Christina Romer on Face the Nation

Bob Schieffer spoke with Chair of the Council Of Economic Advisors Christina Romer about whether the bailout and stimulus will be effective in repairing the economy.

Watch CBS Videos Online

(HT: Greg Mankiw)

China, the dollar, and trade

In an article in the New York Times Greg Mankiw says It's No Time for Protectionism. And he is right.

Mankiw writes

Just before his confirmation as Treasury secretary, Timothy F. Geithner turned up the heat on the Chinese regarding the dollar-yuan exchange rate. President Obama, he said, “believes that China is manipulating its currency. Countries like China cannot continue to get a free pass for undermining fair-trade principles.”

Like many economists, I cringe whenever I hear the term “fair trade.” It is not that I am against fairness — who is? — but the word “fair” is so amorphous in this context as to defy definition. Most often, the slogan “fair trade” is little more than a rallying cry for protectionism.

On the question of China manipulating its currency Mankiw asks

But timing aside, is Mr. Geithner right about the currency question? Are Americans hurt by China’s exchange-rate policy?

And the answer is, of course, yes and no. Mankiw writes

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy.

So, some exporters and import substitution industries will face hard times, but consumers face cheaper prices. Mankiw continues

Mr. Geithner and other China critics might also want to ponder how the Chinese keep the yuan undervalued. The essence of the policy is supplying yuan and demanding dollars on foreign-exchange markets. The dollars that China accumulates in these transactions are then invested in United States Treasury securities.

So when the Treasury secretary complains about the undervalued yuan, his message to the Chinese boils down to this: Stop lending us money.

Not surprisingly, after Mr. Geithner made his remarks about the Chinese currency, the prices of Treasuries fell and yields rose. If China took him seriously, long-term interest rates would rise even more. As the United States embarks on a path of unusually large budget deficits, the nation’s chief financial officer should pause and think carefully before turning up the heat on one of its biggest creditors.

Also it is not clear why the US is rising this issue now. In the overall scheme of things it isn't that important right now. Mankiw quotes Olivier Blanchard, the chief economist of the International Monetary Fund, as saying

“It is probably not the right time to focus on the Chinese exchange rate, given that it is not a central element of the world crisis. There are many other things we should be thinking about.”

And Blanchard has a point. But directing the world's attention to the China currency issue amid a worldwide recession and growing fears of depression is unfortunately more than just a distraction. As Mankiw says "It is downright counterproductive". He adds

Senators Charles E. Schumer, Democrat of New York, and Lindsey Graham, Republican of South Carolina, have long proposed dealing with the yuan undervaluation by imposing tariffs on Chinese imports. The Treasury secretary’s comments risk stoking those protectionist embers.

Indeed, protectionist influences seem to be finding their way into the stimulus bill winding its way through Congress. The bill passed by the House included a provision banning the use of foreign iron and steel in infrastructure projects. The Senate has adopted a somewhat more flexible restriction (after voting down an amendment by John McCain to strip the “Buy American” provision from the bill).

But perhaps the worst thing is that as Maniw notes the president isn't taking a strong stand against protectionism.

Despite having hired many first-rate economists with impeccable free-trade credentials, the president has been only tepid in his public opposition to this creeping protectionism.

This really is one issue at one time where the worlds needs strong leadership from the US. President Obama has to kill these protectionist moves within the US stone dead. The world will not thank him for beginning a new round of trade wars.

Libertarian ideas to stimulate the economy

At cnn.com, Jeffrey A. Miron has some Libertarian ideas to stimulate economy. Is that an oxymoron?

Jeffrey A. Miron, senior lecturer in economics at Harvard University, seems to want to do what in some ways seems the impossible, and come up with a libertarian stimulus package. Miron starts by saying

[...], libertarians do not argue for doing nothing; rather, they advocate eliminating or adjusting policies that are bad for the economy independent of the recession.

But if these policies are to be advocated for independently of the recession, are they a "stimulus package"? Aren't the measures put forward by other groups in terms of a stimulus package special because they are not measures they would, in normal times, be suggesting? Don't libertarians advocate eliminating or adjusting policies that are bad for the economy at all times and thus they would add nothing in terms of extra policy measures to deal with the current situation? Wouldn't many libertarians in fact argue that governments doing nothing is the correct policy response to the current crisis?

Miron puts forward the following as a stimulus package that he thinks libertarians can endorse.

Repeal the Corporate Income Tax: Repeal would spur investment, improve the transparency of corporate accounting, slash compliance costs, and avoid the distortions caused by the special-interest provisions in the tax code. Repeal can work fast, by raising companies' share prices, increasing cash flow, and allowing corporations to lessen their need for bank lending.

Yes, but most libertarians (and some non-libertarians) would argue for this independently of the crisis, so its not really a stimulus, or entirely a libertarian, measure.

Increase Carbon Taxes While Lowering Marginal Tax Rates: Reasonable people disagree about how much the U.S. should reduce its use of fossil fuels, but crowded highways, air pollution, and global warming all suggest that some reduction is desirable.

This is a very mainstream, non-libertarian, measure. Greg Mankiw, for example, has been pushing this for a long while. Also such advocacy is independent of any stimulus package.

Moderate the Growth of Entitlements: The elephant in the room amidst the stimulus debate is the impending imbalance in Social Security and Medicare as the baby boom generation moves into retirement. Without reductions in benefits, taxes will have to increase substantially, generating a major drag on the U.S. economy.

But wouldn't the libertarian position be that programs like Social Security should be removed completely and private systems be used instead? But again, wouldn't libertarians argue for this independently of the crisis, so its not really a stimulus measure?

Eliminate Wasteful Spending: Most discussion of the stimulus focuses on areas where, according to proponents, government spending should be higher. Much current expenditure, however, is wasteful.

A mainstream looking move. Many non-libertarians would also argue for this, and they would do so independently of the crisis.

Withdraw from Iraq and Afghanistan

Again many non-libertarians would support and advocate this, and do so independently of the current situation.

Limit Union Power: [...] Laws that protect unions are problematic. Unions raise wages above market levels, increasing unemployment. Thus the Obama administration can signal American business that it cares about efficiency, not just redistribution of wealth, by opposing the card check bill. Better yet, it can repeal the Davis-Bacon Act, which inflates labor costs in federal contracts.

Nothing libertarian, per sec, about this move. A number of different groups of non-libertarians would argue for it, independently of any stimulus package.

Renew the U.S. Commitment to Free Trade: One crucial danger in the current environment is that the U.S. and other countries will embrace protectionist policies. The U.S. enacted prohibitive tariffs during the Great Depression, and many trading partners retaliated. World trade plummeted, contributing to the economic misery.

I have pointed out a number of non-libertarians who argue against protectionism recently, so not really a libertarian policy as such. Also protectionism being bad is independent of the current situation.

Expand Legal Immigration

This would get a lot of non-libertarian support and again independently of a stimulus package.

Stop Bailing out Businesses that Took on Too Much Risk

This measure would also get a lot of non-libertarian support and this support would be independent of a stimulus package.

Miron ends by saying

The libertarian view, then, is that many desirable policy changes involve less government, not more. Even changes that are inconsistent with the Keynesian stimulus framework, such as reductions in military spending, make sense when the spending is wasteful.

It is tempting to believe that every problem has a solution, but the reality is not so nice. It is possible, even likely, that the best we can do is fix things we know how to fix, and then get out of the way. This may not ameliorate the current situation, but it avoids making things worse. In economics as in medicine -- first, do no harm.

While I think that Miron's ideas are good ones, what I don't see is how they are definitively libertarian, as opposed to, say, just good economics. The measures Miron suggests would get, I think, a lot of support from non-libertarians and thus I don't see anything libertarian, as such, about these ideas. Also, even if we accept Miron's list as libertarian, these ideas would be argued for even without the current crisis and thus I'm not sure they really are, therefore, a stimulus package, rather than a general libertarian wish list. I also wonder if other libertarians would think them too mainstream and not radical enough and so not truly libertarian at all.

Interesting blog bits

1. Peter Boettke on Some Basic Economics of Public Policy.
2. Eamonn Butler on Bailing out the [UK] carmakers will take us back to the 1970s.
3. Russell Roberts asks What can we learn from Japan?
4. Greg Mankiw on The Mature Keynesian Perspective.
5. Greg Mankiw on The Mature Keynesian Perspective II.
6. Arnold Kling's Morning Reading.

Malkiel on buy american

Burton G. Malkiel, a professor of economics at Princeton University and the author of "A Random Walk Down Wall Street" has a piece in the Wall Street Journal on Congress Wants a Trade War. Malkiel argues that "The president should veto "Buy American" if he doesn't want to be remembered like Herbert Hoover". He goes on to write

This Buy American momentum is bad economics, and by threatening to destabilize trade and capital flows, it risks turning a global recession into a 1930s-style depression. Asked about Buy American on Tuesday, President Barack Obama told Fox News that "we can't send a protectionist message." He said on ABC News that he doesn't want anything in the stimulus bill that is "going to trigger a trade war." He's right

Those comments by Obama are good news, but will he walk the talk? Malkiel continues

Suppose that we did not allow free trade between the 50 American states. Citizens like me in New Jersey would be far worse off if we could not buy pineapples from Hawaii, wine and vegetables from California, wheat from Kansas, and oil from Texas and Louisiana while we sell pharmaceuticals to the rest of the country. The specialization that trade makes possible allows all of us to live better.

The situation is the same with respect to world trade. Both we and the Chinese are better off if we can import inexpensive clothing from China and sell them large-scale computers and data storage equipment.

But not everyone is better-off because of trade and this is where politics comes in.

To be sure, such trade does not make everyone better off, and that is why free trade is often a tough sell, especially during times of hardship.

If I am a textile worker whose job is lost because Chinese imports have caused my factory to close, I feel the pain far more acutely than consumers feel the benefits of cheap clothing. The pain tends to be localized while the benefits are spread broadly. No one person's benefit can compare with the loss felt by the textile worker. But the total benefits do exceed the costs. And competitive markets have spurred the innovation revolution that has made the U.S. the economic powerhouse that it is.

The solution for the displaced worker is job retraining and adjustment assistance, and to improve the safety net available to displaced workers during the transition period. We also need to revamp our educational system so that it prepares workers for the jobs that are available today -- and imparts the flexible skills that make our citizens ready for the future jobs that we cannot even imagine.

Because total benefits exceed the costs you can compensate the losers from trade and still make people better-off. The protectionist approach to these job losses via mechanisms like Buy American

[...] invite retaliation by other nations, and the spread of "beggar thy neighbor" policies throughout the world.

This House provision caused a palpable anxiety during the recent World Economic Forum at Davos, and America's closest allies are furious. "Buy American" would effectively ban Canadian steel products and other raw materials from infrastructure projects receiving stimulus funds. Foreign steel would only be allowed if domestic products were either unavailable or drove up the cost of the project by 25% or more. If the provision is not diluted, Mr. Obama will find a very hostile reception during his first international trip to Canada later this month.

Hostility has been no less evident in Europe and China. The European Union has said that it will not stand by idly if the U.S. violates its trade agreements and its obligations to the World Trade Organization. The risks of retaliation and a trade war are very real.

And the upshot of this would be bad for the US, and the rest of the world.

Since the U.S. is the biggest exporter in the world, retaliation could cost America more jobs than the provision would create. It could also destabilize the global capital flows on which the U.S. depends to fund its deficits. Moreover, the provision could delay some shovel-ready infrastructure projects, since sufficient American-made materials may not be immediately available. The U.S. does not manufacture enough steel to meet domestic demand.

Malkiel ends in article by noting

Buy American provisions and other forms of protectionism will destroy jobs, not create them. They are an irresponsible and self-defeating response to a downturn in world economic activity. Beggar-thy-neighbor policies create more beggars and hostile neighbors. Let's hope that President Obama presses his Democratic colleagues in Congress to listen to him, and to British Prime Minister and Labour Party head Gordon Brown. As Mr. Brown put it at Davos, "Protectionism protects nobody, least of all the poor.

I find it hard to believe that Obama's economic advisers haven't already pointed all this out to him. So why hasn't he come out and said that the Buy American idea is wrong and protectionism won't help the US economy? The most obvious answer is that he is playing politics, power and votes are more important than the economy, and many people, not just in the US, will suffer if this is true.

Stimulis

From Reason.tv:

(HT: Will Wilkinson)

Interview of Robert Barro

Over at the Atlantic magazine's website is an interview of Harvard macro economist Robert Barro by Conor Clarke. They talk about the stimulus bill, fiscal policy, and related issues in macroeconomics.

This bit is fun:

Do you read Paul Krugman's blog?

Just when he writes nasty individual comments that people forward.

Oh, well he wrote a series of posts saying he thought the World War II spending evidence was not good, for a variety of reasons, but I guess...

He said elsewhere that it was good and that it was what got us out of the depression. He just says whatever is convenient for his political argument. He doesn't behave like an economist. And the guy has never done any work in Keynesian macroeconomics, which I actually did. He has never even done any work on that. His work is in trade stuff. He did excellent work, but it has nothing to do with what he's writing about.

Greg Mankiw: my preferred fiscal stimulus

Over at his blog Greg Mankiw outlines his preferred fiscal stimulus:

Regular readers of this blog have a pretty good sense of my policy preferences. But for those occasional readers who might be stopping by, let me reiterate what I would do right now if I were the fiscal king.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. This provision would essentially be giving governors the temporary authority to impose a payroll tax on his or her citizens, collected via the federal tax system. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters. It is called federalism.

Any further federal spending projects should be evaluated on the basis of cost-benefit analysis. That analysis would take time, but it would ensure that the projects are not a waste of taxpayer dollars.

Some traditional Keynesians would object that government spending has a larger multiplier than tax cuts. Even though that is the prediction of standard Keynesian models, the evidence is not completely consistent with that conclusion, as I have discussed here in previous posts. In addition, given the lags inherent in large spending projects, and the risks inherent in hasty spending at the federal level, the case for taxes over spending as the fiscal instrument of choice is compelling. To me, at least.

None of this should be viewed as a substitute for fixing the banking system and trying to come up with a better process for homeowners and banks to work out mortgage loans in default. Housing and finance are the real sources of the macro problem. Any fiscal stimulus, such as the one I propose above, is only an attempt to mitigate the symptoms. Those symptoms are severe, so mitigation is fully appropriate. But fiscal policy is not a panacea for what now ails the economy.

This last paragraph is important. Fiscal stimulus will not fix what is wrong with the economy. It may help with some of the symptoms but much greater reform is needed if we are to deal with the actual causes of the current crisis.

Some numbers on buy American

This Policy Brief (pdf) from the Peterson Institute for International Economics looks at the number of jobs that the Buy America campaign will create in the US steel industry.

The Policy Brief estimates that the additional US steel production fostered by the Buy American provisions in the the US House of Representatives Bill will amount to around 0.5 million metric tons. This in turn translates into a gain in steel industry employment equal to roughly 1,000 jobs. I guess the good news from that is that only 1000 jobs will be lost elsewhere in the US economy.

The reason the job impact is small because steel is very capital intensive and thus not many workers are needed in steel production. In fact, only around 150,000 workers - out of a total US workforce of around 140 million - are employed in the US steel industry as a whole.

The draft bill before the US Senate stipulates that, in addition to steel and iron, all manufactured goods used in projects financed by the stimulus plan must be produced in the United States. In this case the Policy Brief estimates that Buy American requirements will create a job gain of roughly 9,000 jobs. At this point you should note that given the size of the US labour force, as a percentage, the numbers being talked about are very small.

The Policy Brief goes on to say

In response to the Buy American measures, other countries would likely choose to echo US legislation by further restricting the ability of foreign firms to bid on public contracts. Such action—applied to lucrative new projects covered by their own stimulus programs—would raise additional barriers to US manufactured exports.

[...]

Moreover, foreign countries might extend their retaliation list to other US manufactured goods, especially if the Senate version of Buy American provision becomes law, since it covers all manufactured goods. In particular, foreign countries might cut off purchases of US products for public projects.

To deal with this possibility the authors of the Brief identified 12 major US trading partners and looked at government procurement spending in each of those countries as a percent of GDP. Applying that proportion to US exports of goods and services to each country, they estimate what share of those countries’ direct and indirect imports of US goods and services are the result of government procurement. The total value is around $104 billion. In their view, at least a small share of those exports are "at risk" of echo or retaliation measures. But even if as little as 1 percent of those exports were in fact lost by echo or retaliation behaviour, the resulting employment loss in the United States would be around 6,500 jobs. In an extreme case that 10 percent of those exports are lost, as many as 65,000 jobs could be lost.

The Brief summaries their results so far as

The negative job impact of foreign retaliation against Buy American provisions could easily outweigh the positive effect of the measures on jobs in the US iron and steel sector and other industries. The difference is that jobs lost would be spread across the entire manufacturing sector, while jobs gained would be concentrated in iron and steel and a few other industries.

Over the longer term, of course, the US economy will adjust and new jobs will be created so that the overall effect on the number of jobs will be zero. But if you take the above results as an indicator of the short term effects of Buy America, they don't look good. What is clear is that the US, and the world, will be poorer as a result of such protectionist measures.

But the Policy Brief goes further. It points out that with a Buy American requirement, the prices charged to public agencies would likely be higher for US iron and steel and other manufactured products. Higher prices would mean that fewer roads and schools could be built with the stimulus money. Of course such higher prices will also hurt steel using export industries such as heavy machinery. On the other hand, prices might fall for foreign steel sold by countries where the steel industry depends on exports to the United States, such as Mexico and Canada. And effect of this could be that private US buyers might in turn switch their purchases to those foreign producers. Depending on the size of the switch, the jobs created by the Buy American provisions in the short term could be significantly reduced by a loss of sales to private business in the United States.

None of this makes Buy American look any better.

From the only in the USSR file

Tyler Cowen at Marginal Revolution has this piece on, of all things, the market in burnt out light bulbs.

For most of us, it is hard to fathom the rationale for a market in burnt-out light bulbs. But in the scarcity-driven Soviet economy, the market was entirely reasonable. Light bulbs were rarely available to individual consumers, but were obtainable for state-sponsored activities. Thus, it would be difficult to purchase a light bulb for a new lamp in one's home, while burnt-out bulbs in state-run offices or factories were routinely replaced. So if someone purchased a new lamp and needed a bulb, he would buy a used light bulb for a small fee and replace a functioning bulb at work with the dud. He would then take the functioning bulb home for the new lamp, while the burnt-out bulb at the office/factory would be replaced with a new functioning bulb. Meanwhile, the maintenance person at the office/factory would take the used bulb and sell it on the used light bulb market.

There really are markets in everything!!!

Yes we can ... (updated)

Willem Buiter tells us, over at FT.com, that YES WE CAN!! have a global depression if we really continue to work at it... Buiter writes

I used to be optimistic about the capacity of our political leaders and central bankers to avoid the policy mistakes that could turn the current global recession into a deep and lasting global depression. Now I’m not so sure.

I don't think anyone is that sure anymore. He continues

I used to believe that the unavoidable protectionist and mercantilist rhetoric would not be matched by protectionist and mercantilist deeds. Protectionism was one of the factors that turned a US financial crisis into a global depression in the 1930s. Protectionism imposes large-scale structural sectoral dislocation, as exporters are ejected from their foreign markets and domestic producers that depend on cheap imported imports suddenly find themselves to no longer be competitive, on top of the global effective demand failure we are already suffering from.

Unfortunately when we look at recent moves in the US, the rhetoric looks like it is being matched by deeds. Buiter goes on to say

I used to believe that our fiscal policy makers would, when faced with a combination of national and global disaster, manage to come up with a set of national fiscal packages that would be modulated according to national fiscal spare capacity and that would be designed not only to boost domestic and global demand but also to eliminate or at any rate reduce the underlying global imbalances that are an important part of the story of this global crisis. Instead we find the US engaged in fiscal policies that will aggravate the underlying global imbalances.

On the issue of protectionism Buiter explains

The odious US House of Representatives has tagged a Buy American clause onto the Obama administration’s $819 bn (or more) fiscal stimulus bill. If this were to become law, US federal spending would, wherever possible, be restricted to goods and services produced by US companies. The main promotor of this act of global economic vandalism was the US steel industry, but other import-competing industries have lobbied also. It is quite likely that the Buy American net will be cast even more widely when the Senate gets its turn at the fiscal stimulus act.

There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world. The response of the assembled non-US finance ministers in Davos made this clear. Retaliation from the EU countries and the rest of the world would follow swiftly. Because this disastrous US Congressional actions follows so closely on Treasury Secretary Geithner’s declaration that China is manipulating its currency, it is essential that the Obama administration draw a clear line in the sand. If anything like the Buy American clause inserted by the House survives in the bill president Obama gets on his desk, he must veto it. The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause. If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House. If such is the case, God help us all.

A wuss would be my guess.

I have not covered all of his section on protectionism and I have missed out his sections on monetary and fiscal policy, so read the the whole article. It is provocative, to say the least.

But Buiter's conclusion?

We can go down in history as the generation that created the Great Depression of the Noughties. Just keep on beating the protectionist drums. Keep on the footdragging that prevents effective qualitative and quantitative monetary policy easing in the Eurozone and the UK. And go ahead with unsustainable fiscal stimuli in the US, the UK and elsewhere that will spook markets, push up long-term interest rates and raise the spectre of sovereign default by countries not belonging to the group of usual suspects. Yes we can! I hope we won’t.

Update: The Inquiring Mind comments on the Buiter column here and also discusses a Economist article on The return of economic nationalism.

You know you have hyperinflation when ......

.... you can cut 12 zeros off your banknotes.

This report from the BBC says that Zimbabwe is revaluing its dollar again, removing twelve zeros from the currency with immediate effect. Just last year, the central bank was forced to take 10 zeros from the local unit in an effort to make the currency more manageable, but the zeros returned within a few months. And the 12 just removed will also return within a few months.

Life at Wal-Mart

Eric Crampton point me to a posting at Boing Boing where Charles Platt blogs on Life at Wal-Mart. Platt went from being a senior writer at Wired magazine to an entry-level position at Wal-Mart. Are things at Wal-Mart really as bad as some people say? Platt writes

It started when I read Nickel and Dimed, in which Atlantic contributor Barbara Ehrenreich denounces the exploitation of minimum-wage workers in America. Somehow her book didn’t ring true to me, and I wondered to what extent a preconceived agenda might have biased her reporting. Hence my application for a job at the nearest Wal-Mart.

He goes on

The job was as dull as I expected, but I was stunned to discover how benign the workplace turned out to be. My supervisor was friendly, decent, and treated me as an equal. Wal-Mart allowed a liberal dress code. The company explained precisely what it expected from its employees, and adhered to this policy in every detail. I was unfailingly reminded to take paid rest breaks, and was also encouraged to take fully paid time, whenever I felt like it, to study topics such as job safety and customer relations via a series of well-produced interactive courses on computers in a room at the back of the store. Each successfully completed course added an increment to my hourly wage, a policy which Barbara Ehrenreich somehow forgot to mention in her book.

My standard equipment included a handheld bar-code scanner which revealed the in-store stock and nearest warehouse stock of every item on the shelves, and its profit margin. At the branch where I worked, all the lowest-level employees were allowed this information and were encouraged to make individual decisions about inventory. One of the secrets to Wal-Mart’s success is that it delegates many judgment calls to the sales-floor level, where employees know first-hand what sells, what doesn’t, and (most important) what customers are asking for.

Several of my co-workers had relocated from other areas, where they had worked at other Wal-Marts. They wanted more of the same. Everyone agreed that Wal-Mart was preferable to the local Target, where the hourly pay was lower and workers were said to be treated with less respect (an opinion which I was unable to verify). Most of all, my coworkers wanted to avoid those “mom-and-pop” stores beloved by social commentators where, I was told, employees had to deal with quixotic management policies, while lacking the opportunities for promotion that exist in a large corporation.

Of course, I was not well paid, but Wal-Mart is hardly unique in paying a low hourly rate to entry-level retail staff. The answer to this problem seems elusive to Barbara Ehrenreich, yet is obvious to any teenager who enrolls in a vocational institute. In a labor market, employees are valued partly according to their abilities. To earn a higher hourly rate, you need to acquire some relevant skills.

So life at Wal-Mart may not be as bad as some would have us believe.

EconTalk this week

John Cochrane, of the University of Chicago, talks with EconTalk host Russ Roberts about the financial crisis. He talks about the origins of the crisis, why the Troubled Assets Relief Program (TARP) was flawed from the beginning, why mark-to-market accounting isn't the cause of the problem, argues for letting banks fail, and makes the case against the large increases in government spending.

Government and the great depression

Harold L. Cole, professor of economics at the University of Pennsylvania, and Lee E. Ohanian, professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA, have an opinion piece in the Wall Street Journal on How Government Prolonged the Depression.

Cole and Ohanian open by saying

The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.

They ask the question

Why wasn't the Depression followed by a vigorous recovery, like every other cycle?

Their answer

It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.

So what stopped a blockbuster recovery from ever starting? The New Deal.

They go on to say

The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.

The lessons from all of this?

The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.

They end by explaining

President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.

Irwin on buy american (updated x2)

I quoted trade economist Douglas Irwin in a previous posting on the dangers of protectionism. Now I see that Irwin has an article in the New York Times pointing out the obvious that: If We Buy American, No One Else Will. Let me add, exactly the same could be said about New Zealand, which is buy New Zealand campaigns are so stupid. Irwin writes

WORLD trade is collapsing. The United States trade deficit dropped sharply in November as imports from the rest of the world plummeted in response to the financial crisis and global recession. United States imports from China, Japan and elsewhere declined at double digit rates. The last thing the world economy needs is for governments to give a further downward shove to trade. Unfortunately, we may be doing just that.

Steel industry lobbyists seem to have persuaded the House to insert a “Buy American” provision in the stimulus bill it passed last week. This provision requires that preference be given to domestic steel producers in building contracts and other spending. The House bill also requires that the uniforms and other textiles used by the Transportation Security Administration be produced in the United States, and the Senate may broaden such provisions to include many other products.

That might sound reasonable, but history has shown that Buy American provisions can raise the cost and diminish the effect of a spending package.

Irwin ends his piece by reminding us that

When the United States imposed the Smoot-Hawley Tariff in 1930, it helped set off a worldwide movement toward higher tariffs. When everyone tried to restrict imports, the combined effect was a deeper global economic slump. It took decades to undo the accumulated trade restrictions of that period. Let’s not make the same mistake again.

Let's not. And not just the US but all countries, including New Zealand, have to make sure that protectionist moves are beaten back.

Update: On the world trade is collapsing front John Macilree's Weblog reports that

On 29 January 2009 the International Air Transport Association (IATA) reported that December 2008 saw a massive 22.6% drop in air cargo movement compared with the same period in 2007.

The regional numbers indicate that the sharp drop is global. Although the drop in the Middle East and Africa was smaller, the hardest hit region was Asia/Pacific with a 26% drop.

He also reports that the rate for shipping a container from Asia to Europe by sea has dropped to zero. This is in response to a massive decline in exports out of North-East Asia.

All this can't be a good sign.

Update 2: Nobel Prize wining economist Gary Becker writes on Buy American Once Again. Becker opens his piece by saying

Every recession, including those milder than the current recession, leads to pressure to reduce spending on foreign goods by raising tariffs and other import restrictions. The avowed goal is to help domestic workers and businesses that are going through difficult times. Hostility to imports when unemployment is high and rising is surely understandable. Nevertheless, it is unwise to engage in seriously restrictive international trade policies even during a serious recession.

and closes it by explaining

One major reason why trade restrictions and other government "stimulus" programs may be politically attractive during a recession is that identifiable groups benefit, such as the steel industry, or the recipients of the government stimulus spending. By contrast, the harm to workers in export industries who suffer because of the indirect effects of trade restrictions on exports, or the harm to workers in industries that are crowded out by government spending, is remote and not so apparent.

Too true.

Bad, just plain bad ..... (updated)

Just when you thought the idea of a stimulus package couldn't get any worse, the following report comes from the Washington Post:

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.

A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods

[....]

U.S. industrial giants including Caterpillar, General Electric and the domestic aerospace industry are emerging as strong opponents. The measures, they argue, could violate trade deals the United States has signed in recent years, including an agreement on expanding access to government procurements reached through the World Trade Organization.

But most damaging, critics say, would be the "protectionist message" attached to imposing such barriers on foreign companies. Nations including China and many in Europe are preparing to spend billions of dollars of taxpayer money on stimulus projects. American companies are angling for a piece of those pies, and retaliatory measures against U.S. companies, executives argue, could significantly complicate those efforts. This week, a European Commission spokesman threatened countermeasures if the Buy American provisions are approved.

Just what the world needs now, a trade war :-( Apart from anything else, such measures will increase the cost of projects undertaken as part of the stimulus package. Also note that such protectionist measures don't affect the total number of jobs in the economy much. All they do is shift those jobs around. Some industries, iron and steel in the above example, gain jobs but other industries lose them, exporters for example. As trade economist Douglas Irwin puts it:

Since trade both creates and destroys jobs, a frequently asked question is whether trade has any effect on overall employment. Unfortunately, attempts to quantify the overall employment effect of trade are exercises in futility. This is because the impact of trade on the total number of jobs in an economy is best approximated as zero.

What such protectionist measures do do is make the country as a whole poorer.

We have to hope, along with Greg Mankiw, that "President Obama and his economists strongly oppose these first shots in a new trade war of protectionism." The Washington Post report says:

The administration has not addressed the issue publicly, and sources close to the issue said it appears that a response is still being formulated.

(HT: Greg Mankiw)

Update: The Inquiring Mind blog comments here and here and includes links to articles from the Times which look at the issue here and here.

Interesting blog bits

1. Karl Storchmann on How Reliable are Wine Judges? Not at all!
2. Declan McCullagh on For Many Economists, Stimulus Falls Flat.
3. Gavin Kennedy tells us Adam Smith is Innocent.
4. Greg Mankiw on Summers vs Obama.
5. Megan McArdle on Dissecting the stimulus debate.
6. Kiwiblog on RMA changes look positive. (I can't help thinking that the devil is in the detail, so we will have to wait and see.)

Headline I never thought I would see ...

Jeff Sachs is Right! by William Easterly.

Actually the full headline is "Jeff Sachs is Right! (at least about one thing)", but that's one more thing than I thought Bill Easterly would say Sachs is right about. The headline links to an article by Easterly called Leaders Go Left, But Economists Get Back To Basics on Forbes.com. Easterly writes:

The conventional view at Davos is that a previous consensus in favor of free enterprise has taken a huge beating from the Great Crash of 2008-2009. What is much less known is that many economists are not willing to play along.

Damn right we're not! Easterly continues:

Instead, the crisis seems to have scared many economists of all kinds--including some previously heterodox--to reassert the orthodox recommendations of Econ 101.

I knew something very different was going on among economists when the world's leading trade skeptic, Dani Rodrik of Harvard, the intellectual protector of protectionists, said on his blog on Dec. 31 that protectionism would be catastrophic right now.

A very diverse group of leading economists of all ideological stripes met at a preparatory conference for Davos in Dubai in November 2008. They said in a formal statement that one of their chief tasks is "advocating against the deregulation backlash." An update right before Davos by this same group stressed the importance of "openness to trade" and "competitive markets."

Then there's another school of thought that asks WWJD? What would Jeff do? Jeffrey Sachs has spent more than two decades calling for the U.S. government to spend huge sums on anything that moves, from Bolivia to Poland to Russia to global health to Africa to global warming. But on Wednesday, Jan. 28, as Davos opened, Sachs suddenly announced that he is now a U.S. deficit hawk.

"Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package."

He sounds like one of those IMF fiscal austerity priests issuing a stern reprimand to some benighted land--like those that prior to Wednesday he derided at every opportunity. But on today's deficit dangers at home, I had to agree with Jeff Sachs for the first time in over a decade.

After that statement, I think I need a wee lie down.

Economics: three insidious teachings

Philip Salter at the Adam Smith Institute blog refers us to this essay by the economist Anthony de Jasay. In his essay Anthony de Jasay sets out what he considers to be the three insidious mistakes that are taught to secondary school children in Europe. Only three? These mistakes are the distribution-independence, the worker-defence and the property "rights" theses. Salter notes

In regards to the distribution independence thesis, “high school textbooks teach that capitalism, leaving as it does the distribution of income to the free play (or, as some will say, the caprice) of the market, generates inequality. It goes without saying that inequality is bad both because it is "socially" unjust and because it reduces the aggregate "utility" derived from aggregate income.” This of course rests on the supposition that income is independent of its distribution, which is of course patently absurd.

The worker-defence thesis relies on the idea that employers would abuse workers if "workers' rights" were not defined, extended and bolstered by legislation. Of course, in truth the dominant effect of this legislation is to “create excess supply in the labour market by making employers shun the increased risk of hiring.” As a result the bargaining power of workers is weakened.

The property “rights” thesis is the idea that property is a social construction, granted by society (read government). In reality property is “generated by contracts and matched by the corresponding contractual obligations. Lending and borrowing, mortgages, leases, partnerships, insurance policies, options and other derivatives represent property "rights." They are derivatives of property, and are offset by the corresponding obligations of counter-parties as assets are offset by liabilities.” Thus, property is not the governments to give “rights” to.

de Jasay was inspired to write this essay because of the growing concerns expressed in German and French business circles about the type of economics taught in secondary schools. I have yet to hear of such concerns from business people here in New Zealand. Have I missed them? Do business people even know economics is taught in schools here? Or do they think that what is taught is right, or just irrelevant so they don't care?