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February 21, 2008
Prosperity and making stuff
Russell Roberts
Harold Meyerson thinks we've become a nation of shoppers rather than a nation of producers:
If 19th-century England was a nation of shopkeepers, the United States today is a nation of shoppers, and our role in the world economy is to buy what other countries -- or U.S.-based corporations with factories in other countries -- make. It was not ever thus. In the four decades following World War II, our largest employer was General Motors; for the past decade, it's been Wal-Mart.
It's a fact. Sort of. Actually, the federal government is the largest employer—1.7 million employees and that excludes the Post Office. Does that mean we've become a nation of bureaucrats because a little over 1% of all employees work for the government? Does it mean we're on a perilous downward path where instead of making things, we regulate things? That would be a silly statement. It is equally silly to conclude that because Wal-Mart is the largest private employer we've stopped making things.
Actually, making things is not the road to prosperity. The road to prosperity for a nation is to use the skills of its citizens wisely. The wise use of those skills depends on the skills and desires of people in other nations. Sometimes that means making stuff. Sometimes it means providing services in exchange for making stuff.
And as it turns out, we do make a lot of stuff here in the United States. Manufacturing output is dramatically greater today than 30 or 40 or 50 or 60 years ago, the halcyon era that Meyerson imagines once existed. Manufacturing output has almost tripled since 1970. What has happened over the last 60 years is that productivity in the manufacturing sector has increased greatly. That has allowed the US manufacturing sector to produce a lot more stuff with roughly the same or even a declining number of employees.
Wal-Mart is a red herring. It's success hasn't come at the expense of the manufacturing sector. The trends in the manufacturing sector go back 60 years, long before Wal-Mart existed.
Meyerson continues:
GM followed in the footsteps of Henry Ford, who by 1913 had concluded that he needed to pay his workers enough that they could afford to buy a new Ford. Wal-Mart, by contrast, pays its workers so little that they are compelled to shop at Wal-Mart.
But even if Wal-Mart weren't a downward force on wages throughout much of the economy,
Sorry to stop the quote in mid-sentence, but it's such a great stopping point. Wal-Mart is a downward force on wages throughout much of the economy? What does the word "much" mean in that sentence? I think it's a hedge for the author. It covers a lot of ground. It would be absurd to argue that Wal-Mart lowers wages in Manhattan so maybe it's a geographical qualifier. It would be absurd to argue that Wal-Mart lowers wages in baseball or journalism or the computer industry, so maybe it's a sectoral qualifier.
But where is the large part of the economy (much, after all, means a substantial part) that Wal-Mart does affect wages in a downward fashion? Is it in certain geographical areas where Wal-Mart stores have opened, like say, in DeKalb county, outside of Atlanta? When Wal-Mart opened a store there recently, 7500 people showed up for 400 jobs. Did Wal-Mart attract those people by offering LOWER wages than were being offered elsewhere?
And how is it that a company that employs slightly less than 1% of the labor force affect wages in much of the economy, however you define "much?"
But Meyerson has a worse problem to explain. How does a nation of shoppers thrive when incomes are stagnating, as he believes they are?
Here's the full quote:
But even if Wal-Mart weren't a downward force on wages throughout much of the economy, consider the implications of a nation whose chief economic activity is personal consumption -- more particularly, personal consumption at a time when incomes are stagnating. The only way such a nation can get along is to go into debt, which is precisely what Americans have done.
Do you see the problem? How can a nation of stagnating incomes get to enjoy so much stuff? It must be debt. We're living beyond our means. We're borrowing to support a lifestyle we can't afford.
Debt is up in recent years, but so is wealth. I'd like to see evidence that the prosperity of say the last 25 years is due to borrowing. The prosperity of the last 25 years is real. It has been driven by productivity increases in manufacturing and the service sector, created by an explosion of innovation in how we handle information.
Meyerson's solution to our alleged economic crisis is to elect either Hillary or Obama:
One of the crucial differences between the two parties this year is that Hillary Clinton and Barack Obama have both revived the idea of a national industrial strategy -- better late than never -- while John McCain still acts as if banks and corporations, left to their own devices, would revive our economy through their investments. Problem is, we've left banks and corporations to their own devices for decades, and they've funded the rise of low-wage, high-profit East Asia . Nonetheless, McCain calls for across-the-board corporate tax cuts, though that money may well be bound for Shanghai. Clinton and Obama, by contrast, call for the public sector to take up the slack created by the private sector's reluctance to invest in the United States.
Ah, that's the ticket. Let's try the Japanese economic strategy. And what does he mean by the private sector's reluctance to invest in the United States? Everybody wants to invest in the United States. Foreign governments, foreign investors, American investors and American companies. The money flows in because the United States is the most productive economy on the face of the earth. Would someone let Harold Meyerson in on this secret?
Posted by Russell Roberts in Standard of Living, Work | Permalink
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Comments
I slight quibble with wording--you say "The road to prosperity for a nation is to use the skills of its citizens wisely." Since I know you do not mean it as it reads, you might have said, "The road to prosperity is for a nation to allow its citizens to use their skills wisely."
Posted by: Randy | Feb 21, 2008 9:46:56 AM
Hi, my name is Laramie Yazzie. I’m a student at Mesa Community College. I have recently attended an ASET Conference with Ethics, Economics, and Freedom as the main topic of discussion. After hearing the first speaker’s presentation on the topics, I have started to think about the future and how all three main points will be affected. How each one will progress in the future? Do you think the year 2009 may not be better than 2008? Reason is the economic recovery is seen as slower than expected, that is why the U.S. is in a deficit. Do you think that Policymakers need new approaches to improve the lives and work prospects to help balance out everything? There are also many different issues that lead to a downward fall for the main points. There are such issues as low-income citizens working, businesses that breaks laws of the land and damage the social contract between its workers and employers. The increase in wages due to the rule of law in low skill jobs that may benefit society allowing participates in the economy. There are many things to be considered when think and trying to figure out the best way to success for all three areas. Also to name one more major issue would be unemployment and retirement funds that will no longer be available to the people of this work environment.
I would like your personal opinion and elaboration on this very serious topic. This is an issue that I am really bothered by, mainly because I am the future of this generation. There are many things that all young adults should take interest in for the sake of our nation.
Posted by: Laramie Yazzie | Feb 21, 2008 10:05:47 AM
Randy,
I think Professor Roberts wording is correct. When he writes "for a nation to use its skills wisely", I think the word "nation" means "the people who reside in a geographical boundary". Were you thinking he meant "government" when he wrote "nation"? Some do equate "nation" with "government", but I doubt Professor Roberts would.
Posted by: John Dewey | Feb 21, 2008 10:05:48 AM
fyi - the randy in the first post is a different randy.
Posted by: Randy | Feb 21, 2008 10:08:44 AM
Do you see the problem? How can a nation of stagnating incomes get to enjoy so much stuff? It must be debt. We're living beyond our means. We're borrowing to support a lifestyle we can't afford.
The current account deficit isn't real? The negative savings rate isn't real? The bankruptcies and mortgage defaults aren't real? The declining house prices aren't real? The falling dollar isn't real? I'm not asking you to be a Cassandra, but you don't account for these facts. I'd like to see some clash. Ignoring reality doesn't change it.
Debt is up in recent years, but so is wealth.
Leverage is up, and asset prices are up. Inflation of consumer prices has been lower, but signs of consumer inflation exist. Were the Austrians wrong about the business cycle?
I'd like to see evidence that the prosperity of say the last 25 years is due to borrowing.
Would you really acknowledge the evidence? No one suggests that all of the prosperity is due to borrowing. The issue is a margin of prosperity, particularly for low to middle income workers. Are we really more productive than workers in South Korea and China at this point, or are we only more entitled?
The prosperity of the last 25 years is real. It has been driven by productivity increases in manufacturing and the service sector, created by an explosion of innovation in how we handle information.
As an IT worker, I'd like to believe you're right, and I do believe that IT offers real benefits, but the current account deficit exists. Maybe foreigners only want to invest in the U.S. so much, but this theory is the extraordinary claim requiring extraordinary evidence. The British empire fell. That's history, not politics.
American exceptionalism? I don't think so. The "axis of evil" didn't reinvent the second world war. It was only an illusion of this reinvention. The second world war really did decimate much of the world's most productive economy, leaving the U.S. economy practically untouched except for all the dead men. The largely unilateral "war on terror" only fattened the state in the U.S. and decimated only a tiny, backward but oil rich nation while disabling far more U.S. men than it killed.
And what does he mean by the private sector's reluctance to invest in the United States? Everybody wants to invest in the United States. Foreign governments, foreign investors, American investors and American companies.
Treasury notes are not investments in real productive means. Purchasing entitlement to tax revenue is not what I call "investment". The purchase of corporate shares needn't be investment in real productive means either.
The money flows in because the United States is the most productive economy on the face of the earth. Would someone let Harold Meyerson in on this secret?
This is an assumption you're making. I really hope the assumption is true. Believe me. I have no reason to wish for anything else.
Posted by: Martin Brock | Feb 21, 2008 10:09:57 AM
I love the implicit assumptions of the rhetoric against outsourcing to lower-wage cultures and countries: Those unclean foreigners with funny eyes, skin colors and unholy languages don't deserve to have jobs as much as honest god-fearing Americans do.
Posted by: Grant | Feb 21, 2008 10:12:58 AM
Laramie: "The increase in wages due to the rule of law in low skill jobs that may benefit society allowing participates in the economy."
What does this mean, Laramie? Do you believe that large numbers of U.S. employers are currently "breaking the law" by paying less than minimum wages?
Posted by: John Dewey | Feb 21, 2008 10:13:19 AM
Martin, I don't believe a single business cycle or the probably-coming recession (according to Intrade) effects the fundamentals of the US economy. A correction isn't likely to spell the end of American prosperity unless it results in massive government failure, e.g. the Great Depression.
Posted by: Grant | Feb 21, 2008 10:17:54 AM
Martin Brock: "As an IT worker, I'd like to believe you're right, and I do believe that IT offers real benefits, but the current account deficit exists. "
Why does the current account deficit matter so much to you, Martin?
It was Steve Forbes - or perhaps Forbes publisher Rich Karlgaard - who pointed out:
"Since the Jamestown settlement in 1607, what has since become the United States has run a trade deficit with the world for about 350 out of 401 years. It hasn't exactly killed us!"
Posted by: John Dewey | Feb 21, 2008 10:25:22 AM
"Ignoring reality doesn't change it."
but ignoring reality as you see it makes mighty good sense. usually you're comments are simply inapplicable to human activity but this time you've simply bumbled us to death. (splat)
the point of the post was to illustrate an alternative to the idea that americans are headed for doomsday in a place that doesn't take credit cards. try to stay on point. i admit to your points that the world isn't as perfect as you or i would like to to be. But using anything that is "wrong" to argue against everything that isn't is just plain goofy. goofy goofy goofy. i've got a nickname for you. guess what it is.
Posted by: matt | Feb 21, 2008 10:41:11 AM
Why does the current account deficit matter so much to you, Martin?
It's an economic observation awaiting a theoretical explanation by the economists here, and the economists talk around it rather than explaining it. Denial always raises a red flag.
It was Steve Forbes - or perhaps Forbes publisher Rich Karlgaard - who pointed out:"Since the Jamestown settlement in 1607, what has since become the United States has run a trade deficit with the world for about 350 out of 401 years. It hasn't exactly killed us!"
In 1607, we weren't selling Treasury notes to foreign central banks and calling it "investment".
Apparently, the negative savings rate is real. The bankruptcies and mortgage defaults are real. The declining house prices are real. The falling dollar is real. The rent seeking at GM is real. The stagnant median income is real. The long lines for jobs at WalMart are real, 7500 people literally standing in line for 400 openings. The "axis of evil" and "war on terror" evoking the second world war and expending trillions without the slightest historical credibility is real. The leading edge of the baby boom really nears eligibility for Social Security benefits.
When you have some specific answers to specific questions, I'll take you seriously. Until then, you're just another politician.
Posted by: Martin Brock | Feb 21, 2008 10:52:21 AM
but ignoring reality as you see it makes mighty good sense. usually you're comments are simply inapplicable to human activity but this time you've simply bumbled us to death. (splat)
You say absolutely nothing here.
the point of the post was to illustrate an alternative to the idea that americans are headed for doomsday in a place that doesn't take credit cards. try to stay on point.
I haven't said anything about "doomsday". The U.K. still exists. It didn't evaporate after the empire fell. Your straw man's point doesn't merit my attention.
i admit to your points that the world isn't as perfect as you or i would like to to be.
Perfection has nothing to do with any of my points. I'm asking you to explain facts, and you're ignoring them instead.
But using anything that is "wrong" to argue against everything that isn't is just plain goofy. goofy goofy goofy. i've got a nickname for you. guess what it is.
I haven't used anything that is "wrong" to against everything that isn't. I'm addressing the issue that Meyerson raises while Roberts says "prove it" and changes the subject. He doesn't deny growing credit extension masquerading as prosperity. He only asks for more evidence of it before changing the subject.
You may label me however you like, of course. The labeling demonstrates precisely nothing.
Posted by: Martin Brock | Feb 21, 2008 11:00:39 AM
The accelerating divergence between the income of Federal employees and other income is also real.
Posted by: Martin Brock | Feb 21, 2008 11:05:24 AM
Ironically, I'm the one being an Austrian here.
Posted by: Martin Brock | Feb 21, 2008 11:20:30 AM
Martin Brock: "The long lines for jobs at WalMart are real, 7500 people literally standing in line for 400 openings."
I think that just proves that WalMart is a desirable employer. For the past 30 years at least, WalMart has continued to receive dozens of applications for every opening. So what? So has Southwest Airlines. and FedEx.
My small retail business in Tennessee is not so successful. I only get 8 or 9 in-store applications every time I advertise a job, presumably because I cannot offer the level of pay and benefits that WalMart does.
Martin, what do you think it means when 18 people apply for every opening at WalMart?
Posted by: John Dewey | Feb 21, 2008 11:47:11 AM
Martin Brock: "In 1607, we weren't selling Treasury notes to foreign central banks and calling it "investment".
Why does it make any difference at all who buys our treasury notes? If your are arguing that the federal fiscal spending deficit is wrong, I'll agree. But what does that have to do with the current account deficit?
Posted by: John Dewey | Feb 21, 2008 11:50:45 AM
"You say absolutely nothing here."
actually, i said this: but ignoring reality as you see it makes mighty good sense. usually you're comments are simply inapplicable to human activity but this time you've simply bumbled us to death. (splat)
"I haven't said anything about "doomsday"."
alas, you are right. but for why say this:
"The current account deficit isn't real? The negative savings rate isn't real? The bankruptcies and mortgage defaults aren't real? The declining house prices aren't real? The falling dollar isn't real?"
sounds a bit like you're trying to point out things that are "wrong"... otherwise. perhaps you would have used these in support of roberts' argument instead of against it?
"Perfection has nothing to do with any of my points."
ha ha. now that's true! but imperfection has plenty to do with them.
"He doesn't deny growing credit extension masquerading as prosperity."
prosperity is prosperity. what difference does it make if one borrows to get there? you seem to take issue of people buying into or borrowing against the future revenues of government or business... but borrowing against one's own future revenues seems like ok to me.
"You may label me however you like, of course."
of course. goofy.
"The labeling demonstrates precisely nothing."
i submit that the labeling demonstrates precisely goofiness.
Posted by: matt | Feb 21, 2008 11:54:14 AM
Martin Brock: "When you have some specific answers to specific questions, I'll take you seriously. Until then, you're just another politician."
Since you were responding to my comment, I can only assume this last paragraph is directed to me as well. What specific questions have you asked me?
"An economic observation awaiting a theoretical explanation by the economists here" is not a specific question.
Posted by: John Dewey | Feb 21, 2008 11:54:48 AM
That sure was a particularly terrible Meyerson op-ed. And you can't even email the guy. I especially enjoyed the second to last sentence:
"The Democrats' incomes-and-industrial policy won't bring back, say, Big Steel, but it will raise wages and put more Americans to work actually making things."
With Meyerson, it is as he says. Walmart = lower wages and Democrats = higher wages. I wish we all could have such insight, and dispense with the analysis.
Posted by: Greg | Feb 21, 2008 12:49:19 PM
Martin:"The stagnant median income is real. "
Please read about median compensation. When you look at only one portion of the pie, that fits your world view, people tend to discount everything you say, rightfully or wrongly.
Posted by: Tom | Feb 21, 2008 12:50:57 PM
I think that just proves that WalMart is a desirable employer. For the past 30 years at least, WalMart has continued to receive dozens of applications for every opening. So what? So has Southwest Airlines. and FedEx.
WalMart is a desirable employer compared with the other options of the applicants. The issue is 7500 people literally standing in line to apply for 400 positions. The report of this line itself noted how extraordinary it was. The WalMart official accepting the applications reported it as extraordinary. Saying that it's not exceptional simply denies the evidence that Roberts himself presented in this forum. As I said then, I have nothing against WalMart. I shop at WalMart all the time. I love WalMart.
My small retail business in Tennessee is not so successful. I only get 8 or 9 in-store applications every time I advertise a job, presumably because I cannot offer the level of pay and benefits that WalMart does.
Right. I have no problem with economies of scale. We had retail businesses in the fifties too, but median income rose with rising per capita GDP then.
Martin, what do you think it means when 18 people apply for every opening at WalMart?
It means just what I say above. I've never suggested anything else. You simply talk around the point without addressing it. The point is that these people find no better options and are attracted to the WalMart openings enough to stand in a line with 7500 other people.
Posted by: Martin Brock | Feb 21, 2008 1:20:56 PM
"The current account deficit isn't real? The negative savings rate isn't real? The bankruptcies and mortgage defaults aren't real? The declining house prices aren't real? The falling dollar isn't real?"sounds a bit like you're trying to point out things that are "wrong"... otherwise. perhaps you would have used these in support of roberts' argument instead of against it?
The word "wrong" doesn't appear. The word "real" appears. I don't see how a large current account deficit, a falling dollar, a negative savings rate, bankruptcies and mortgage defaults and declining house prices support Roberts' argument, and I'm here not to support Roberts' argument reflexively.
I'm posting at Cafe Hayek, and I do see how these phenomena might support the argument for an Austrian-style credit bubble. I wonder if you do.
ha ha. now that's true! but imperfection has plenty to do with them.
Yes. Imperfect information has plenty to do with them.
prosperity is prosperity. what difference does it make if one borrows to get there? you seem to take issue of people buying into or borrowing against the future revenues of government or business... but borrowing against one's own future revenues seems like ok to me.
von Mises and Hayek thought it mattered. "One's own future revenue" is a problematic expression when discussing Treasury notes, the credit of General Motors, subprime mortgages leading to substantial faults and the rest.
The trouble is that you're playing a reflexive partisan game instead of applying economic principles consistently. Simply agreeing with Roberts doesn't gain you anything, even in this forum. He's not keeping score. You won't receive a grade from him.
Posted by: Martin Brock | Feb 21, 2008 1:33:46 PM
What specific questions have you asked me?
I referred to specific questions in the post to which you responded.
"The current account deficit isn't real? The negative savings rate isn't real? The bankruptcies and mortgage defaults aren't real? The declining house prices aren't real? The falling dollar isn't real?"
The issue is a credit bubble. The Austrians say that credit bubbles can cause boom/bust cycles. This issue seems eminently topical at cafehayek.com.
Posted by: Martin Brock | Feb 21, 2008 1:41:36 PM
Please read about median compensation. When you look at only one portion of the pie, that fits your world view, people tend to discount everything you say, rightfully or wrongly.
My world view is irrelevant, and you have no idea what my world view is anyway. The issue involves a statistic measured by the Census Bureau in the March Current Population Survey, BLS statistics on hourly earnings and other economic statistics.
I've read about median compensation. When Roberts discussed median family income earlier, I added statistics on individual incomes from the same source. If you have something to add, you can add it, but you don't add anything here.
Posted by: Martin Brock | Feb 21, 2008 1:47:00 PM
Martin Brock: "The point is that these people find no better options and are attracted to the WalMart openings enough to stand in a line with 7500 other people."
Sorry, Mr. Brock, but I don't understand how that is a point. It's an observation, but that's about all. Are you making some conclusion or suggesting some causal relationship through making that observation? If 7,500 feel that the chance at a WalMart job is worth waiting in line, so what? It just says to me that working at WalMart is considered to be a good deal. Is that your point?
Posted by: John Dewey | Feb 21, 2008 2:31:17 PM
Martin Brock: "I don't see how a large current account deficit ... support Roberts' argument"
I'm really not sure which of Professor Robert's arguments you are referring to. Is it:
"The road to prosperity for a nation is to use the skills of its citizens wisely."?
or
"Debt is up in recent years, but so is wealth."?
or
"The prosperity of the last 25 years ... has been driven by productivity increases in manufacturing and the service sector"?
or
"The money flows in because the United States is the most productive economy on the face of the earth."?
Which of those arguments are you referring to, Martin? The last one is directly tied to the capital account surplus - which, of course, is what "causes" the current account deficit.
Posted by: John Dewey | Feb 21, 2008 2:45:02 PM
"I don't see how a large current account deficit, a falling dollar, a negative savings rate, bankruptcies and mortgage defaults and declining house prices support Roberts' argument, and I'm here not to support Roberts' argument reflexively."
they don't support his argument. i never said they did. they support my earlier use of the the word "doomsday" which was used to mock your argument (which I later explained after you complained about it but nevermind.)
"von Mises and Hayek thought it mattered."
that doesn't make it true--and even if it is, simply stating it is a lousy argument.
""One's own future revenue" is a problematic expression when discussing Treasury notes, the credit of General Motors, subprime mortgages leading to substantial faults and the rest."
ok, why is it problematic?
"The trouble is that you're playing a reflexive partisan game instead of applying economic principles consistently."
actually, the game i'm playing with you is more like... checkers... yet the pieces on both sides are the same color.
"Simply agreeing with Roberts doesn't gain you anything, even in this forum."
yeah but i just found a quarter on the floor.
"He's not keeping score."
yeah he is. and i'm beating you.
"You won't receive a grade from him."
then how did this "A+" end up in my pocket?
Posted by: matt | Feb 21, 2008 2:56:34 PM
Sorry, Mr. Brock, but I don't understand how that is a point. It's an observation, but that's about all. Are you making some conclusion or suggesting some causal relationship through making that observation?
The point as stated above is that these people have no more lucrative opportunity and find the opportunity at WalMart attractive enough to stand in a line with 7500 other people for 400 openings. The point is that the turnout was very exceptional according to the WalMart official asked to comment on it.
The point is that you're focusing on this point exclusively while ignoring the others.
If 7,500 feel that the chance at a WalMart job is worth waiting in line, so what?
So 7,500 feel that the chance at a WalMart job is worth waiting in line. The WalMart official reported in Roberts' article thought it very remarkable.
If people were waiting in line at a soup kitchen, they'd also be pursuing a good deal compared with their other options. If they were waiting in line at a Syrian refugee camp after being driven out of Baghdad by Shia militias, they'd be pursing a good deal too. If people march to a concentration camp, they presumably prefer this option to the alternative.
My point is not that working for WalMart is like marching to a concentration camp. My point is that your point is vacuous. People always pursue their best options. The fact demonstrates precisely nothing. The question is: why do so many find no better options?
Why did median income stop rising 35 years ago while per capita GDP did not? Why is a divergence between the income of Federal employees and other employees diverging? Why do current GM employees borrow against the company's credit and take the borrowed money with them?
It just says to me that working at WalMart is considered to be a good deal. Is that your point?
Relatively, it's a good deal. This fact has never been a controversy. I've never denied it. I repeatedly acknowledge it. You repeatedly reiterate it. Every other point goes unaddressed. That's where we are.
Posted by: Martin Brock | Feb 21, 2008 2:56:48 PM
I'm really not sure which of Professor Robert's arguments you are referring to. Is it:"The road to prosperity for a nation is to use the skills of its citizens wisely."?
Truisms are true.
"Debt is up in recent years, but so is wealth."?
As I say above, asset prices are up, and this fact is completely consistent with the Austrian theory of a credit-driven boom/bust cycle. I would be shocked if the easy credit had not raised asset prices. Real wealth has also risen. The stagnation of median income is a distribution issue. Average Federal employee income hasn't stagnated. It has diverged from private sector income.
"The prosperity of the last 25 years ... has been driven by productivity increases in manufacturing and the service sector"?
I nowhere deny productivity increases over the last 25 years. I take them for granted throughout my posts.
"The money flows in because the United States is the most productive economy on the face of the earth."?Which of those arguments are you referring to, Martin? The last one is directly tied to the capital account surplus - which, of course, is what "causes" the current account deficit.
Why don't you respond to me instead of your straw man, John?
I explicitly state in my first post, "Maybe foreigners only want to invest in the U.S. so much, but this theory is the extraordinary claim requiring extraordinary evidence." I clearly understand this Lafferian explanation.
Despite Laffer's recent apologetics, this theory does not account for the falling dollar, much less the negative savings rate, the bankruptcies and mortgage defaults, the liquidity crisis in mortgage securities or the falling house prices. It has nothing to do with the Federal budget deficit. The Chinese finance their currency peg largely by purchasing Treasury notes. It has nothing to do with rent seeking at GM. You simply ignore any point that doesn't fit your pet theory.
If foreigners sell us things to get dollars to reinvest in the U.S. (real investment, not the purchase of entitlement our tax revenue), then why is the dollar falling? Have they stopped reinvesting?
Posted by: Martin Brock | Feb 21, 2008 3:29:02 PM
Why is a divergence between the income of Federal employees and other employees accelerating? It accelerated in the Bush administration according to Cato.
Posted by: Martin Brock | Feb 21, 2008 3:31:44 PM
yeah he is. and i'm beating you.then how did this "A+" end up in my pocket?
You're a legend in your own mind.
Posted by: Martin Brock | Feb 21, 2008 3:32:42 PM
Martin, 18:1 ratio for Walmart jobs in that particular town means those people lack any other skills. Should they be given $40/hour for high-skilled work they can't do? What is your solution?
Posted by: FreedomLover | Feb 21, 2008 4:07:51 PM
Martin Brock, it is very difficult to discuss anything with you. To me, whatever arguments you are making are not clear at all.
Martin Brock: "I explicitly state in my first post, "Maybe foreigners only want to invest in the U.S. so much, but this theory is the extraordinary claim requiring extraordinary evidence." I clearly understand this Lafferian explanation."
Sorry, but I clearly do not understand what you are "explicitly" stating in this sentence, so I cannot respond to it. Would you try expressing this thought in a different way?
Martin Brock: "Why don't you respond to me instead of your straw man, John?"
Sorry, Martin, but I just cannot respond to vague words I do not understand. That's why I have previously asked you what argument you refer to when you say:
Martin Brock: "I don't see how a large current account deficit ... support Roberts' argument"
Professor made several arguments in this post. Which one did you refer to in this statement?
Posted by: John Dewey | Feb 21, 2008 4:26:33 PM
"You're a legend in your own mind."
is there some other reality that matters?
Posted by: matt | Feb 21, 2008 4:36:38 PM
Martin, 18:1 ratio for Walmart jobs in that particular town means those people lack any other skills.
These people have no skills more valuable in other venues. This fact is not equivalent to having no other skills. It's not just the ratio of applicants to openings. It's the lining up with 7500 people for applications, indicating a measure of desperation.
Should they be given $40/hour for high-skilled work they can't do? What is your solution?
I've suggested reforms like a progressive consumption tax. I don't propose any statutory wage controls, but when we had a similar tax system in the past (high marginal income tax rates with exemptions for investment), median income did rise with rising productivity. Correlation is not causation, but there is reason to believe that something similar would happen again.
I'm not agreeing with Meyerson generally, not at all, but he makes this point regarding Ford's policy in the early twentieth century of paying Ford workers enough to afford the goods they produced. That's not to say that we must all produce things we would consume ourselves, but we want to produce things that we could consume if we chose to consume them.
Of course, the tax is counterproductive without the exemption for investment. The point is not to raise revenue for Federal expenditure, just the opposite. The point is to discourage marginal consumption and encourage marginal investment in the production of goods available to more people.
Ideally, this sort of tax raises only enough revenue for its administration. Then "stimulating the economy" is a matter of raising the marginal rates, since raising these rates lowers the tax revenue by encouraging investment at the expense of marginal consumption.
Posted by: Martin Brock | Feb 21, 2008 4:50:14 PM
It seems that some believe that when someone gets a job at Walmart they stay in that job for the rest of their life. Welfare reform has moved a lot of people off the government dole and into productive lives. A certain number of these people will either attain advancement within Walmart or move on to other jobs that pay more. Coming off of welfare, they need work experience in order to move up in the world. Walmart gives them that chance.
Walmart has provided jobs to many of those who might have had a hard time finding a job because of their lack of work experience. The growth of human capital and the increased self respect and happiness that many former welfare recipients have achieved because Walmart gave them a chance to build a resume and become "self-actualizing" citizens never seems to be recognized or even occur to Walmart's critics.
This is odd because many of Walmart's most vocal critics claim to care so much for the very people that are benefiting from a job at Walmart.
Posted by: Flash Gordon | Feb 21, 2008 5:19:40 PM
Martin Brock: "It's the lining up with 7500 people for applications, indicating a measure of desperation."
How can you know this is a "measure of desperation"? If a student fills out an application for a parttime job to supplement his other education and living funds, how does that indicate desperation?
If seniors bored with retirement fill out an application to be greeters, how does that indicate desperation?
If a local McDonald's employee wishes to upgrade to a cleaner, less stressful environment, how does that indicate desperation?
Do you think anyone with a pre-existing bias can read anything they wish into the phenomenon of 7,500 people wishing to work at WalMart?
Posted by: John Dewey | Feb 21, 2008 5:21:30 PM
Martin Brock, it is very difficult to discuss anything with you. To me, whatever arguments you are making are not clear at all.
What part of "negative savings rate" don't you understand? Why is "bankruptcy and mortgage default" difficult to grasp? You completely ignore these words as though I haven't written them, but anyone else can easily review the record and see them. The words are not mysterious or vague.
Sorry, but I clearly do not understand what you are "explicitly" stating in this sentence, so I cannot respond to it. Would you try expressing this thought in a different way?
"Foreigners" are people and other interests (like states and corporations) outside the U.S. Foreigners exchange things with interests inside the U.S. If a foreigner sells me a good or service, this exchange raises the U.S. merchandise trade deficit and the current account deficit. If I sell a foreigner a good or service (as I often do directly), the exchange lowers the deficit. A capital asset, like a corporate share or a bond, is not a "good or service" in this sense. I discovered this fact decades ago by asking an economist at the Federal Reserve.
The Laffer theory of the current account deficit is that foreigners sell us more merchandise than we sell them, because the foreigners want to obtain dollars with which to purchase capital assets denominated in dollars. Buying a real capital asset (a real means of production) in the U.S. is what I call "investing in the U.S."
In common parlance, buying a U.S. Treasury note is also "investment", but buying a Treasury note is simply buying entitlement to Federal tax revenue (or money created by the U.S. central bank), so I distinguish these purchases from "investment". Entitlement to tax revenue is not my idea of a real means of production.
Foreigners don't just stuff dollars in their mattresses, so a merchandise trade deficit does imply Laffer's capital account surplus, but "investing in the U.S." can mean many things, not least the purchase of Treasury notes. The words needn't imply any expenditure enhancing productivity in the U.S., only the purchase of entitlement to U.S. produce.
Other reasons exist for accumulating dollars and dollar equivalents like Treasury notes. We can discuss these reasons if you want, but Laffer's tautology does not explain the current account deficit. An accounting identity is not an explanation. The "Laffer curve" doesn't explain anything either.
If that's not clear enough, I'll try again.
Sorry, Martin, but I just cannot respond to vague words I do not understand. That's why I have previously asked you what argument you refer to when you say:
Again, words like "savings rate", "bankruptcy" and "default" are not vague. I write these words repeatedly in the thread, and you never acknowledge them at all, so the appeal to "vagueness" is disingenuous.
Professor made several arguments in this post. Which one did you refer to in this statement?
Roberts disputes the premise that Roberts himself establishes when he writes, :"Do you see the problem? How can a nation of stagnating incomes get to enjoy so much stuff? It must be debt. We're living beyond our means. We're borrowing to support a lifestyle we can't afford."
I explicitly quote these words in my first post before replying to them. My reply is germane to the words I quote. You quote other statements. I address the other statements above. You ignore my response. The record is clear.
Posted by: Martin Brock | Feb 21, 2008 5:22:36 PM
Regarding WalMart, see my statements above.
Posted by: Martin Brock | Feb 21, 2008 5:23:28 PM
Martin doesn't much of Europe implement a consumption tax (VAT), but yet they have similar wage numbers on a PPP basis (and on a net after tax basis) compared to the U.S? Are they just missing the investment part?
Posted by: Mcwop | Feb 21, 2008 5:29:36 PM
Martin doesn't much of Europe implement a consumption tax (VAT), but yet they have similar wage numbers on a PPP basis (and on a net after tax basis) compared to the U.S? Are they just missing the investment part?
Yes, but a VAT is not what I advocate. A VAT taxes value added at each stage of production, as opposed to a retail sales tax that only applies to the retail price. A VAT is primarily about raising revenue, and I generally favor taxes that individuals pay directly. Hidden taxes are easier to levy.
A progressive consumption tax on the model I favor is not about raising state revenue. It's about lowering state revenue, the higher the marginal rates, the lower the state revenue. This tax essentially is the progressive income tax we have, with higher marginal rates, plus an IRA with unlimited contributions. If Bill Gates wants to live like a welfare mother, he may earn a billion dollars a year and pay no tax whatsoever. I have no problem with this outcome at all. vidyohs would cry when his Federal pension is threatened, so I suppose the tax must raise some revenue.
Posted by: Martin Brock | Feb 21, 2008 5:45:50 PM
"But Meyerson has a worse problem to explain. How does a nation of shoppers thrive when incomes are stagnating, as he believes they are?
Do you see the problem? How can a nation of stagnating incomes get to enjoy so much stuff? It must be debt. We're living beyond our means. We're borrowing to support a lifestyle we can't afford."
"Debt is up in recent years, but so is wealth. I'd like to see evidence that the prosperity of say the last 25 years is due to borrowing."
If you lent me a million dollars I cold appear to be very wealthy in my new house and car. But would I be richer or poorer? Or for that matter if I loaned against my future paychecks, took out loans against the equity in my house or accumulated larger and larger tuition loans, or re-financed with a balloon morgtage I could appear to have lots of stuff but indeed it would be debt driven. I can't believe you ask the questions you do above in a rhetorical fashion. You must read the paper....right?
Massive public spending and debt.
Posted by: muirgeo | Feb 21, 2008 5:47:09 PM
The problem with a credit bubble is malinvestment leading to a boom/bust cycle and inflation (or stagflation) rather than "being in debt".
Posted by: Martin Brock | Feb 21, 2008 5:56:14 PM
If you lent me a million dollars I cold appear to be very wealthy in my new house and car. But would I be richer or poorer?
If you don't repay the loan but keep the house and car, you're richer. If you don't repay the loan but keep the house and car for a while, you're also richer but not as rich.
Posted by: Martin Brock | Feb 21, 2008 6:26:50 PM
Martin Brock: "Buying a real capital asset (a real means of production) in the U.S. is what I call "investing in the U.S."
When Abu Dhabi Investment Authority pumps $7.5 billion capital into Citibank, in hopes to achieve long term returns, that's investment in the U.S., right?
When a British hotel company purchases the U.S. Holiday Inn chain, that's also an investment in the U.S., right?
When Dutch investors buy corporate bonds so a U.S. business can expand its operations, that's also an investment in the U.S., right?
I thought that what Laffer - and Bernanke - claimed about the U.S. capital account surplus was simply that such U.S. assets are more attractive to some foreigners than are the goods available for export. That's not true for all foreigners, of course, as U.S. exports remain at or near all time highs.
Martin brock: "buying a Treasury note is simply buying entitlement to Federal tax revenue (or money created by the U.S. central bank), so I distinguish these purchases from "investment"."
If some foreign nations decide that U.S. government bonds are even more desirable than other U.S. assets, so what? The foreign nations did not create that U.S. government debt, right? It was going to be sold to someone. What difference if it is sold to some central bank or to U.S. investors? It still must be paid back by future taxpayers.
As I see it, the federal fiscal deficit is unrelated to the capital account surplus. Apparently you do not agree.
Posted by: John Dewey | Feb 21, 2008 6:32:27 PM
Martin --
Others beat me to this, but I'm going to post it anyway:
People line up for almost a block outside Magnolia Bakery (in the West Village, NYC) for cupcakes. It doesn't mean that there aren't cupcakes at other bakeries, or that these people are starving. But why would they wait in a line? Maybe because they like these particular cupcakes. But they don't need them to survive.
Without knowing more about those now-famous 7500 applicants, you can't assume that lining up indicates even "a measure" of desperation. Using 2004 data from
http://www.city-data.com/county/DeKalb_County-GA.html
it appears that the unemployment rate was 5.3% and the labor force was 372,000, indicating about 20,000 unemployed people.
Assuming those numbers didn't change much, only at most 3/8 of the county's unemployed people (some of the 7500 were probably employed) came to a 400-opening hiring site. Even the unemployed people don't sound very desperate as a group. (Some of them probably are desperate.)
If DeKalb county is now severely depressed, it means that an even smaller portion of the unemployed showed up for this.
By the way, if my cupcake anecdote seems trivial, your refugee camp analogy on the same issue from the "living beyond our paychecks" thread was overkill. DeKalb County is not like a refugee camp in any way and Walmart jobs are not like humanitarian relief. They're like... other jobs, I guess.
Posted by: Eric | Feb 21, 2008 6:40:57 PM
When Abu Dhabi Investment Authority pumps $7.5 billion capital into Citibank, in hopes to achieve long term returns, that's investment in the U.S., right?
I'm not sure, really. The transaction doesn't purchase Treasury notes directly, but it's definitely in a grey area. Citibank holds lots of Treasury notes and other entitlements that I have a hard time calling "real means of production". If Abu Dhabi buys mortgage backed securities (backing mortgages on U.S. houses) from Citibank, I suppose that's investment in the U.S. I'm not sure that's really what's happening though.
When a British hotel company purchases the U.S. Holiday Inn chain, that's also an investment in the U.S., right?
On the face of it, I agree.
When Dutch investors buy corporate bonds so a U.S. business can expand its operations, that's also an investment in the U.S., right?
Again, I agree on the face of it, even more so. If the purchase of Holiday Inn is nothing but an exchange of titles and never has any other effect on Holiday Inn's operations, I suppose we should still call it "investment", but the word doesn't mean much in this context. I don't much care who owns Holiday Inn as long as the owners operate it to profit in a competitive market.
I thought that what Laffer - and Bernanke - claimed about the U.S. capital account surplus was simply that such U.S. assets are more attractive to some foreigners than are the goods available for export. That's not true for all foreigners, of course, as U.S. exports remain at or near all time highs.
This could be true. Years ago, my local public radio station interviewed an economist from the Fed. The trade deficit was a problem then too. It's a perennial problem. I asked the economist then if my sale of a share of stock to a foreigner affected the trade deficit. She answered, "No ... but ..." That was the entire answer.
We are a highly developed economy. We do have enviable resources and a relatively low population density compared with other highly developed economies. I'm not denying any of this, but ... there are other reasons for mercantilism besides wanting to profit from U.S. growth.
If some foreign nations decide that U.S. government bonds are even more desirable than other U.S. assets, so what?
For one thing, I didn't agree to sell my labor and other resources to these foreign nationals, and I suppose the people who did agree get more out of it than I do.
The foreign nations did not create that U.S. government debt, right?
Well, if you mean that we deserve the government we get, you can say that. I'm not so fatalistic.
It was going to be sold to someone.
I don't take it for granted. I prefer foreigners to buy real U.S. assets. If I had a choice, I'd make this choice. I don't have a choice in reality.
What difference if it is sold to some central bank or to U.S. investors? It still must be paid back by future taxpayers.
It needn't be paid back by future taxpayers. Central bankers routinely manufacture currency. The sale of Treasury notes is part and parcel of various price fixing schemes, like the Chinese currency peg, and it simultaneously empowers statesmen to empire-build and the rest. The people who make these decisions know why they're doing it. You and I can only speculate.
As I see it, the federal fiscal deficit is unrelated to the capital account surplus. Apparently you do not agree.
Well, I say the federal deficit has nothing to do with the current account deficit above, but I'll withdraw this statement. It's not unrelated. The volume of nominally riskless bonds surely affects real investment decisions, and I have no idea what bankers and statesmen say to each other in their meetings.
Posted by: Martin Brock | Feb 21, 2008 7:21:22 PM
Martin Brock,
I think you and I differ on the definition of investment. Perhaps because I am educated in finance, the economics distinction between capital and investment is a little unclear. When I buy shares of GM, I am buying a portion of not only the initial capital for that corporation but also the earnings retained and reinvested in its operations over years and years. To me, all the dollars I use to buy GM stock should be considered investment. But I think economists may call this investment only in the initial year that the earnings were retained and used in the business.
In any case, I see no problem whatsoever with investors in GM selling their shares - indirectly through brokers - to anyone they please. If an Italian uses his dollar holdings to buy my shares of GM instead of buying a new Corvette, I don't see how the U.S. is harmed at all. Likewise, I don't see how Italy is harmed if I buy shares of Fiat rather than purchasing an Alfa Romeo.
Do you view the sale of U.S. equities to foreigners as a negative thing for the U.S.? Do you feel that we are selling off our wealth in order to consume? As Professor Roberts has shown in a subsequent post, the net wealth of U.S. households has been increasing.
As I see it, the U.S. economic engine is so huge that we can easily afford to let investors from all over the globe participate in its growth. To me, that foreign investors believe in the U.S. economy enough to desire shares of U.S. corporations is positive.
Posted by: John Dewey | Feb 22, 2008 6:44:39 AM
Everything Russell Roberts writes is accurate, but it elides a real issue that Meyerson alludes to but doesn't quite explicate. Yes, manufacturing is booming in America. But the decline of manufacturing jobs -- which, as Roberts writes, is due to dramatic increases in productivity -- is a real problem. In particular, it's a problem for those Americans (and there are tens of millions of them) who don't have the intellectual aptitude to be 'knowledge workers'.
This would be less of a problem if we didn't continue to import millions more folks without this aptitude from Mexico to work menial jobs here. What will happen when their kids dropout or fail out of high school and don't have a high-paying manufacturing job to fall back on? They will swell the aggrieved class of those who, like Meyerson, believe the solution is to elect a leftwing Democrat who proposes more redistribution of wealth.
Posted by: DaveInHackensack | Feb 22, 2008 8:01:01 AM
They will swell the aggrieved class of those who, like Meyerson, believe the solution is to elect a leftwing Democrat who proposes more redistribution of wealth.
The idea that high school drop outs are responsible for all of the rent seeking in the Federal government is extremely incredible. What you imagine as the "welfare state" constructed by "left wing Democrats" to benefit "the poor" is a rounding error in Federal spending. If you could execute every Mexican immigrant and every high school drop out today, the Feds would raise your taxes tomorrow, because they'd need more tax revenue from you to collect the same rent. If you couldn't execute them but could only jail them, the situation would be even worse.
Posted by: Martin Brock | Feb 22, 2008 8:31:51 AM
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