Revisiting the outcomes of the 21th century Chinese import boom

The conventional wisdom among economists is that the post-2000 Chinese import boom—which we know rapidly devastated the American manufacturing base—was overall good for the U.S.; that (as I argue) artificial barriers to trade generally make both parties poorer, and over the long run trade ends up lifting all boats. While I think it will always be true that trade barriers increase the price of products, a lot of the other assumptions may not be true.

If it’s good to reduce trade barriers with a country, is it wise to do it overnight? We now realize that a small policy shift in 2000 boosted the confidence of companies to move manufacturing jobs to China and of the Chinese government to invest in infrastructure to meet that demand. Many American towns were built slowly on the backbone of manufacturing and rapid closing have made economic recovery in those areas almost unimaginable. The advice to “move to where the jobs are” is almost always given by people employed, who can afford moving costs, and who don’t have local family members to support.

Can Americans get by without manufacturing jobs? Economists generally say this will free up workers to do more high-level jobs, but we’ve clearly failed at efforts to raise the education level and prospects of the bottom third of wage earners. It’s looking like the people who left monotonous, but stable, decent-paying factory jobs of yesteryear do not end up in better service industry jobs. Instead, those jobs were replaced by 1) part-time jobs of lower wages and constantly-shifting scheduling—hurting workers’ abilities to form and maintain families, and 2) destructive periods of unemployment.

Aren’t the “losers” of trade liberalization a small number of factory workers? Putting a few thousand people out of work impacts their families and all the businesses they and their families frequent, and it also destroys a large social network that was probably valuable to families.

Is the under- and unemployment of a large population of Americans worth cheaper products? It seems to me that Americans would’ve been just fine had the prices of products stayed at the level they were in the late 90s or lowered more slowly. At a certain level of wealth, more products and bigger homes don’t increase real prosperity, and particularly if those come with the awareness of increased suffering of your fellow citizens.

Wasn’t this worth lifting the Chinese out of poverty? The rise of China’s middle class is certainly a win for billions of people, but rapid export to the U.S. did not do that. China left poverty not because the West invaded it with factories, but because its leaders embraced capitalism and it had a ton of untapped potential. Had the U.S. not outsourced so rapidly, China still certainly would have industrialized, and maybe without such problems of pollution and inequality.

The timing of rapid globalization also sadly coincided with the big-boxification of retail. By the 90s, Wal-Mart was such a retail behemoth that it could dictate the prices of goods it was willing to pay suppliers and essentially make or break a supplier. Under this this intense pressure, suppliers had little choice than to sacrifice American factory jobs; Wal-Mart built their company on “Made in the U.S.A.” yet knowingly forced suppliers to outsource American jobs to save pennies per product. Consumers of course had no idea that trade-off was being made. There’s still not a satisfying answer to the question of is a community better off as a whole with one Wal-Mart than dozens of smaller retailers, but I’d wager that the transition and its speed—the closing of a large number of competing stores along with U.S. factories—was not good for communities.

We, of course, can’t say for certain what would’ve happened had trade with China not progressed or had it progressed more slowly. It’s also not clear we can “turn back the clock,” but when we negotiate trade deals we should definitely think more of the millions who may be displaced, maybe permanently, and of the bigger effect that can have on America as a whole. Economists were massively naive to think this would all wash out, but then economists weren’t driving this; U.S. big box shareholders decided this was necessary.

Why wouldn’t a Basic Income be consumed by inflation?

Interest in the Basic Income is definitely picking up. This recent piece from Andrew Flowers, like most, doesn’t at all mention the possibility that the BI amount could be somewhat or completely eaten away via increased prices.

The BI will give rent collectors—landlords, near-monopolies like AT&T/Comcast, state/local governments, on and on—large incentives to increase rents, prices, and fees. Of course it will have some level of inflation.

If the inflation effect turns out to be large, BI would be a waste of time and scary to roll back, but there’s also a danger it could be regressively redistributive. I think it’s likely Congress would pass the BI only if it also reduced more direct help to the poor. If Congress took away that help, inflation—if occurred—would effectively force the poor to turn over what’s left to the rent collectors higher up the wealth distribution.

BI is still an interesting thought experiment to me, and it’s cool that studies are underway, but those studies need to be large and long enough to detect for inflationary effects, and articles discussing BI should mention that risk.

There are plenty more feasible ways to help the poor: increase wage subsidies like the EITC, target wage subsidies toward those having particular trouble finding work, or even some WPA jobs.

San Francisco, do you want to be Manhattan?

Another day, another article on S.F.’s crazy real estate market. Except it’s perfectly rational behavior: The secret is out that S.F. is an awesome place to live with plenty of very high-paying jobs, but also land is scarce and there are lots of development restrictions.

If no policies change, prices—both housing and general commodities—will continue to go up until S.F. is basically another Manhattan; if you want to live there you either must be in the upper class or able to live in a shoebox. The good news is that California is wonderful and people can live happily outside S.F. The city would just need to beef up its transportation infrastructure for an enormous commuting class, and the Bay Area will suffer the environmental implications of that.

If, however, you think there’s value in having residents from a wider range of incomes, you have to be willing to build a ton of new, and very dense, housing, including bulldozing some old areas—not every inch of the city can be treated as a historic artifact. Unfortunately plenty of lefties think that anything that’s good for rich developers must be bad for everyone else, and it just ain’t so. I highly recommend reading Matt Yglesias’s bite-sized ebook The Rent Is Too Damn High, which makes very convincing arguments that loosening development restrictions is a great idea for everyone. Lots of people want to live in S.F., and we should let them. Density is great for the economy and for decreasing the environmental impact of cars and commutes.

Renters are already living very densely packed in “single family” homes, so it’s pretty clear there would be plenty of demand for new apartments in a variety of sizes. The natural opposition to this is going to be existing owners that benefit from rising prices, but certainly a motivated majority (renters) could successfully push for expanded development. But until they realize it’s in their interest, they’ll keep complaining about a variety of things that don’t matter while being slowly forced out of the city.

Gainesville has been increasing the density of housing around the university and it seems to be pretty great to me. Until a few years ago it seemed inevitable that there would be ever increasing sprawl and student traffic, but now a lot more students can live in walking distance.

We should probably replace the minimum wage with a wage subsidy.

With the recent discussions of hiking the federal minimum wage, I came across a plan that might solve three MW-related problems:

  1. The MW is rarely enough to get by on.
  2. The MW eliminates (from the regulated market at least) all positions that create less value than the MW. Do you have a great idea for a job that someone might happily do for $7.00/hour? Sorry, that job can’t exist legally.
  3. Inexperienced workers or those with criminal records present more risks to employers, and the MW makes it impossible to offset that risk by reducing the starting wage a bit. This makes it hard for these folks to get a foot in the door.

Because of problem 1 (and because we make a value judgment on the individual and project that value onto our expectations of wages), we tend to only push the MW up, which just exacerbates problems 2 and 3. Then we paper over those failures by paying the unemployed to remain idle, which is bad for their health, their skills, and their community’s productivity. So if there never were a MW, it would sure seem like a bad idea compared to Morgan Warstler’s plan of just having the government pay the difference between the market wage and what society feels individuals need to get by on ($280/wk in his outline).

A particular flavor of wage subsidy, this plan would set up a second labor market where qualifying employers (almost any small business) would have access to workers for as low as $40/wk—low enough to create almost infinite demand for labor—but these employees would take home at least $280/wk (the “Guaranteed Income”), with the government picking up the difference.

The exciting thing here is this could instantly produce almost full employment, giving workers lots of choice of jobs and forcing employers to compete for even low-wage workers in pay and work conditions. The evidence seems to suggest that Germany’s wage subsidies (in the form of shorter work weeks) allowed Germany to have one of the lowest unemployment rates of the OECD countries during the recession and it probably cost less than the equivalent unemployment benefits, too. It certainly reduced the extremely damaging effects that unemployment has on individuals and families.

Warstler also suggests having employees and employers use an eBay-like ratings platform to improve information flow (the value of employees, the conditions/benefits of jobs, bad behavior of parties) within the market. This seems like a good idea, and sites like Glassdoor show there’s demand for it at the higher end of the payscale, but I have some doubts that it will make such a huge difference; I think it will still be weird and a bit dangerous to your working relationship to publicly rate your boss. Anyway, I don’t see why we can’t roll this out independently of GI.

Ultimately I think this plan—and all the other wage subsidy schemes—sound much better for workers than the current “if-you-can-find-work-at” minimum wage system, which seems as hopelessly flawed as every other attempt to artificially dictate prices.

A few other concerns with the plan:

  • Not all employers qualify for GI workers and I think the question of which can/can’t will be difficult to pin down. E.g. If I hire my neighbor to do all my chores and vice versa, we each end up pocketing $240/wk in subsidies. Rooting out these schemes would be tough. Warstler seems to think we don’t necessarily need to and that we might get valuable information from seeing how these pan out.
  • GI employers get workers for significantly less than non-GI employers, and I wonder what kind of market distortions that would create. The answer may be none.
  • The transition into GI could be chaotic, as overnight there’d be countless jobs to choose from and non-GI employers would have to react to this serious competition. We just have no idea what kind of jobs people will come up with, but every additional job would seem to improve the situation for workers.
  • How do GI workers get stable healthcare? Do they get access to a group plan? This could cause problems for workers wishing to move between the GI/non-GI markets.

If we’re stuck with a minimum wage, it would seem best to keep it as low as possible and boost/widen availability of tax credits like the EITC. Essentially this also works as a wage subsidy if by another name.

And can we just get rid of the awful “tipping” system/reduced wage for food workers, as if they’re for some reason especially deserving of having every night’s pay be at the whim of customers and dozens of other elements out of their control.

Capitalism has failed as a brand

The word needs to be retired. It gets evoked by some to mean a type of dog eat dog libertarianism and by others as a shorthand for the abuses of corporations and unjust outcomes of markets.

I see the idea as the simple preference that people be free to participate in voluntary markets, not be forced into labor, and be allowed to own property and build wealth. This is real basic stuff that almost everyone agrees on because history showed all the competing ideas led to mass poverty and starvation.

The real important questions of today are how a government deals with the fact that people don’t live in bubbles, they don’t agree on things, they can become physically or mentally ill, they can misbehave under the influence of substances, they can make poor decisions and have bad luck, they take advantage of others, they can use their wealth to buy advantages and monopolies, and they can be born into bad situations by no fault of their own.

Destroying the Venezuelan Economy

It’s sad to watch Venezuela’s economy being crushed by its president, Nicolás Maduro. Venezuela’s real inflation is 280% a year, but the government is trying to deny that by imposing price ceilings and artificially limiting access to foreign currency. The result is massive shortages made even worse by the fact that it’s more profitable to smuggle the rationed goods back out of the country.

But the scariest is that Maduro recently ordered a military-backed looting of one of its big box chains. Those stores certainly won’t be able to re-stock at the government-set prices, so basically Maduro just directly destroyed that business, and all other retailers know they could be next.

Normally this inflation would make Venezuela’s products and labor force more competitive and spur foreign investment to stabilize the economy, but the Venezuelan government can no longer be trusted. If Maduro is re-elected, Venezuela will continue sinking towards a completely government-controlled state, like Cuba. But at least it will be easier to escape from.

Bad Analogies Lead to Bad Policies

I was forwarded an e-mail that made a terrible analogy (my emphasis):

Here’s another way to look at the Debt Ceiling: … You come home from work and find …  your home has sewage all the way up to your ceilings.

Sewage would make a home immediately uninhabitable and actively damage the value of the home and its contents. Your first clue that this analogy is a failure is to see that the U.S. debt doesn’t do this. During deficits we’ve had great periods of growing prosperity and people from all over want to come here.

Consider also the huge debt we incurred fighting WWII. If debt were like sewage, we would’ve done more to stay out of the war, or the resulting debt would’ve led us to ruins by the 50s. Instead, high employment (fueled by deficit spending) left us with a strong economy able to quickly pay back that debt while prospering.

U.S. debt is–not coincidentally–more like a credit card. Yes, we’d prefer not to need one, and we must keeping paying on it, but besides the payment, it incurs no other short term liabilities, and no one is demanding we pay it off tomorrow, next year, or in our lifetimes. And unlike most consumers, the U.S. is known to be the most trustworthy borrower in the world, so creditors treat us well, never hitting us with surprise fees (i.e. it doesn’t have the risk associated with a consumer credit card), and in fact they’re willing to loan to us right now at almost no interest on current purchases. (We’ll come back to that.)

We know that credit is helpful during emergencies, regardless of your debt level. If sewage were flooding your home and you had only a credit card to pay with, you’d still call the plumber and charge it.

Back in the real world, a more apt metaphor for flooding in your home is our high unemployment. It is actively damaging human capital as people lose their skills, homes, and families from financial stress. And this damage is not limited to those directly affected. Being unemployed for long is known to reduce the wages you earn for the rest of your working life, which reduces the taxes you can pay, and your productivity, and this makes the country’s long term revenue & growth problems even worse.

The good news is that the waste water is receding. The bad news is that it’s receding slowly, while destroying the value of our nation’s workforce.

Even worse, irrational fears of deficits have distracted us from the real emergency. Politicians and hard money economists have convinced us to choose to accept damagingly high unemployment to avoid using the credit card, and–making the situation even more head-slappingly absurd–is that new purchases on our credit card accrue virtually no interest. We could borrow for almost nothing to help get people back to work doing real productive, useful things growing the economy, but instead we’re a madman yelling, “can’t use the credit card!”, while sewage floods in.

It’s unsurprising that this recovery is slow because it’s the only one in recent history where we’ve simultaneously slashed government spending (mainly at the state/local levels). While politicians complain about our out of control spending–mostly safety net spending that will recede after the recession–we’re fully suffering the effects of austerity, and just like the UK is finding out, it’s painful and ineffective.

I’ve been very much won over by the arguments and real evidence presented in support of Keynes. The hard money advocates have some compelling, ideologically pure arguments, but their models don’t seem to support what we see in the real world during recessions, and getting this wrong hurts millions of people, not just economists’ reputations. Krugman can be a annoyingly partisan hack, but even many right-leaning economists know he’s right on the economics and he regularly posts real data from the economy to prove it. And I’m certain most politicians secretly agree. Watch what happens when budget cuts are proposed in their area. Their argument becomes, “If we cut this (unnecessary) military project it will destroy the town.” And he’s right; government spending can be just as important as consumer spending in supporting an economy. Consumers without jobs can’t buy much and demand drives everything.

That doesn’t mean we should keep unnecessary projects, but at this time there are many useful tasks we should be hiring the unemployed to do. For many it was the jobs they were already doing before state budget cuts–like teaching and policing. This is the absolute best time to bail out state governments and to take up needed infrastructure projects that will have to be done eventually.

Very sadly, neither party will be making the race about the urgency of high unemployment, perhaps because it’s out of sight for them and the unemployed don’t fund SuperPACs. At the very least Obama has tried to pursue legislation like 2011’s American Jobs Act (killed by Republicans).

And despite all the hand-wringing about debt, neither presidential candidate is proposing serious plans to address it. Romney’s tax and growth plans are just fantasy and Obama’s don’t raise enough money to do much.

And if this post isn’t depressing enough, maybe David Frum will work for you.

Honduras Might Try Charter Cities

From the Charter Cities blog:

The government in Honduras is convinced that a charter city could be the safe playing field, with new rules, where Hondurans of all backgrounds can come together and put their skills to work with the financial resources, expertise, and technology available in the rest of the world.

I first read about charter cities last June, and I still see it as an incredibly important idea. Some of the best criticism of the idea I’ve read is from Ranil Dissanayake on the Aid Thoughts blog. This quote (from here) seems to sum up his argument:

Romer’s approach is wrong not because he thinks rules are important or that countries should invite rich Governments to enforce them, but because Romer thinks he already knows the rules, and that they can be imported anywhere. That’s not how it works. In a recent post I pointed out how different rich countries are from each other. That’s partly because their rules, evolved over hundreds of years in some cases, are specific to each of their own contexts. Romer doesn’t see this. He just sees the rules of today, and imagines that they can be peeled off a society and pulled over a new one, like a one size fits all t-shirt.

Firstly, I’ve yet to read that Romer thinks he “already knows the rules”, especially down to the details. From the early mention of the Honduras experiment, it seems unlikely that Romer, the Charter Cities organization, or foreign governments will be deciding all the rules. Secondly, some rules are much more important for success. E.g., Dissanayake mentions the variance in rape law between the U.S. and France, but these differences have little influence on economic progress (Koreans once all had similar, if not identical, cultural laws and norms, but changes in those aren’t what held North Koreans back), and immigrants in both countries easily accommodate either law. There are large chunks of the “rules” that could be left up to the host country or designed around the culture of the populations most likely to migrate there.

Also I think the incentives are right for allowing cultural enclaves some variance in their social laws if it reduces ethnic tension, since this would be destructive to land value (reducing the rents the host country can collect), to productivity (making investors unhappy), and to the credit of the organizations making the rules.

In short I think Dissanayake significantly underestimates the willingness/ability of people in poverty—and willing to move to escape it—to accept culturally different rules. I think in richer countries we’ve come to see cultural rules as so important because we can afford to.

Since I didn’t post it before, here’s the TED talk (19 min) on charter cities from 2009:

Kristof on Haiti & Trade

I can’t agree more.

Ultimately what Haiti most needs isn’t so much aid, but trade. Aid accounts for half of Haiti’s economy, and remittances for another quarter — and that’s a path to nowhere.

The United States has approved trade preferences that have already created 6,000 jobs in the garment sector in Haiti, and several big South Korean companies are now planning to open their own factories, creating perhaps another 130,000 jobs.

“Sweatshops,” Americans may be thinking. “Jobs,” Haitians are thinking, and nothing would be more transformative for the country.

Let’s send in doctors to save people from cholera. Let’s send in aid workers to build sustainable sanitation and water systems to help people help themselves. Let’s help educate Haitian children and improve the port so that it can become an exporter. But, above all, let’s send in business investors to create jobs.

Otherwise, there will always be more needs, more crises, more tragedies, more victims. Back in the cholera treatment center here in Mirebalais, health workers were still disinfecting the bed on which Mr. Merilus had died when, in the tent next door for milder cases, a middle-aged woman suddenly collapsed.

Nurses splashed water on her face but could not revive her. So they rushed her to the main cholera hospital tent to take the newly vacant bed there.

And that is the brutal cycle of poverty in Haiti that only jobs and trade can break.

“Buy American”

When economies are struggling, protectionism seems well-intentioned: By “buying American” we can go back that golden fantasy age when everything was American-made and everyone had a decent-paying job and could afford the latest luxuries. I have some examples that I hope can convince you that freer trade benefits everyone. It’s not completely intuitive; we commonly think that one person is always screwed in a deal; if it’s good for [insert foreign country], it must be bad for America. Continue reading