Cafe Hayek

Perspective

My latest essay in the Pittsburgh Tribune-Review is (are you sitting down?) on the benefits of free trade.  Here are some passages:

We've all seen a drawing that looks like two very different things depending upon how the viewer looks at it. In one case, for instance, what at first appears to be the craggy face of an old woman suddenly looks like a beautiful woman standing in a sexy pose. If you look for the old woman in the drawing, you see the old woman. If you instead look for the gorgeous babe, you see the gorgeous babe.

Same picture. Same objective reality. Two wholly different sightings.

And so it is in economics. The very same set of facts -- the very same objective reality -- often tells two (or more) very different stories depending upon the attitude and knowledge that the observer has when examining these facts. More imports from abroad and the losses of specific domestic jobs that they typically entail are seen by some as a sign of trouble for the domestic economy. Others see these same facts as a boon -- as the opportunity to get valuable goods and services at lower costs and as releasing scarce domestic labor to produce outputs that would otherwise be too costly to obtain.

.....

When trade is free, even craggy and slothful economies can be transformed into lively and fertile ones. That's my perspective.

Krugman's Peculiar Sense of History

Paul Krugman makes a claim in his column (appearing in today's New York Times) that is both wrong and misleading.

The column features his familiar theme that ordinary Americans are suffering terribly as a result of the decrepit shape of America's current, GOP-ransacked economy.  Krugman's offending statement is the one in bold:

Our [that is, ordinary Americans'] bleakness partly reflects the fact that most Americans are doing considerably worse than the usual economic measures let on. The official unemployment rate may be relatively low — but the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high. [emphasis added]

Sounds ominous.  But what does this figure mean?  The closest statistic that I can identify to "percentage of prime-working-age Americans without jobs" is to start with (one minus) the labor-force-participation rate of Americans aged 25-54.  Then adjust that figure for the unemployment rate of Americans in that age group.

For example, if 90 percent of Americans between the ages of 25-54 are participating in the labor force (that is, either have or are seeking employment), then ten percent of Americans in this age-group are without jobs by choice (some, for example, are stay-at-home parents).  These ten percent of Americans without jobs are not "unemployed," for they are not in the labor force.

Then, to determine the actual number of prime-working-age Americans who are "without jobs," we must add to this 10 percent of Americans, in this age group, who are without jobs because they aren't in the labor force whatever percentage of the remaining 90 percent of Americans aged 25-54 are unemployed.  BUT because there's no reason to suppose that unemployment is hitting workers in this age group today significantly any harder or less hard (relative to workers in other age groups) than in the past -- and because, by Krugman's own admission, today's unemployment rate of 5.1 percent isn't especially high -- we can ignore this unemployment rate for my purposes.

So what am I getting at?  This: Krugman's statement that "the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high" is, as I said above, both wrong and misleading.

Look at Figure 1B on this page from the San Francisco Fed.  (HT Russ.)  It does not show the labor-force-participation rate for all Americans aged 25-54; rather, it breaks down the participation rate for Americans in this age group by sex.

Look at the labor-force-participation rate of men (aged 25-54).  That rate is indeed lower than in the past.  For the full time period reported in this Figure, that rate is indeed at an all-time low.  It peaked in 1953, and has been declining ever since.

Now look at the labor-force-participation rate of women (aged 24-54).  Not surprisingly, it has surged in recent decades, although leveling off a bit since around 1990 and even declining a tiny bit since around 2000.

It's highly unlikely that, given that today prime-working-age women participate in the labor force at rates vastly higher than was true even in, say, 1975, that the percentage of all Americans aged 25-54 who are "without jobs" is today lower than it was thirty or even twenty years ago.

Whatever is the percentage of prime-working-age Americans who are today "without jobs," it surely isn't -- contrary to Krugman's hysterical claim -- "historically high."

One possibility is that Krugman saw these, or similar, data and confused "men aged 25-54" for "all workers aged 25-54."  If so, then he's correct that the percentage of men in this age group "without jobs" is "historically high" (where "history" here is confined by the data that go back no farther than the late 1940s).  But today's "historically high" figure is part of a trend that began during the first year of the presidency of Dwight Eisenhower.  At that time, George W. Bush was seven years old.

(Note also that, although the labor-force participation rate of prime-working-age men has been declining for a half century, the trend is slight.  Even today's "historically" low figure is pretty darn high.)

So, to summarize.  Krugman is simply wrong to assert that the percentage of Americans of prime-working-age without jobs is "historically high" -- and misleading to suggest that, whatever this percentage might be today, that it is evidence of some major economy malady.  A rise in the percentage of prime-working-age persons "without jobs" might just as well reflect greater middle-class prosperity -- resulting in more years of schooling or early retirement -- as it reflects economic hardship (such as workers so discouraged by their futile job searches that they just call such searches to a halt).

BTW, this post from Megan McArdle on labor-force-participation is worth reading.

Living Beyond Our Paychecks?

Former Secretary of Labor Robert Reich recently contributed this confused and confusing op-ed to the New York Times.  Here's the letter that I sent in reply:

At least a full-sized op-ed is required to address the many wrong-headed presumptions, factual errors, and non sequiturs that mar Robert Reich's "Totally Spent" (February 13).  The most blatant mistake, however, is Mr. Reich's assertion that women entering the workforce, and people working longer hours, are examples of how Americans "live beyond their paychecks."

When more family members work, and when those who work do so for more hours per week, families' paychecks increase. Working more might be good or bad - it might be evidence of underlying economic problems - but it emphatically is not a means of living beyond a paycheck.

Sincerely,
Donald J. Boudreaux

"24" circa 1994

I watch very little television, so I've never seen the show "24."  (I don't even know what it's about.)  But I understand and enjoy this spoof on "24" -- a pilot for the show allegedly shot in 1994.  For those who believe that America's middle-class has been economically stagnant, this short video gives you some reasons to doubt the stagnation hypothesis.  (HT to Mathieu Bedard)

If America's Middle-Class is Disappearing, It's Only Because Ordinary Americans are Getting Richer and Richer

I sent the following letter two days ago to the Wall Street Journal:

So Lou Dobbs might run for President ("CNN's Lou Dobbs for President? He Says No, Sort of," January 7).  May the ghost of Adam Smith help us!

You report one of Mr. Dobbs's trademark roars: "The middle class in this country, the majority in the country, has been ignored.  Our elites in Washington, D.C., both political and corporate, are hell bent on ignoring the majority."  Perhaps this claim is true, but if so the inference Mr. Dobbs draws - that the American middle-class is in trouble - is emphatically mistaken.  I quote my colleague Walter Williams: "Controlling for inflation, in 1967, 8 percent of households had an annual income of $75,000 and up; in 2003, more than 26 percent did. In 1967, 17 percent of households had a $50,000 to $75,000 income; in 2003, it was 18 percent. In 1967, 22 percent of households were in the $35,000 to $50,000 income group; by 2003, it had fallen to 15 percent. During the same period, the $15,000 to $35,000 category fell from 31 percent to 25 percent, and the under $15,000 category fell from 21 percent to 16 percent. The only reasonable conclusion from this evidence is that if the middle class is disappearing, it's doing so by swelling the ranks of the upper classes."

Sincerely,
Donald J. Boudreaux

The Wages of Misunderstanding

Paul Krugman circa 1996 understood the point of this letter (below) that I sent yesterday to the New York Times.  Paul Krugman circa 2007 apparently doesn't:

Opposed to free trade, David Raines asks "How can it be good for workers to be subjected to competition from low-wage countries?" (Letters, December 27).  This question reveals a common misunderstanding.

Worker compensation in America is high because American workers are made highly productive by the great amounts of capital they work with.  (And by the way, America is rich in capital, in part, because she consistently runs capital-account surpluses - i.e., "trade deficits.")  Where wages are low, it is because workers in those places have little capital to work with and, therefore, are not very productive.

G.M. and Toyota continue to sell cars even though bicycles - a competing means of transportation, but one far less productive than cars - fetch much lower prices.  For the same reason, with free trade American workers will continue to sell their labor for high wages even though many workers abroad fetch much lower wages.

Sincerely,
Donald J. Boudreaux

Krugman vs. Krugman, Again

In today's edition of the New York Times, Paul Krugman offers up the old pauper-labor "theory" for why trade with low-wage countries is likely to harm typical workers in high-wage countries.

Here's a letter that I sent in response:

Paul Krugman worries that, although trade between high-wage countries is mutually beneficial, "trade between countries at very different levels of economic development tends to create large classes of losers as well as winners" - and so is suspect because it likely harms ordinary American workers ("Trouble With Trade,” December 28).

A famous trade economist argues that this concern is misplaced.  In a 1996 essay, this economist - responding to a protectionist who fretted that western trade with low-wage countries would harm workers in the west - wrote that this protectionist "offers us no more than the classic 'pauper labor' fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates."

Oh - the economist who wisely warned against the pauper-labor fallacy is none other than Paul Krugman.

Sincerely,
Donald J. Boudreaux

It's worth noting here also the apt and spot-on correct closing lines of this 1996 essay: "Ricardo's idea is truly, madly, deeply difficult. But it is also utterly true, immensely sophisticated -- and extremely relevant to the modern world."

Future Jobs

The following letter of mine is published in today's edition of the New York Times:

To the Editor:

Bob Herbert quotes the observation by Andrew L. Stern, president of the Service Employees International Union, that Americans today “cannot see where the jobs of the future are that will allow their kids to have a better life than they had.” Mr. Stern adds, “And they’re not wrong.”

But when could Americans of any generation foresee future jobs? Did the blacksmith in 1890 foresee jobs in the auto industry? Did the corner grocer in 1940 foresee his son prospering as a regional manager for Wal-Mart?

Did the telegram-deliverer in 1950 foresee his child designing software for cellphones? Did the local pharmacist in 1960 foresee his daughter’s job as a biomedical engineer?

Our inability today to see the details of the future is no more worrisome than was the same inability of our grandparents. 

Donald J. Boudreaux
Fairfax, Va., Dec. 22, 2007
The writer is chairman of the economics department, George Mason University.

"It's Getting Better All the Time"

If the New York Times and other major, elite news outlets are to be believed, the only real question today is whether ordinary people will meet their end by being roasted or flooded to death by man-made global warming or by being crushed -- as they crawl in search of crumbs of toxic food not grown locally -- beneath the diamond-studded heels of boots worn by the richest one-percent of the population.

Patrons of the Cafe know that Russ and I are generally skeptical of most of the fear-mongering about the state of humanity.  Admittedly, we are both deeply influenced by the late Julian Simon, who is, in my opinion, the most underrated economist ever to live.

So I'm delighted to learn that Manoj Padki has started the wonderful new blog "It's Getting Better All the Time" (whose title comes from this book written by Julian Simon and his student Stephen Moore).  In this blog, Manoj will report and document many of the countless ways that humans are progressing.  I will visit Manoj's blog at least once each day.

Wages in China

Today's New York Times reports that "wages [are] rising 10 percent or more a year in many Chinese cities."

If true -- and, for the reason that follows, I find this stat to be believable -- such a rise in wages is no surprise.  Such a rise in wages is the natural result of more market-driven investment, greater commerce, and economic growth.

And if true, this stat is difficult to reconcile with those pundits and politicians who argue that strong, independent labor unions are necessary to ensure that workers enjoy the benefits of economic growth.  In China, independent labor unions are illegal.  I confess to being no expert on the realities of the operations of labor unions in China, but I suspect that this reality is not remotely close to the model that the Robert Kuttners, Harold Meyersons, Paul Krugmans, John Edwardses -- and John Sweeneys -- among us believe should be adopted in the U.S. so that American workers can prosper.

Wages generally rise -- and wages rise generally -- because of market forces that improve worker productivity and encourage economic change and growth.   Labor unions are not the source of a general rise in real wages.

Jobs in a Market Economy

Here's a letter that I sent today to USA Today:

To the Editor:

Dale Powers argues that the hiring of foreign skilled workers "wastes" the brainpower of Americans ("Don't waste U.S. brainpower by hiring foreign workers for coveted jobs," June 4).  Mr. Powers' brainpower as an aerospace engineer might be awesome, but it's weak in economics.

The number and kinds of jobs in a market economy aren't fixed.  They expand and change as entrepreneurs seek to use all available talent as productively as possible.  Consider the microchip - which, after all, is a substitute for lots of human brainpower.  If Mr. Powers' argument were correct, the advent of this device would have cast millions of smart, educated Americans into low-skilled jobs.  Instead, of course, the microchip has created for talented Americans countless high-wage jobs whose existence was inconceivable thirty years ago.

Sincerely,
Donald J. Boudreaux

Friedman On Growth Measurements and Immigration

I thank Bob Higgs for drawing my attention to a short but insightful 1974 article, in the March/April 1974 issue of the Journal of Political Economy, by Milton Friedman.  (For those of you with access to JSTOR, here's the link.)  I'm giddy with pride that my most-recent column in the Pittsburgh Tribune-Review reminded Bob of this article, by Friedman, entitled "A Bias In Current Measures of Economic Growth."

Here's an excerpt:

It is common practice to measure the growth in economic welfare in a country over any considerable period by the rate of growth in real per capita income.  However, this measure can be seriously biased for a period during which the country experienced substantial immigration or emigration.

Consider the United States from, say, 1870 to 1914.  During that period, real per capita income as measured by Simon Kuznets grew at the annual rate of about 2 percent.  However, there was heavy immigration, reaching a peak rate of over 1 1/4 million persons a year in 1907.  By 1914, roughly one-third of the total population of the United States was foreign born or of foreign or mixed parentage, and one-fifth of the population over 14 years old was foreign born.  Their counterparts in 1870 -- for, of course, we want to measure the growth in economic welfare for a "representative" population, not for a collection of identical and aging individuals -- lived and worked in other countries, not in the United States.  We have every reason to believe that their 1870 counterparts had lower incomes than the then population of the United States -- presumably that is why the United States experienced heavy immigration, not emigration.

The foreign-born in 1914 probably also had lower incomes than the rest of the U.S. population, but again the fact of continued large-scale immigration, let alone a wide variety of historical evidence, suggests that their incomes in the United States were substantially above the incomes that they could have received in the countries from which they came.  In any event, the incomes of the 1914 foreign-born are included in the aggregate income underlying the 1914 per-capita income estimate, while the incomes of their counterparts in 1870 are completely excluded.  The result is to bias the estimated rate of growth downward.
......

One of the great economic achievements of the United States in the period from 1870 to 1914 was the absorption of millions of residents who came to the United States with little but their bare hands, were able to make a better life for themselves than in their countries of origin, and to lay the foundations for a still better life for their children.  Yet not only is this achievement not recorded positively in the common measure of economic growth, it actually enters as a negative factor, reducing the measured rate of growth.

Just so.

Norberg on History's Greatest Achievement

Johan Norberg is one of my very favorite scholars.  (If you haven't yet read his book In Defense of Global Capitalism, you're missing an outstanding intellectual achievement.  Read it!  Carefully.  Twice.)

The editorial page of today's Wall Street Journal features another worthy contribution by Johan -- an essay entitled "Humanity's Greatest Achievement."  Here are some key passages:

We tend to take our opportunities for granted, but our ancestors could not have imagined what we now have. In the last 100 years, we have created more wealth than in the 100,000 years before that, and not because we work more. To the contrary: In the last century, work hours have been halved in the Western world. It is because new ideas have made it possible for us to work smarter and find easier ways to satisfy our needs and demands.

The people we should thank are the innovators and entrepreneurs, the individuals who see new opportunities and risk exploring them -- the people who find new markets, create new products, think out new ways to handle commodities commercially, organize work in new ways, design new technology or transfer capital to more productive uses. The entrepreneur is an explorer, who ventures into uncharted territory and opens up the new routes along which we will all be traveling soon enough. Simply to look around is to understand that entrepreneurs have filled our lives with everyday miracles.

Entrepreneurs are serial problem-solvers who search out inefficiencies and find more practical ways of connecting possible supply with potential demand. In that way, they constantly revolutionize our economy, and have made it possible for average people today to live longer and healthier lives, with more access to technology than the kings had in previous generations.

Had this radical improvement of our lives been accomplished by political leaders and central planning, it would have been celebrated as humanity's greatest achievement. But that is not how entrepreneurs are perceived, to say the least. For a hint of how the popular culture thinks of the innovators, take a look at any Hollywood film. Chances are that the villain is either a mad scientist or a greedy businessman. That is slightly ironic, since we would have neither film technology without scientists nor a film industry without businessmen. This is to say nothing of our political culture.

Ignore P.C. Roberts' Name-Calling

Paul Craig Roberts continues to insist that the U.S. economy is on the fast track to disaster.  He asserts that "Another five years like the last, and little will be left" of American prosperity.

Why?  Because free trade in today's world means that American wages must fall in order for Americans to remain employed in any industry save ones that require its workers to be in close physical proximity to U.S. consumers.  So the wages of motel maids and bartenders might not fall, but those of any workers whose jobs can be 'outsourced' will plummet.  Here's P.C. Roberts again:

Globalization is wiping out the American middle class and terminating jobs for university graduates, who now serve as temps, waitresses and bartenders. But the whores among economists and the evil men and women in the Bush administration still sing globalization’s praises.

Today's Wall Street Journal ($$) presents evidence that is at odds with P.C. Roberts's fantastical image of impoverished America.  Here are the opening paragraphs:

Five years after the dot-com bubble burst, job growth has returned to Silicon Valley. But it's a different kind of growth than in past recoveries, favoring higher-skilled workers.

Netflix Inc.'s hiring shifts are typical. During the tech boom, the online movie-rental service created 100 customer-service jobs near its Los Gatos, Calif., headquarters in the heart of Silicon Valley. After the tech bust in 2000, Netflix eliminated half of those positions. But the total headcount at Netflix's Silicon Valley offices has grown 20%, to nearly 200 staffers in the last few years.

That's because Netflix, while shedding some lower-end jobs, has aggressively created new, higher-level jobs. It's adding jobs in departments such as Web engineering and product development: That groups' hiring of engineers jumped 20% to more than 50 people in 2005 alone. "Our new engineers have an average of seven to 15 years experience," says Patty McCord, Netflix's chief talent officer. "Five years ago, we hired people with three to five years of experience."

Does the CPI Overstate Inflation?

As Russ announced, Cafe Hayek recently opened a section dealing with the alleged "hollowing out" of America -- the alleged disappearance of the American middle-class.

My two latest columns in the Pittsburgh Tribune-Review -- here and here -- offer some reasons why the Consumer Price Index likely overstates inflation -- and, hence, causes the measured growth in living standards of ordinary Americans to be lower than it really is.

The Haves and the Have Nots

I wrote recently about the people who like to complain that America is being hollowed out, that we're becoming a two-tiered society of haves and have nots, an hourglass economy where the rich get all the gains and the poor stand in place or fall further behind.

Here's a slightly older example of the genre from Upton Sinclair's The Jungle, which is celebrating its 100th birthday:

"All over the world two classes were forming," wrote Sinclair in "The Jungle." "The capitalist class, with its enormous fortunes, and the proletariat, bound into slavery by unseen chains."

There is nothing new under the sun.

The quote is from a nice piece in today's WSJ ($) by John Miller. According to Miller, Sinclair wanted The Jungle to spur a revolution, not meat inspections.  Ah, the law of unintended consequences.

Woe is us?

We're starting a new category at Cafe Hayek—The Hollow Middle.  This category will include posts about the despair some invoke about America being hollowed out or the vanishing middle class or the have and have-not society we're allegedly moving towards. 

Harold Meyerson's column in today's Washington Post kicks off the category.  His piece looks at the workers at a Ford auto plant that's being shut down.  They are highly skilled and the main reason for the plant's demise is partly due to Ford's failure to update the Lincoln, assembled at the plant.  The workers actually feel pretty good about themselves and the future, refusing to see themselves as victims, but Meyersohn sings a different tune:

"It's not, 'Woe is us,' " says Burkie Morris, speaking for his defiant, reeling buddies. Maybe not for you, Burkie, but speaking for your countrymen, who are seeing American manufacturing dismantled and the middle torn from our economy: Woe is us.

As I pointed out earlier this week, American manufacturing is not being dismantled.  I'd like to see the evidence that the middle is being "torn from our economy."  Actually, I have no idea what it means.  But it sure sounds sinister.  It's a code-phrase really, that supposed to remind the reader of all the horrible things allegedly happening to the American economy, the hollowing out, the death of the middle class, the rich getting richer and the poor getting poorer.  I think those horrible things are usually distortions of the data masquerading as facts.