Entries by Skeptic (576)


The fight to reform the banking system is over, and the bankers won.

That's Simon Johnson's conclusion here at Baseline Scenario, where he links to longer pieces he co-authored in the Daily Telegraph and Financial Times.


What’s the market alternative to this big government program?

In our zeal to get rid of Big Government, let's not throw any babies out with the bath water.  For example, as a result of government programs, each mile driven on US streets and highways is 85% less likely to cause your death now than it was in 1949, 80% less likely than in 1966, and half as likely as in 1989, according to unpublished data obtained from NHTSA.

graph of NHTSA data show US fatalities per 100 million vehicle miles traveled declined steadily from 7 in 1949 to 1 in 2010 This dramatic improvement has been driven by regulations and standards (seat belts, air bags, head restraints, infant seats, crash resistance, collapsible steering columns, rollover resistance, tire quality, drunk driving enforcement, etc.) and  by government spending on safer roadways. If there is a plausible explanation for how this might have been accomplished as efficiently (or at all) by market forces, I haven't heard it. Furthermore, the achievement came in spite of concurrent regulatory programs requiring better fuel economy (fuel consumption per vehicle mile traveled is down 40% from 1975) and vastly reduced per-mile pollution. Looks like a very big success to me. 

Government isn't the answer to every problem, but it isn't always the problem either, Ronald Reagan's rhetoric to the contrary notwithstanding. Let's try to get past the slogans and ideology and look at the merits of individual government programs--before we start them and when we consider ending or defunding them.


Most read Realitybase posts in March

The American Dream died in February 1973 (with graphs from multiple sources showing stagnation of inflation-adjusted middle class incomes since the 1970s after strong and steady post-WWII growth)

The Dysfunction and Corruption of Our Healthcare System, Its Damage to the National Economy and other Basic Healthcare Matters (Guest Post) (describing a system that is destroying the American business economy and our ability to compete globally, which violates fundamental insurance risk principles, and which has inherent conflicts of interest that prevent quality national health care delivery and cost efficiency, and proposing a solution)

The Citigroup Plutonomy Memos (with key quotations from documents that are being disappeared)

One chart refutes three myths about US foreign trade. (about Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade)

The history of US per-capita petroleum consumption will surprise you.  (A graph and other data show US per-capita consumption of petroleum is down substantially from the 1970s, has been very stable since 1983 because of CAFÉ standards, and has fluctuated only slightly with retail price changes)

Comparative Advantage—The Unicorn of Free Trade (a collection of sources and analyses demonstrating that the assumptions of classic Ricardian theory rarely if ever align with real-world conditions)

The Recession is Coming! The Recession is Coming! (December 2007 post with charts showing America's middle class had already been in recession for 7 years and asking if we really care about them)

My new political home is the Tea Party?  (the otherwise pro-market Tea Party supports a nationalist trade policy that confronts foreign abuses and fights for American companies)

Is the New York Times editorial board adapting to reality, or is this cognitive dissonance?  (after urging us editorially to “embrace” globalization, NYT acknowledges that globalization is partly responsible for the Middle Class economic decline)


Common Ground for Tea Partiers and Liberals

We are accustomed to thinking of the US political spectrum as a linear spectrum from left to right and the need always to have a center-left coalition or a center-right coalition in order to elect Congressional majorities or to pass legislation. In this framework, left and right are polar opposites in terms of political philosophy. But what if the political spectrum is not a straight horizontal line but is shaped like a horseshoe?

In this configuration, one can imagine a political polarization that is not left-right but is top-bottom based on economic class instead of political theory. The Tea Party representing the far right and socialists representing the far left both have strong populist sentiments, and both are angry that both major parties are effectively controlled by wealthy elites.

The Left has long feared Big Business and Wall Street and has tried to use government to check their power to exploit the lower economic classes. 

On the other hand, Tea Partiers identify Big Government as the biggest threat to their interests.  However, I suggest they react strongly against any powerful institution that intrudes negatively into their lives.  They are anti-Wall Street and were very upset at the 2008-09 Bush-Obama bailout of the financial system.  They are anti-free trade and very suspicious of MNCs and foreign companies and people, which our increasingly open borders largely benefit.  And, despite their anti-government rhetoric, they are strongly in favor of Social Security and Medicare. They seem to feel that their lives are getting worse, not better, and that, rather than having control over their own lives, they are being dictated to and victimized by powerful people and institutions. They feel alienated from these shadowy forces and exploited by them--and that's not so different from how liberals feel.


Great Wealth and Great Political Power


Most Read Realitybase Posts in February

The American Dream died in February 1973 (with graphs from multiple sources showing stagnation of inflation-adjusted middle class incomes since the 1970s after strong and steady post-WWII growth)

The Citigroup Plutonomy Memos (with key quotations from documents that are being disappeared)

One chart refutes three myths about US foreign trade. (about Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade)

US job creation has been declining since April 2000 and is now in freefall. (features a dramatic graph)

Comparative Advantage—The Unicorn of Free Trade (a collection of sources and analyses demonstrating that the assumptions of classic Ricardian theory rarely if ever align with real-world conditions)

The Recession is Coming! The Recession is Coming! (December 2007 post with charts showing America's middle class had already been in recession for 7 years and asking if we really care about them)

More and better education is good but is no solution to our jobs and inequity problems. (for decades we've had way too many college grads for the jobs available—with stats showing over half of BAs under 25 and a third of those 25-29 working in low-skill jobs, plus links to supporting posts and articles)

The US trade deficit is tribute paid to foreigners. And it's big. (Nobel laureates Paul Samuelson and Paul Krugman and other prominent economists including Dani Rodrik, Alan Blinder, Martin Wolf, Larry Summers, Joseph Stiglitz, Dean Baker, and even Alan Greenspan have said that the US middle class is net worse off as a result of persistent trade deficits averaging 3% of GDP.)


Cheese heads go better with Koch?

The pending effort of Wisconsin's governor and majority-GOP legislature to bust the the public employee unions has overshadowed the authority in the same bill to sell off, or contract for the operation of, state-owned energy facilities without competitive bids, reviews by the Wisconsin public service commission, appraisals, or any other protections of the public financial interest.  Even the former Soviet Union wasn't this sleazy when it sold out to its crony capitalists.  From Mike Konczal's report (emphasis his): 

16.896 Sale or contractual operation of state−owned heating, cooling, and power plants. (1) Notwithstanding ss. 13.48 (14) (am) and 16.705 (1), the department may sell any state−owned heating, cooling, and power plant or may contract with a private entity for the operation of any such plant, with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state. Notwithstanding ss. 196.49 and 196.80, no approval or certification of the public service commission is necessary for a public utility to purchase, or contract for the operation of, such a plant, and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project under s. 196.49 (3) (b).

Konczal then quotes from his friend Ed at ginandtacos.com:

If this isn’t the best summary of the goals of modern conservatism, I don’t know what is. It’s like a highlight reel of all of the tomahawk dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism. Extra bonus points for the explicit effort to legally redefine the term “public interest” as “whatever the energy industry lobbyists we appoint to these unelected bureaucratic positions say it is.”

In case it isn’t clear where the naked cronyism comes in, remember which large, politically active private interest loves buying up power plants and already has considerable interests in Wisconsin. Then consider their demonstrated eagerness to help Mr. Walker get elected and bus in carpetbaggers to have a sad little pro-Mubarak style “rally” in his honor. There are dots to be connected here, but doing so might not be in the public interest.

Who do Ed's links go to?  Koch Industies. 


The invisible hand takes care of economists who support free markets.

The movie Inside Job is unkind to supposedly neutral economists who take frequently large and frequently undisclosed sums of money from moneyed interests favored by their writings and utterances.  Edward Fullbrook put up some juicy quotes from reviewers here, for example this one from Sean O'Grady in The Sunday Independent:

Yet the most pathetic and fascinating individuals in this film are the economists, whose uncomfortable links with private enterprise and the banks are excruciatingly dragged out of them. Fingering them is a novelty, and they come off badly. Especially enjoyable is a tetchy exchange with Glenn Hubbard, former economic adviser to George W Bush, and current dean of Columbia University Business School. No, he won’t tell us his outside earnings.

Equally relishable is the spectacle of Frederic Mishkin, a professor at Columbia and former member of the US Federal Reserve, looking mortified about the $124,000 he was paid by the Icelandic chamber of commerce to write a paper extolling the stability of their financial system. But best of all is John Campbell, honorary fellow of Oxford University’s Corpus Christi College and chair of the Harvard Department of Economics, who ends up more flummoxed than any mere academic has a right to be.

In comments, noted heterodox economist Paul Davidson relates this bit of personal history (I fixed a few typos):

As someone who has been arguing against them since 1960 when I published my first article in the AER; and in the 1970s when [as] a member of Brookings Economic Panel I was vociferious—and I learned that I was to be ignored.

For example, when I applied for an NSF [National Science Foundation] grant (in 1980) to do a research project on changing the international payments system. My project was rejected by all the inside NSF peers. One even wrote on his rejection report paper that “Davidson has been successful in publishing his research. But he marches to a different drummer and therefore should raise his own money and not ask for a grant from OUR MONEY” [emphasis added by Davidson]. This rejection is filed in the Duke University library archives along with my other professional correspondence, etc.–-under a Duke library project to collect the papers, correspondence, etc of many economists!!


Krugman-Einstein Trade Theory

How did we miss this?  Nobelist in international trade theory, Paul Krugman, has published a paper laying out a theory of interstellar trade that deals, inter alia, with the difficulties of general relativity. Hat tip to Steve Keen, who posts some key excerpts here (the most accessible way to start reading it) and wonders if possibly Krugman is trying to embarrass somebody. 


Chu trying again to get DOE out of hydrogen research.

In a preview of Obama's 2012 budget proposal, DOE Secretary Chu announced that "the Department is reducing funding for the hydrogen technology program by more than 41 percent, or almost $70 million, in order to focus on technologies deployable at large scale in the near term." In the past Chu has explained why hydrogen has poor prospects for being useful in the energy mix and is probably a technological dead end as a transportation fuel. In fact, in the quotation below, he says becoming a saint would require fewer miracles.

Joe Romm, who once headed the DOE research funding office and has written about the problems in his book The Hype about Hydrogen and extensively on his ClimateProgress blog, has posted on this again today and included a link to an interview of Chu by Technology Review in May 2009, from which the following quotation is taken:  

TR: It used to be thought, five to eight years ago, that hydrogen was the great answer for the future of transportation. The mood has shifted. What have we learned from this?

SC: I think, well, among some people it hasn't really shifted [laughs]. I think there was great enthusiasm in some quarters, but I always was somewhat skeptical of it because, right now, the way we get hydrogen primarily is from reforming [natural] gas. That's not an ideal source of hydrogen. You're giving away some of the energy content of natural gas, which is a very valuable fuel. So that's one problem. The other problem is, if it's for transportation, we don't have a good storage mechanism yet. Compressed hydrogen is the best mechanism [but it requires] a large volume. We haven't figured out how to store it with high density. What else? The fuel cells aren't there yet, and the distribution infrastructure isn't there yet. So you have four things that have to happen all at once. And so it always looked like it was going to be [a technology for] the distant future. In order to get significant deployment, you need four significant technological breakthroughs. That makes it unlikely.

TR: So this is an example, perhaps, of picking a technology prematurely. Is there anything we've learned from that in terms of future policy?

SC: I wasn't there when they started making this [decision]. I'm not sure it was deeply understood what was required. Now, having said that, I think that hydrogen could be effectively a "battery" in the sense that suppose you had a way of using excess electricity--let's say a nuclear plant at night, or solar or wind excess capacity, and there was an efficient electrolysis way of turning that into hydrogen, and then we have stationary fuel cells. It could effectively be a battery of sorts. You take a certain form of energy and convert it to hydrogen, and then convert it back [into electricity]. You don't have the distribution problem, you don't have the weight problem. [Editor's note: Storage tanks can be heavy.] In certain applications, you don't need as many miracles for it to happen. If you need four miracles, that's unlikely: saints only need three miracles [laughs].

The last time Obama and Chu tried to cut R&D funding for hydrogen, Congress wouldn't let them


How far from Mu*barak to Barack?

After 18 days of massive street demonstrations, yesterday Egyptian president Mubarak abdicated and left the military in charge. Political power has long been highly concentrated in the hands of Egyptian elites, and the young, middle class, and working class demonstrators used the only political tools apparently available to them. Meanwhile, elites in America are consolidating their political power with their economic power, leaving non-elite Americans more and more impotent to make government respond to popular will. As just one example, here's somthing 86% of Americans agree on but our elites are blocking.

Bob Herbert raises the question whether non-elite Americans now have, or soon will have, only Egyptian-type remedies. If so, I doubt that Americans, who are accustomed to thinking they are entitled to effective popular control over their governments and who took to the streets in the Great Depression and during the 1960s, will wait as long as the Egyptians did. Maybe the widespread extreme rhetoric we decry as "uncivil" and harmful to the political process accurately reflects increasing acceptance of extreme ideas. 

From Herbert's op ed:

As the throngs celebrated in Cairo, I couldn't help wondering about what is happening to democracy here in the United States. I think it's on the ropes. We're in serious danger of becoming a democracy in name only.

While millions of ordinary Americans are struggling with unemployment and declining standards of living, the levers of real power have been all but completely commandeered by the financial and corporate elite. It doesn't really matter what ordinary people want. The wealthy call the tune, and the politicians dance.

. . . .

In an Op-Ed article in The Times at the end of January, Senator John Kerry said that the Egyptian people "have made clear they will settle for nothing less than greater democracy and more economic opportunities." Americans are being asked to swallow exactly the opposite. In the mad rush to privatization over the past few decades, democracy itself was put up for sale, and the rich were the only ones who could afford it.

. . . .

As Jacob Hacker and Paul Pierson wrote in their book, "Winner-Take-All Politics": "Step by step and debate by debate, America's public officials have rewritten the rules of American politics and the American economy in ways that have benefited the few at the expense of the many."

. . . .

The Egyptians want to establish a viable democracy, and that's a long, hard road. Americans are in the mind-bogglingly self-destructive process of letting a real democracy slip away.

I had lunch with the historian Howard Zinn just a few weeks before he died in January 2010. He was chagrined about the state of affairs in the U.S. but not at all daunted. "If there is going to be change," he said, "real change, it will have to work its way from the bottom up, from the people themselves."


* "The word "mu" is actually from Chinese, meaning "nothing"; it is used in mainstream Japanese in that sense."


More and better education is good but is no solution to our jobs and inequity problems.

The current issue of American Prospect has a good article by Lawrence Mishel of Economic Policy Institute, The Overselling of Education: We need a better-educated citizenry, but the cure for increasing inequality lies elsewhere. He concludes:

The nation's productivity increased by 80 percent from 1979 to 2009, and good productivity growth can be expected in the future. It is not education gaps that have caused nearly all of those gains to be captured by the top but rather economic policies that redistributed economic and political power.

Mishel explains why our economic and political elites, who have benefited greatly from the policies of the last three decades, want to focus on inadequate education as the supposed cause of our pervasive economic problems and better education as the solution: They don't want attention focused on the real causes of rising economic inequity, grossly inadequate job creation, declining class mobility, decline in prosperity from one generation to the next, and unaffordability of infrastructure and other public goods. I reached a similar conclusion in May 2008 in Education is doing a lot less for the economy than we all thought it would.

Although Mishel makes the arguments well, he didn't have room for the type of supporting data that I included in my post and its addenda where, for example, I documented the following contradictions to the education-as-panacea meme (if that's what it is). Click here for the discussions and links to sources:

In recent decades, the US has not had a shortage of college-educated workers for jobs requiring a college education. At least half of college graduates under 25 are working in jobs that do not require a college degree. This continues a downward trend from a shameful 58% working in jobs requiring college degrees [amended 3/3/11] in the supposedly-tight labor market of 2000. According to OECD, 33% of US college graduates ages 25-29 are in low skill jobs.*

Several studies reported that many college graduates end up in jobs for which college training is not required.  For example, 12% of mail carriers, a quarter of travel agents and retail-sales supervisors, a third of flight attendants, and nearly half of aerobics instructors have B.A. degrees. 

Only 2 of the 10 job categories projected to grow the fastest require college degrees. 

The income gap between high school graduates and college graduates is not widening because incomes of college graduates have accelerated through the last 2 or 3 decades. To the contrary, average incomes of recent college graduates have risen only modestly and not at all since 2001. The widening gap is because the incomes of high school graduates grew at a much slower pace or not at all.

From 2000 to 2007, those with professional degrees (J.D., M.D., MBA, etc.) were the only educational group for which median incomes rose—even Ph.D.s lost ground. 

States and nations that have a high percentage of college educated people do not necessarily have faster economic growth, and at least one study found a negative correlation. 


*Only two OECD nations have higher rates of underutilization of college educations: Spain (44%) and Canada (37%).


Does the US have a productivity problem? 

Tyler Cowen says Innovation Is Doing Little for Incomes and speculates as to why that's so.  That generated a good discussion here on Mark Thoma's blog.  The following graph of annual percentage changes is presented to make it accessible to that discussion. 


Most Read Realitybase Posts in January

Recent posts:

"Only the little people pay taxes." (strictly domestic US companies pay nominal high federal tax rates while MNCs effectively pay little or nothing)

Obama names fox to head advisory panel on hen house security. (GE's Immelt, a leading offshorer of jobs and proponent of lower US wages, appointed to head panel on jobs and competitiveness)

Did decline of the American middle class "just happen" or is it political? (Alan Blinder says it just happened, but the work of Jacob Hacker, Paul Pierson, Kevin Phillips, et al. demonstrate it's political)

Oldies but goodies:

The Citigroup Plutonomy Memos (key quotations from documents that are being disappeared)

US job creation has been declining since April 2000 and is now in freefall. (features a dramatic graph)

The American Dream died in February 1973 (includes graphs from multiple sources all showing stagnation of inflation-adjusted middle class incomes since the 1970s after steady and substantial post-WWII growth)

The Dysfunction and Corruption of Our Healthcare System, Its Damage to the National Economy and other Basic Healthcare Matters (Guest Post) (describing a system that is destroying the American business economy and our ability to compete globally, which violates fundamental insurance risk principles, and which has inherent conflicts of interest that prevent quality national health care delivery and cost efficiency, and proposing a solution)

One chart refutes three myths about US foreign trade. (about Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade)

Comparative Advantage—The Unicorn of Free Trade (a collection of sources and analyses demonstrating that the assumptions of classic Ricardian theory rarely if ever align with real-world conditions)


Obama’s SOTU address may make his re-election more likely but leaves the economy, jobs, and wages to fend for themselves.

Obama needs two things to get re-elected: A much improved economic situation (especially employment) and the financial and political support of those big industries that backed him and traditionally back Democrats (Wall Street, media, entertainment, and high tech). He's probably concluded, rightly I think, that there's nothing he can do between now and November 2012 to fix the economy because nothing that might work can get through the Congress. So he's apparently decided to solidify the support of Big Business and just hope for the best on employment, wages, and the economy in general.

To this end, in his State of the Union Address last evening he proposed lowering corporate tax rates and fixing regulations that put "an unnecessary burden on businesses." Most importantly, he reaffirmed as his own premise the MNC/Wall Street doctrine that globalization must continue, that trade liberalization should be accelerated, that exports can be doubled, and that US workers must compete head to head with the rest of the world including low-wage developing nations like China. "The competition for jobs is real," he said.

But his plan for how the US will win the competition is the same as it's been for three decades:

We know what it takes to compete for the jobs and industries of our time.  We need to out-innovate, out-educate, and out-build the rest of the world.  We have to make America the best place on Earth to do business.  We need to take responsibility for our deficit and reform our government.  That's how our people will prosper.  That's how we'll win the future. 

Like second marriages, this is a triumph of hope over experience. We did not lose jobs to Chindia because they out-innovated us, but they are rapidly catching up in innovation. We did not lose jobs to Chindia because their people are better educated—they are not better educated, but they are catching up. We did not lose jobs to Chindia because they had better infrastructure, but they are catching up. We lost jobs to Chindia because labor there is much cheaper and more docile, because health, safety, environmental, and labor regulations do not exist or are not vigorously enforced, because of extraordinarily generous subsidies, and because China in particular requires foreign companies to transfer technology and higher-skill jobs as a precondition to Chinese market access.

The truth is that, while better education, innovation, infrastructure, quality, and fiscal stability can't hurt American competiveness, the major competitive battleground is always price. If the US is going to compete successfully with Chindia, wages and salaries for the bottom 80-90% of Americans must continue to come down, purely domestic businesses must continue to suffer from shrinking demand, and governments at all levels will have shrinking tax revenues. Only MNCs, Wall Street, the owners, managers, and servants of capital, and developing nations benefit from this. I believe Obama knows this, but of course he can't say it if he hopes to be re-elected.


Obama names fox to head advisory panel on hen house security.

From Bloomberg today:

President Barack Obama will name Jeffrey Immelt, General Electric Co.'s chief executive officer, to head his outside panel of economic advisers, replacing former Federal Reserve Chairman Paul Volcker.

Immelt wrote in an op-ed today in the Washington Post that Obama asked him to take the helm of the newly renamed President's Council on Jobs and Competitiveness. The group will reach out to labor and business leaders to serve "as a catalyst for action," he wrote.

Immelt, 54, is an original member of the panel, which was formed as the President's Economic Recovery Advisory Board in February 2009. GE's CEO since 2001, he heads the world's biggest maker of jet engines, medical-imaging equipment and power-plant turbines and gives the White House a corporate heavyweight to help burnish Obama's pro-business credentials.

Multinational corporations, GE foremost among them, have led the globalization movement that has caused US middle class incomes to stagnate and a rapid decline in the percentage of American adults who are working. Immelt has said that US wage levels must continue to decline in order for US manufacturing to be "competitive" with imports.

In Obama Administration happy talk about middle class incomes is not supported by any strategy or plan I said this:

The clear implication [of a then recent Larry Summers speech] is that it is Obama Administration policy to bring middle-class income growth rates up to, or at least nearer to, the growth rates enjoyed by the top few percent. (That they have been lagging since about 1973 is documented here and here.)  Another clear implication is that exporting more and reducing imports of consumer goods is the route to this goal. I suggest the Administration has no plan to achieve either of these goals and that mushy thinking and immense political obstacles stand in the way.

At present, MNCs are the predators, and strictly domestic businesses and labor are the prey.  Making one of the chief beneficiaries of the status quo his chief advisor on such matters pretty well guarantees there will be no important relevant policy changes in this Administration, doesn't it?


Robert Reich: The Real Economic Lesson China Could Teach Us

Republished below with permission is a post from Robert Reich's blog, www.robertreich.org. His latest book AFTERSHOCK is now available.

Highlighting today's summit between Chinese President Hu Jintao and President Obama is China's agreement to buy $45 billion of American exports. The President says this will create more American jobs. That's not exactly right. It will create more profits for American companies but relatively few new jobs.

Nearly half of the deal is for two hundred Boeing aircraft whose parts come from all over the world. The rest involves agricultural commodities that don't require much U.S. labor because American agribusiness is highly automated, and chemical and high-tech goods that are even less labor-intensive.

General Electric and other companies are signing up for deals with China involving energy and aviation manufacturing. But much of this will be done in China. GE's joint venture with Aviation Industries of China, to develop new integrated avionics systems (which presumably will find their way into Boeing planes) will be based in Shanghai.

Here's the real story. China has a national economic strategy designed to make it, and its people, the economic powerhouse of the future. They're intent on learning as much as they can from us and then going beyond us (as they already are in solar and electric-battery technologies). They're pouring money into basic research and education at all levels. In the last 12 years they've built twenty universities, each designed to be the equivalent of MIT.

Their goal is to make China Number one in power and prestige, and in high-wage jobs.

The United States doesn't have a national economic strategy. Instead, we have global corporations that happen to be headquartered here. Their goal is to maximize profits, wherever they can make the most money. They'll make things in America for export to China when that's most profitable; they'll make it in China and give the Chinese their know-how when that's the best way to boost the bottom line. They'll utilize research and development wherever around the world it will deliver the biggest bang for the dollar.

Meanwhile, Republicans and deficit hawks are cutting publicly-supported R&D. And cash-starved states are cutting K-12 education, and slashing the budgets of their great public research universities, such as the one I teach at.

No contest.

And no hyped-up trade deals are going to change this fundamental imbalance.

Some say all we need to do is put our currencies in better balance. But even if the Chinese upped the value of the yuan and the US (courtesy of the Fed) reduced the value of the dollar – so everything they bought from us was cheaper and everything we bought from them, far more expensive – they'd still win. We'd have more jobs than now because our exports would be more attractive in world markets, but those jobs would summon fewer goods from around the world. In other words, we'd be poorer.

Let's get real. We're losing ground. The U.S. labor force is now smaller than it was before the Great Recession began and most American families are worse off. December's unemployment rate dropped to 9.4 percent from 9.8 percent but almost half the improvement was due to 260,000 people dropping out of the labor force.

Average hourly wages grew by three cents in December; weekly wages, by $1.02. And almost all the gains in income occurred at the top. The major assets of rich Americans are financial – whose values have increased as corporate profits have grown. The major assets of the middle-class asset are their homes, whose values continue to drop.

The President now says the answer is to help American business. "We can't succeed unless American businesses succeed," he said recently. "And I'm going to do everything I can to promote their ability to grow and prosper."

But the prosperity of America's big businesses has become disconnected from the prosperity of most Americans.

Republicans say the answer is to reduce the size and scope of government. But without a government that's focused on more and better jobs, we're left with global corporations that don't give a damn.

China is eating our lunch. Why? It has a national economic strategy designed to create more and better jobs. We have global corporations designed to make money for shareholders.


The plan is for US and Chinese incomes to continue “converging.”

The US has had a decade of declining rates of employment, stagnant wages, and flight of talent and innovation. Meanwhile, China enjoyed the opposite. In the bilateral talks going on Washington this week, the US intends to push (again, for the umpteenth time) for China to phase out its FOREX interventions that keep the value of its renminbi low versus the dollar because, we say, that gives Chinese companies and workers an unfair price advantage versus US companies and workers in foreign trade. This is not the only mercantilist policy that China has pursued and may not even be the one most damaging to US interests, but it has gotten the most attention. Yesterday, The News Hour broadcast a Paul Solman interview with two professors who explain the Chinese position on the currency issue.

Professor Geng Xiao, Director of the East Asia Global Center in Beijing, and an honorary Professor at the University of Hong Kong, explains the Chinese view that there is an ongoing natural convergence between the US and Chinese economies in terms of incomes, wage rates, employment rates, growth, inflation, etc.:

GENG XIAO: Basically, the Chinese income is rising. Chinese price levers are rising. And the U.S. income is stagnating, right? So the two are converging. And that's what we expect. And this is what will happen, no matter what the Chinese government wants or not. So, if we just have a little bit more patience, everything will actually fall into places.

Professor Yasheng Huang of the MIT Sloan School of Management says the only problem is that Americans have a borrow-and-spend mentality that would persist no matter what the exchange rate is. American consumers must change their profligate ways, and there is no good reason for China to make any policy change.

PAUL SOLMAN: So, if China's goods were more expensive than they currently are, you think the United States would still be borrowing money?

YASHENG HUANG: From India, from Vietnam, from Brazil. I'm not saying I agree with the Chinese completely. All I'm saying is that it is very difficult to make the argument with the Chinese and say, you do something about your exchange rate, but, by the way, we can spend the way we want, right? So, that's a -- that's not a winning argument with anybody.

It isn't only the Chinese who think US wages should decline to the level of rising Chinese wages. Neoclassical economists see the world this way too and see the solution to chronic US unemployment, trade deficits, and the hollowing out of the middle class as still lower US wage rates. As long ago as 2008, top Democratic economic policy guru Robert Rubin was reported to be troubled by the human effects of convergence, but not troubled enough to suggest US policy changes.

How much does the US wage level need to decline according to this view? Edward Hadas, Martin Hutchinson, and Anthony Currie say:

American workers are overpaid, relative to equally productive employees elsewhere doing the same work. If the global economy is to get into balance, that gap must close. . . .  It's possible to run the numbers to show that American manufacturing workers should take average real wage cuts of as much as 20 percent to get into global balance. 

The fact that our US government keeps moving in this direction with bipartisan support makes my blood boil.


Marshall Auerback: Chinese Trade Policy Must Focus on Social Consequences

Republished with permission from New Deal 2.0:

Focusing on currency isn’t going to cut it for America’s workers.

You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.

Today, the global economy is characterized by huge trade imbalances. Everyone has focused on exchange rates. That is the wrong focus. China’s net business fixed investment now may be equal to two times the combined fixed investment of Europe, Japan, and the United States. That capacity has to go somewhere. Some of it has to go abroad. Some of it has to substitute imports China now buys elsewhere. This will cause even greater trade imbalances, which will be problematic given the political constraints on using fiscal policy to offset the likely deterioration in America’s external sector (and corresponding increased threats to employment).

We’re now seeing the consequences of our “malign neglect” of China’s economic policies: The Chinese are preparing to dominate the higher tech and capital goods areas — from new Stealth fighters, to high speed railways, to solar, to nuclear. So what happens to the US industrial base when Boeing can’t sell abroad because China has the same line of planes and they are cheaper? Oops! There go our military aircraft exports.

This points to the issue of import substitution, which everyone forgets. Exporting into a country with two billion people is a chimera because China doesn’t really want American exports; they want total self-sufficiency. Building your plants in the land of the two billion armpits is a chimera as well, because the locals will steal your know-how and then undercut you and carve up the domestic market, which they control against you. Look at what is happening to the Spanish wind turbine company, Gamesa, as a recent NYTimes article illustrated:

Gamesa has learned the hard way, as other foreign manufacturers have, that competing for China’s lucrative business means playing by strict house rules that are often stacked in Beijing’s favor.

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

China’s capital expenditure as a percentage of GDP has now reached a historically unprecedented 50% of GDP. Throughout economic history, countries with especially high investment to GDP ratios have embarked on inefficient investments. In the 1820s they built too many canals. In the railroad boom in the UK in the 1840s they built three lines between Leeds and Liverpool but the traffic could barely support one. Throughout the 19th century railroad boom after railroad boom led to busts. We saw a repeat of the same across a broad spectrum of industries during the 20th century, right up to the present day. The oil boom of the 1970s led to gluts of rigs and tankers that were idled for a decade. The bubble decade in Japan produced unneeded private investment that, in the two decades since, has been scrapped and replaced. In emerging Asia in the late 1980s and 1990s excesses of residential investment led to gluts that took a decade to work off. In the past decade the US did in residential construction what emerging Asian countries did a decade earlier.


A neurological basis for group cohesion? But who’s in my group? 

In stating a moral basis for limiting immigration and not offshoring jobs, I said this:

It is moral to give preferences to in-groups over outsiders, nuclear family over extended family, family over other community members, members of one's religion, political party, union, or other organization over non-members, tested and loyal members over applicants and probationary members, etc.  Neither our civilization nor even our species can survive without cohesive groups whose members are loyal to and support each other to the partial or total exclusion of others.  The ability to form and maintain groups of composition, function, and commitment appropriate to life's difficulties, perils, and threats is fundamental. 

Researchers at the University of Amsterdam started with the same Darwinian premise and found that oxytocin, which is thought to promote feelings of love and trust, promotes such feelings toward in-groups but not toward out-groups, as reported in the NYT Science section today. The researchers even found the effect in the lifeboat dilemma I discussed in my October 14, 2010 update.

The researchers labeled as ethnocentrism their finding that Dutch college students were more favorably inclined to Dutch names than to German or Muslim names. It would be interesting to know if the discrepancy is also observed across other socio-economic and political divides, e.g., this one discussed in a post by Peter Radford today:

Buried in the Atlantic Monthly article Konczal quotes from, is an even more worrying material. The social divisions opening up in America are viewed with disdain or equanimity by those at the top. The new "global elite" feel energized by their ability to exploit worldwide business, and have reached a point where local problems, such as the high wages of the American middle class relative to the emerging middle class elsewhere, is seen in cynical business school terms. As one interviewee in the article says: tough. Maybe the American middle class needs to face up to reality and accept lower wages. Or, worse, if we create four middle class jobs in China, but lose one in the US, we are still ahead.

Just who is the "we" in this statement?

The elite.

This new elite thinks it is above what it sees as local, and therefore lesser, issues. It is based in places such as New York, London, Moscow, Hong Kong or Mumbai, and sees workers the world over as one big labor pool. Differential wages, and cultural matters are nuisances.

The Atlantic piece is linked in the quotation; Mike Konczal's post at Rortybomb is here.

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