much the same way as in the examples above. It is the comparative advantage in productivity per worker for all the industries that determine which industries goods we export, and which industries goods we import.

Ultimately anyone who buys anything, and we all do, benefits, while those who lose their jobs in the great comparative advantage tradeoff will be losers, at least in the short run, and sometimes forever.

The losers are going to be louder than the winners, while the winners may not even realize they are winners in the trade action. The trick is to get the losers into the winners industries.

This winner and loser thing will cut across broad educational lines, and is thus not an issue of trying to turn textile workers into software writers for example.

Posted by: happyjuggler0 | Apr 19, 2006 2:11:26 AM

Liberty -- your point is not in contrast to my point.

The situation could be one in where in year one the real medium income in New England was 150% of the real mediume income in
the MidWest. In year 25 the real mediem income in new england could only be 125% of the real medium income in the midwest.

So if you look at the income data in year 25
you would find that real medium income in New England is higher then in the midwest.
But that does mean that the real income of New Englanders had not stagnated. The outcome in year 25 could have come about in many different ways. One could be a sharp drop for new england and a sharp rise for the midwesterners. Another could be no growth for NE and rapid growth for the midwest. Another could be NE growing at a 2% or 3% slower average growth rate over the period then for NE.

Looking at a snapshot of one year in the middle of the time period I was talking about does not disprove my point, nor does it surprise me.

The post WW II trend has been for the large regional differences in the standards of living within the US to drop sharply as the poorer southern states grew faster and the wealthier northern states grew more slowly. But the real income in the Northern states is still higher then in the southern states
even though the differences are now much smaller.

The drop from 150% to 125% ratios I used were just off the top of my head to demonstrate the point, but I'm sure if I went to the trouble to find the data it would support the line of reasoning.

Sorry I was so slow getting back to you, I was busy earning a living.

Posted by: spencer | Apr 19, 2006 10:45:10 AM

"If there were only two countries, England and France, and there were only two goods, cheese and wine, and France produced both at a lower price than England..."

Now imagine that there's a third way to make money. Though ownership of capital. England has more capital than France, and uses the capital to buy up all the cheese and wine factories in France. Now England doens't have to produce anything at all, England makes money simply by owning.

But this situation sucks for the workers of England who don't have any capital. They are stuck doing jobs like shining the shoes of the rich English capitalists.

Posted by: Half Sigma | Apr 19, 2006 11:18:09 AM

Spencer,

First of all, if some states boom and catch up to others because they have particlarly good economies at various times, that is expected - the question becomes whether the economy can provide a good livelyhood for those states that are not booming - both by absolute and historical standards. If the "recession" in New England lasted fifty years but those states were still growing in absolute terms (just slower) and never fell in absolute terms below what the "booming" Midwest was achieving, I think clearly the economy has done all it needs to do.

Secondly, regions (states or countries) that begin poorer, tend to grow faster when they have a boom. Starting from less, the introduction of industry or technology or demand will create a larger percentage growth. Hence the booming Midwest would be expected to have higher growth than New England at that time, even if New England was doing very well.

That said, lets test your hypothesis as best we can.

The only data I have is 1959 and 1969, but here goes:

CT: 38%
MASS: 39%
RI: 40%
VT: 47%
ME: 35%
NH: 36%

Average: 39.2%

IL: 34%
WIS: 36%
MICH: 41%
KS: 32%
IND: 38%
OH: 34%
IOWA: 43%
MIN: 43%
SD: 41%
MIS: 39%
ND: 39%
NEB: 41%

Average: 38.4%

So, no, it seems that New England was acually growing faster than the MidWest during those last 10 years of the "recession" (or did you call it a "depression"?)

Again, if you changed your mind and you think the recession ended earlier - just find me some stats to prove your point.

Posted by: liberty | Apr 19, 2006 11:25:34 AM

>They are stuck doing jobs like shining the shoes of the rich English capitalists.

How can they shine shoes? Neither shoes, nor shoe polish is a good. And there are no services. If there were, the English workers could bake bread to sell to the Eeevil rich capitalists, they could open restauarants for the Eeevil rich capitalists and they could write Marxist treatises to sell morons like you.

Posted by: liberty | Apr 19, 2006 11:28:47 AM

My, liberty, aren't you a snotty little person. Can't make a good argument so you revert to an ad hominem. Now that's a good way to win an argument. Maybe, if you really want to ensure your "win", you could also flick a booger on him, too. That'll teach him to argue with the "master" baiter.

Posted by: nunyabidness | Apr 19, 2006 12:02:23 PM

>Can't make a good argument so you revert to an ad hominem.

If you'll read a little closer, you'll see that the argument is in there. However, the post I was responding to wasn't very heavy on the arguments either. And you called me a name, making your argument worthless.

Posted by: liberty | Apr 19, 2006 12:15:04 PM

Liberty --if you go to Historical Statistics of the US you will find
the following data that shows from
1930 to 1970 that percapita income
in New England fell from 129% of the
US average to 108 % of the US average
while in the East North Central Region
it fell from 111 to 107.

http://www.census.gov/prod/2005pubs/06statab/income.pdf
I am now ready for you to change your mind.

I will concede that my use of the term depression may have been overboard, but it was years of stagnation.

ratio of per capita income to us per capita
........us.....new .... E.N.
.............england...central
1930....100....129.....111
194o....100....121.....112
1950....100....106.....112
1960....100....109.....107
1965....100....108.....106
1970....100....108.....105

Posted by: spencer | Apr 19, 2006 1:36:09 PM

>I am now ready for you to change your mind.

Why should that make me change my mind? I appreciate your taking me the time to find the statistics, but my above points still hold:

1. The US average went up quite a bit, given the Midwest boom and general industrial boom, the boom in the 1960s etc.

2. New England still had very good growth, in fact as I showed above, growth was greater in New England than in the Midwest between 1959 and 1969.

3. Incomes were still above the US average!

Not only was it not a depression, but there was both good growth (an absolute measure and relative to its own history) and relative prosperity (108% of US average).

I do not concede your point at all. The economy was good to New England even after they lost the jobs they had enjoyed pre-depression.

Posted by: liberty | Apr 19, 2006 1:54:23 PM

WHich table was that from, by the way? I can't find it.

Posted by: liberty | Apr 19, 2006 2:02:51 PM

Marrying the figures spencer provided with real GDP/capita (as a proxy for real per capita income), the incomes of New Englanders grew at a 2.22% annual rate, while incomes for the country as a whole grew at 2.68% from 1930 to 1970. Ex-New England, that "country as a whole" number would be slightly higher.

I suppose that supports both the relative stagnation and absolute improvement views.

For what it's worth. Looks like catch-up to me.

Posted by: Morgan | Apr 19, 2006 2:22:31 PM

I moved to Boston in 1974 when the discussion in business and economic circles was about how the long decline of the New England economy was finally ending. For most of the post WW II era it had largely been an era of dying mill towns and economic stagnation. In many ways it was similiar to what Japan has gone trough over the last 15 years. Actually, the bottom or rebound had started in the 1960s but it was driven by defense technology firms and the 1970 recession was concentrated in this industry and set back the New England bottom by years.

the table was from series F 287-296

For a good, quick survey go to:

http://www.h-net.org/reviews/showrev.cgi?path=25685966373918

Posted by: spencer | Apr 19, 2006 2:42:17 PM

Half sigma:
"Now England doens't have to produce anything at all, England makes money simply by owning."

"But this situation sucks for the workers of England who don't have any capital. They are stuck doing jobs like shining the shoes of the rich English capitalists."

Can you provide any example in history where free trade and free movement of capital has caused this to happen?

Posted by: John Dewey | Apr 19, 2006 3:19:47 PM

Of course labor should be free to frictionlessly flow across borders as easily information and hard goods for the betterment of all.

So doesn't that lead to an argument about the abolition of immigration quotas and only a needed security screening process?

With 11 or 12 million folks in the US already, we're probably near some economic equilibrium already.

What's so special about citizenship or allowing the illegals to stay? It's the entitlements that follow and how to deal with those costs.

Much like Europe has experienced since the wall came down.

But there may be limits. Recommend the current Jared Diamond books.

Posted by: Rich | Apr 19, 2006 5:14:58 PM

"Can you provide any example in history where free trade and free movement of capital has caused this to happen?"

No, because in the past transportation was expensive, and capital was unable to move freely from country to country. So the situation of country A having all the capital invested in country B which does all the production has never been able to happen, until now.

Posted by: Half Sigma | Apr 19, 2006 6:56:56 PM

Buy only U.S.A. when made by an American in America. Charge tarriffs on all imports, pay politians reasonible hourly wages, stop letting attorneys run for office just to make laws. And pray very, very hard that we will only lose some of our skin when we crash.

Posted by: C. Myers | Apr 20, 2006 8:01:29 PM

I'm really late to this post but....it seems to me that none of the doom and gloomers are looking at reality. Neither Half-Sigma nor Spencer seem to be viewing the US economy with any bit of realism. No matter what stats you look at, they all add up to the same result. Things are simply much better today in the US then ever before-we are freer, wealthier and even healthier than at any time in history. The arguments referred to in the original article made by Dobbs and others is really nonsense. The more open and free our borders and trade the better we will all be, any and all facts you look at bear that out. The losers in this sort of game are the socialists, the monarchists, subjects of tyranical governments and the like. Will manufacturing jobs die and thousands of workers be out of a job in the next decade-of course but that was happening all along anyway-it even happens in socialist Europe.

Posted by: Patrick | Apr 21, 2006 11:08:51 AM

"Neither Half-Sigma nor Spencer seem to be viewing the US economy with any bit of realism. No matter what stats you look at, they all add up to the same result. Things are simply much better today in the US then ever before-we are freer, wealthier and even healthier than at any time in history."

I'll agree that medical technology has improved, but besides that I don't see how we are freer, there are more laws now than ever before. You can't even go to the bathroom without violating the law (toilet bowls are regulated by the government).

The top 1% may be wealthier, but not the average American. For young men, median income has been in a state of precipitous decline:

http://www.halfsigma.com/2006/04/median_income_f.html

This is why parents have to give them money so they can live "independently":

http://www.halfsigma.com/2006/04/young_people_re.html

Posted by: Half Sigma | Apr 21, 2006 11:43:48 AM

>For young men, median income has been in a state of precipitous decline

I call bull. Are benefits counted? And for older people, incomes are much higher than ever before. Also unemployment is very low.

Not to mention, you have done a Bill Moyers! I saw a transcript of a show of Now with Bill Moyers where he did the same thing. H picked one year with a high in this case 1973, the one year with the median income of a much higher number (37,151) and then said that its been downhill ever since... in trueth, except that one year, every year has been between 29,000 and 34,000 (with one year at 28,000) and the median has fallen for several years and then rose again, not followed a trend of going down the whole time.

It fell between 1975 and 1980
1975 34,154
1981 31,940

Then it fell more and then rose by 1989
1983 30,236
1989 31,433

Then it fell/stagnated between 1990 and 1995
1990 29,981
1993 28,227
1995 29,060

It rose again by 1999
1999 33,299

And dipped again in 2003
2003 31,383
2004 30,984

This shows pretty much a stagnation of the wage, not a fall, overall. Years of recession its been low, booming years have been high, these last few years have not been as high as expected, but that is at least partially due to a growth in benefits which is not counted, underestimating the actual payment to labor.

Posted by: liberty | Apr 21, 2006 5:42:48 PM

liberty:

I still found Half Sigma's statistics surprising - I wouldn't have expected wages to stagnate for so long in the face of rising GDP/capita (up nearly 100%). It's a fact in need of an explanation.

Labor's share of GDP is not down much. Maybe that's because there are a lot of Boomers in the upper income brackets?

Benefits could be part of the story, but benefits aren't 100% of wages.

Unemployment in 1973-74 was about where it is now, so on its face it doesn't appear to be the result of an extremely tight labor market back then.

I did see an article recently indicating that global aggregate supply and demand were way out of whack around 1973 - could that have some explanatory power?

Posted by: Morgan | Apr 21, 2006 6:04:19 PM

Morgan,

I don't see it as very surprising. Those are the wages of kids - 15 to 24 years. They tend to be unskilled and start at the bottom. If costs don't go way down in the industry, why would they get paid a lot more? Keeping pace with inflation should be about the norm for youth, unskilled labor, over twenty years; there hasn't been any technolgoical revolution that should raise the living standard and these kids are not going to be the prime recipient of the benefits of higher productivity - economic growth. Those who create greater productivity will reap those benefits - the skilled labor and the business owners and the entrepreneurs.

Oh, but I made a mistake, the figures above were from the median income of all men, not the youth. The youth figures actually look like this:

1974: 9,091
1979: 10,261
1983: 7,708
1989: 9,287
1996: 8,343
2000: 10,471
2004: 10,045

Kids are actually doing pretty well right now, compared to most of the past 30 years.

So, why has the median income of men stagnated so much? Part of it is benefits, which often account for 30% of total wage + benefits.

ftp://ftp.bls.gov/pub/news.release/ecec.txt

In other words, if wages have stagnated but benefit costs have risen, then in truth wages may be up 10% or more.

ftp://ftp.bls.gov/pub/news.release/eci.txt

Another part of it is that the purchasing power of the same wage is actually higher because the CPI doesn't take into account technological improvements very well. The same wage can buy you a better car, a better washing machine, a nicer home, etc etc.

Finally, mobility means that by your retirement age, you will be earning much better than the median wage - since the median wage is a median of a group that includes many young people. How has the wage of the older citizen trended?

1970 32,346
2004 39,212

The 700 gain is real, the trend is pretty solid the whole way. Surprisingly, the richest group, the 40 year old men, has stagnated. Again, with the caveat of the two other points I made above.

I think if we could solve the accounting problem with a better CPI and with benefits included in the numbers, we would see that median wages have been going up across the board a pretty decent clip.

Posted by: liberty | Apr 21, 2006 7:35:50 PM

I should have said $7,000 real gain in the 55-64 year old group.

Posted by: liberty | Apr 21, 2006 7:39:03 PM