A very nicely put piece by Morgan Stanley's Stephen Roach:
Morgan Stanley: Over the long sweep of the modern-day, post-World War II era, blue-collar workers bore the brunt of America’s economic cycles. Laid off in bad times, rehired in good times, the US factory worker has grown accustomed to economic pain and distress. By contrast, the white-collar worker knew little of these travails — job security was almost treated as an entitlement. Those dreams are now being shattered. Well-educated, high-paid, middle-aged white-collar workers are losing their jobs for the first time ever. And they are quick to realize that the offshoring phenomenon means that many of those jobs will be lost forever. The result is an outbreak of white-collar shock that has now become a lightning rod in the political arena.
Politicians have quickly discovered that it does little good to argue that offshoring is not to be feared — that it is simply the way the world works. Fed Chairman Alan Greenspan encountered similar pushback in his latest give-and-take with the Congress over the employment issue. Nor is there any payback in quibbling over the order of magnitude of the offshoring phenomenon. Companies and their consultants tend to downplay the scale of such cross-border job shifts. That’s because they are fearful that the Congress will retaliate with tax law changes that would penalize US businesses for playing the global labor arbitrage. But a growing proportion of America’s white-collar workers now see the future in very different terms. Not only is that true of those who have been laid off, but it is increasingly true of those who fear they may be next.
American politicians certainly sense this undercurrent of angst in the US labor market. The pro-labor mood in the Congress is both extreme and bipartisan. As one Capitol Hill veteran put it to me last fall when I was testifying on US-China relations, “The protectionist train has left the station.” And the leading presidential candidates are jockeying for position to be on the “right side” of the jobs debate. Yesterday in Pennsylvania, President Bush said, “There are people looking for work because jobs have gone overseas. We need to act.” Senator Kerry has expressed similar views. The real risk, of course, is that the politicians do the wrong thing. Bills have already been introduced in both houses of Congress that would put steep tariffs on all Chinese products sold in the US. There is talk of going after India and in putting tax penalties on US multinationals who shift jobs overseas. Several states have introduced legislation that bans offshoring contracts. And US immigration authorities have sharply reduced the cap on so-called H-1B visas that cover the entry of foreign IT workers.
The offshoring debate is not about to go away. Neither theory nor fact will temper the palpable sense of angst that has arisen in America’s unprecedented jobless recovery. The drumbeat of protectionism grows louder at precisely the moment when the US has a record current-account deficit, a weakening dollar, and an extraordinary dependence on Chinese financing. It’s a house of cards that has never seemed more precarious. Yet ever-complacent financial markets could care less. The risk is they will — sooner rather than later.
But there's one point he doesn't make--and should. If we had a healthier labor market and stronger aggregate demand there would be little concern about outsourcing: it's the fact that a lot of Americans who thought a couple of years ago that they would have jobs today do not, plus the fact that every American knows that if you lack a job trying to find one now is about as hard as it has ever been at any date since the end of the Great Depression.
And one important reason that we have such a soft labor market is that George W. Bush took advantage of the recession to argue that we needed tax cuts for the $300,000+ a year crowd to "stimulate the economy." Had he proposed real stimulative tax cuts--tax cuts for the working and middle classes who will spend rather than the upper class that saves--we would have a much stronger labor market now. But he gambled that the economy would recover fine on its own, and didn't need extra insurance against a prolonged employment decline.
He gambled. He lost. We Americans lost too. Let's not forget that.
Posted by DeLong at February 13, 2004 05:46 PM | TrackBack
Amen. Mr. Bush should get the blame for the rising protectionist tide. Mr. Bush is not much of a free trader either. He is a master of crony contracts on inside deals. And he gambled with the steel tariffs and he gambled with the farm subsidies and made matters worse instead of better. The cities and states are announcing more layoffs. No wonder there are not enough jobs. I can think of very few fiscal policies where Mr. Bush has got it correct.
Posted by: bakho on February 13, 2004 06:23 PMI think the winning - and appropriate - political message is that free trade isn't a good thing unless it is matched with health care, education, and opportunity for Americans, but protectionism is a terrible thing because it will prevent health care, education, and opportunity for Americans.
China doesn't and never has set the limits for American workers. It is at best a distraction from the political failure to appropriate adjustment costs, without which free trade is morally ambiguous. In other words, attacking foreigners doesn't help babies get medicine, or students affortable tuition, or workers retraining.
Posted by: MattS on February 13, 2004 06:43 PMHow much Federal tax do the "working class" pay anyway? It's negligible isn't it?
Has Brad any numbers to back up his policy prescriptions?
I enjoy reading your posts. This is the first time I've commented. (BTW my day job has never been Ag. Sec'y ;))
Why do you use "outsourcing" when the article uses the term "offshoring"? (I've noted that the President's Economic Report uses the term "offshore outsourcing".) Of course, I know that most punditry uses "outsourcing" but, of course, we, your readers, know that you're not just a "pundit" ;).
Also, why don't I see a serious discussion re the assumption that the USA will benefit "more" in the "free trading" of jobs than other nations. Isn't it possible that the greater net benefit of such will not accrue to USA. (Of course, the reason I might not see such discussion is that I'm *obviously* wrong ;))
Posted by: Dan Glickman on February 13, 2004 06:59 PMMany of these people form much of the core of the Republican Party. Shoe is no the other foot. These aren't the pissant workers to kick around. They sound like a gathering political force. Join forces and negotiate standards for compensation. It works in Hollywood, an incredibly well paying industry. These people should get much higher comnpensation and negotiated buy out packages (like three years of salary not two weeks) to reflect the greater risk in their lives. What would cutting social security and self employment tax to a flat 2% or 3% or 5% (maybe it is 9 % but it has to be lower than the current rate) or whatever the break point is, and add one percent, but then apply it to all salary and wages paid. That's a big tax rate cut for every single tax payer, but an increase for those making a few hundred thousand a year. That's instant money to each middle and lower class family each and every week. This is a progressive tax restructuring.
Posted by: Cal on February 13, 2004 07:25 PMCan anti-dumping laws now apply to overseas services? If these jobs are being commoditized and treated as "assets," then why now expand the trade rules. I have no idea what I am talking about on this point (and many others) but it sounds like something a grad student can write a paper about.
Posted by: Cal on February 13, 2004 07:29 PMabr wrote, "How much Federal tax do the "working class" pay anyway? It's negligible isn't it?"
Not negligible.
Payroll taxes are about 7.5%, starting from dollar 0. Because of the tax incidence, most economist feel that the employer's share, 7.5% also, is actually born by the wage earner.
That makes 15%, and that's 15% that can't be sheltered.
Posted by: liberal on February 13, 2004 07:31 PMLiberal, if most economists think that employers would pay an extra 7.5% to wage earners if they did not have to pay it in payroll taxes, whatever them economists are smoking must be more fun than magic mushrooms. It is a cost to be sure, another one that they avoid by outcountry outsourcing.
This is the issue upon which I disagree with Brad and the majority of the people here.
Perhaps free trade, outsourcing, etc. are unquestionably better in the long run for America as a whole, the American economy as a whole, the majority of individual Americans, and world peace too. It does hurt some people, however, and I believe that a high proportion of those hurt are people who are traditionally represented by Democrats and who traditionally vote for Democrats -- i.e., labor. (And at the same time, because of uncontrolled immigration, these same people are being hurt at home.)
During the free trade debates, various sorts of programs were proposed to soften the blow with retraining and various other sorts of subsidies. As I understand, these really didn't amount to much in the end, partly because Clinton only was able to get his program through Congress with Republican anti-labor votes. (And wouldn't any very substantial program have cost enough to offset the benefit received from free trade, granted that saving labor costs was a big part of the madvantage of free trade?)
By abandoning and demoralizing a substantial part of its constituency, the Democrats (who were already weakened when Clinton came into office) further weakened themselves. And anything individual Democrats have done to benefit this part of their core constituency was immediately ridiculed -- by Democrats -- as "pandering".
I've seen a purported Democrat explain here that factory workers were already an insignificant part of the population anyway, and the way he said it I don't think he just meant numerically insignificant. However small the numbers are they were people who customarily supported Democrats.
Posted by: zizka / John Emerson on February 13, 2004 08:05 PMI think both Dan Glickman and John Emerson make very valid points. There are also issues of increasing returns industries, strategic inflections points, and national security to be considered. I greatly enjoy your web site, but think that the conventional thinking ought to be challenged by you and your many brilliant economist thinkers.
Posted by: reed hundt on February 13, 2004 08:13 PMI think both Dan Glickman and John Emerson make very valid points. There are also issues of increasing returns industries, strategic inflections points, and national security to be considered. I greatly enjoy your web site, but think that the conventional thinking ought to be challenged by you and your many brilliant economist thinkers.
Posted by: reed hundt on February 13, 2004 08:13 PMRe: How much Federal tax do the "working class" pay anyway? It's negligible isn't it?
Try this: How many votes do the "ruling class" have anyway? It's negligible isn't it?
Oh I forgot, the ruling class doesn't need to use the ballot box to get its policy agenda, because it has the means to buy it. That's how we got Bushwhacked to begin with.
Has anyone noticed the inane and ridiculous statement Bush made the other day about how "we need to take action" because jobs were being sent overseas?
Hey, Mr. President.......that was your signature on the CEA report hailing outsourcing as good for America, wasn't it?
Combine this with Bush's "I want to know, somebody tell me" routine on BOTH the WMD fiasco and the Valerie Plame matter, it's gotten pathetic.
Someone needs to tell this moron what's going on in his own Administration!
A bold and decisive leader?????? It would be funny if it wasn't so pathetic.
Posted by: marty on February 13, 2004 09:18 PMEli Rabett, I'm afraid that Liberal is right (and I'm certainly not liberal). Labor is supplied pretty inelastically; that is, labor supply doesn't change much with respect to wages. Labor demand does. So income and payroll taxes are mostly paid by workers regardless of who actually signs the check. Think of sales tax; whether or not it's added onto the final price or already included, you and the store are paying it anyway. Tax incidence is one of those things that just mystifies noneconomists because it isn't immediately obvious.
Zizka writes: "...[Free trade] does hurt some people, however, and I believe that a high proportion of those hurt are people who are traditionally represented by Democrats and who traditionally vote for Democrats -- i.e., labor. (And at the same time, because of uncontrolled immigration, these same people are being hurt at home.)"
I think that the best way to think about free trade is as just another form of technological change. In the past generation, technological change has greatly favored the college-educated (who generally vote Republican) over the less educated, especially during the Clinton administration. Whether that's been the case for a longer time remains to be seen. But the general consensus based on empirical work is that we should be looking at technology rather than politics or trade by itself as a major source of inequality.
As for the effect of immigrants, it isn't be that large. They went from maybe 6 to 14 percent of the labor force in the past thirty years and don't earn that much less than native born citizens, on average. The capital-labor ratio has increased to handle this for the most part. The increase in immigration explains maybe ten percent of the rise in inequality since 1970. It's a nice story but it just doesn't fit the data.
FYI, I recently lost a bet over this. I had thought that immigration would have affected inequality a lot more but when I looked at the data, my colleague was right. There is still a lot of work to be done in this area. In labor economics, truth really is stranger than fiction.
Posted by: Chris on February 13, 2004 09:55 PMI have a deep worry that the cycle of job and industry recreation that is supposed to replace those jobs and industries that we lose overseas is simply not going to happen in the way some economists imagine it might, or at least not as fast as we need it to.
I assume that most of these expectations are extrapolated from looking at models based on historical experience. Industry A drives the country's economy and employs the majority of people either directly or indirectly and along comes Industry/Product B through technical innovation and improved systems. Money and workers flock to industry B because of growing demand and slowly Industry A becomes less of a force as other countries take it up at a cheaper rate. Industry B starts humming along and Industry/Product C is spun off creating new products, demand and jobs. Now here is the catch; unlike before when Industry A was gradually phased out and B gradually took it's place, overseas competition starts laying claim not only the Industry B jobs and products, but both B and C simultaneously. Meanwhile, Industry C hasn't been around long enough to provide the necessary time for a product or an Industry "D" to come along and provide a sufficient alternative.
Okay, so thats my sloppy non-economist assessment. I am not arguing against Free Trade directly since I think the positives might still pan out. However as for those who argued that the US would take over in new "knowledge-based" industries when they lost previous less skilled jobs overseas, I think there is evidence stacking up to suggest that we are quite likely to lose the new stuff as well, even as it's created or before it really takes over as a source of employment. So we get people grasping at straws and throwing stuff out like the "entertainment economy".
Posted by: Waffle on February 13, 2004 10:44 PM"They went from maybe 6 to 14 percent of the labor force in the past thirty years and don't earn that much less than native born citizens, on average."
I don't get it. 8% change seems like quite a bit. Lumping the high-skill immigrant workers in with the unskilled and then averaging obscures what I'm talking about. And at the bottom level, immigrants will bring down others' wages to their level, which is my point, so "don't earn that much less" isn't an argument.
Neither outsourcing nor immigration tells the whole story, but the victims of the boom seem to have been mostly labor, and all the wonderful things that were supposed to move American workers into higher skill categories haven't happened. Exactly the opposite -- education has become increasingly less accessible.
My point of view is political, and I think that it has been a big mistake for the Democrats to have taken such a passive view of these particular developments ("Learn to live with it, it's inevitable" seems to be the prevailing mood). As I said, a major constituency has been weakened and demoralized, meaning that the Democrats are becoming still less able to contend with the Republicans on the issues they still want to fight. "Taking care of your own", one way or another, is something political parties have to do.
Posted by: zizka / John Emerson on February 13, 2004 11:13 PMChris: "..the college-educated (who generally vote Republican)..."
College educated folks generally voting Republican is a surprise to me.
Waffle: Industry A and B paragraph.
I'm not an economist either but to me that paragraph reads very relevant.
========================
This article of Stephen Roach on political economy of jobs offshoring /outsourcing might very well prove to be a landmark article.
Brad's comment on it is very significant as well: The Administration policies are not geared to respond to this consequence of productivity increase by encouraging investment to further increase productivity; the Administration policies are geared to suppress productivity; sort of in line with capitalists in old, complacent sectors sayin; "hey, slow down producivity growth! I just can't keep up steps with it! Oh no? You won't slow down? OK! It is going to be war in Iraq! And it is going to be tax cuts! And it is going to be reduced social spending too!"
Brad's comment, however, stops at identifiying the problem, but does not offer remedy. The remedy, I think, is what I had already suggested in this blog concerning what Howard Dean should have been pursuing:
"A New-New Deal with a global reference."
I think what I mean is that global free trade may need to be restricted to a set of countries that satisfy certain labor market standards including social safety net parameters.
And I think America needs to approach and have a talk with Europe a bit on this one, and likewise, Europe. More specifically, I think America needs to move closer to Europe on social safety net while Europe needs to move closer to America on labor market flexibility issues.
Posted by: Bulent Sayin on February 13, 2004 11:33 PM
Goose-stepping wages paid to the lowest common world denominator benefits only China and India, and actually, benefits only the middlemen in China and India, since the M's of workers doing the labor that we used to do are virtual slaves. As will we all be soon enough.
The whole concept of a tariff-free global free trade is a charade. There is no such thing as free trade. Like calling a blitzkreig a walk in the park. Like believing in Tinkerbell. WTO has been an abyssmal failure for nearly everyone, and now it's come to our shores in spades.
It was lately observed that Bush's tax-cut-as-domestic-spending-impetus, and US$'s decline-as-trade-balance-stimulus have NOT worked in either case. Jobs, real jobs, are fleeing away faster, the foreign trade deficit is skyrocketing, and the dollar has lost 40% of its value. 40%! Poof!
Nobody wants to accept that cutting taxes for the wealthy means they'll just invest in liquid assets which aren't affected by the sinking US dollar or the failing US economy. No duh-h! All those tax savings just got outsourced overseas.
Nobody wants to admit that China pegging their currency to ours, tight as a blood tick, then investing the profits in Australian commodities, real estate and bonds, is the Little Engine That Could. They learned from the Japanese debacle, where the Japanese have had to spent 7 TRILLION yen recently to keep our currency propped up.
Dick et GWB have, in their insatiable greed and economic short-sightedness, created a Perfect Storm for the US economy, for which there is no way back. Raise interest rates, sink the ship. Print more money to keep the markets inflated, buying power declines. Deficit spend more, sink the ship faster. Wait and ride it out, China sucks up another US$100B a month and turns it into AU Gold Monkeys. And jobs gone with it.
Those living wage jobs, the chicken in every pot and car in every garage kinda jobs, continue to disappear like a thousand points of darkness.
We are spending nearly $1T a year to finance GWB's budget- and trade-deficits, and the gap is growing. Fast. If they permanently cut taxes, and fail to budget the exit costs for Iraq and ballooning Medicare Bill, then our ship is sunk.
Unfortunately for us all, this kleptocratic administration of ours seems to have caught a case of prevarication flu in the last few weeks.
And God help us, a whole lot of folks believe it. Expect them to lie like dogs all the way to GWB's re-election, on thru to the end of days.
What's Kerry going to do, raise taxes? Then the wealthy will bail out while they can still get tax-free gains, and the stock market will tank. Private investment will dry up, and we'll be back in the New Deal, praying that public works and farm loans can keep us hobbling along, until the Chinese finally put us out of our misery.
Today, it costs nearly $1500 plus key money to lever out of your cardboard box, and the rent, utilities and upkeep are nearly $1000 a month. Where are you gonna get that kind of scratch?
Hey, buddy, can you spare me a grand?
"Hey, buddy, can you spare me a grand?"
Such ungratefulness!
In Turkey, that'd be more like: "Hey, buddy, can you spare me a million?" Or perhaps a billion, depending on the meaning intended by "grand".
Skunks and rats in Turkey have managed to swindle 70 billion dollars in bank failures and guess who is to pick up the tab? And you know how that 70 billion dollars stands relative to size of Turkish economy? US equivalent of that 70 billion dollars would be about three trillion dollars!
Now, one might ask, so where is the perfect storm to engulf Turkey? That tiny 70 billion storm is already as good as dissipated in the huge harbor of the international monetary system. And there may be ways to avoid perfect storm for the American economy as well.
But "make no mistake": Turks have been badly impoverished.
Americans are being impoverished as well.
Where there is theft, somebody pays for it. And it is usually the victim.
That 300 billion budget surplus was hard earned money of ordinary Americans. They stole it. And they keep stealing from ordinary Americans by (a) reducing the share of wages in distribution of value added and (b) more and more shifting tax burden onto wages and more and more deficit financing, guess who is paying for interest on that borrowing?
If that's not impoverishing Americans, I don't know what is.
Steven Roach: "In days of yore, it used to be that services had to be delivered in person, on site. Cross-border trade in services was unheard of. Now, courtesy of the Internet, that critical assumption has been turned inside out. "
A few years ago, Bruce Sterling the well known SF author wrote: "What if it turned out that the Net was just plain too much for business to handle? That it was downright toxic to free enterprise?"
http://www.austinchronicle.com/issues/dispatch/2002-03-01/screens_feature2.html
Posted by: R. Anand on February 14, 2004 03:04 AM"...offshoring is not to be feared...it is simply the way the world works..."
---Stephen Roach
"Nicely put" indeed. And it "works" too--for guys like Steve and Brad.
Unfortunately for just about everybody except guys like Steve and Brad (AND the guys and girls who like them ;-) it would be FAR closer to the truth to "simply" say
THAT is the way the world DOESN'T work:
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"on Global Keynesianism" (circa 1995)
http://www.jobsletter.org.nz/art/artg0002.htm
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"THE END OF CHEAP OIL" (March 1998)
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"Power to the people" (Sunday, April 29, 2001)
http://observer.guardian.co.uk/global/story/0,10786,524245,00.html
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"US dollar hegemony has got to go" (April 11, 2002)
http://www.atimes.com/global-econ/DD11Dj01.html
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"Blood Money" (Thursday, 27 February 2003)
http://www.truthout.org/cgi-bin/artman/exec/view.cgi?archive=1&num=53
"Star Witness on Iraq Said Weapons Were Destroyed" (February 27, 2003)
http://www.fair.org/press-releases/kamel.html
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"Last of the Big Time Spenders: U.S. Military Budget Still the World's Largest, and Growing" (March 19, 2003)
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"BUSH'S DEEP REASONS FOR WAR ON IRAQ: OIL, PETRODOLLARS, AND THE OPEC EURO QUESTION" (Updated 5/27/03)
http://ist-socrates.berkeley.edu/~pdscott/iraq.html
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"U.S. Budget Deficit Threatens World Economy, IMF Warns" (Thursday, January 8, 2004)
http://www.unwire.org/UNWire/20040108/449_11858.asp
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"Fixing Democracy" (Sunday January 18, 2004)
http://www.truthout.org/docs_04/012004E.shtml
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"The Earth's life-support system is in peril" (Monday, January 19, 2004)
http://www.iht.com/articles/125563.html
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"Bush Budget Cuts May Be Bigger Than Thought- Study" (Thursday February 5, 2004)
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20040206/us_nm/bush_budget_dc_1
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"U.S. Trade Deficit Hits Record in 2003" (Friday, February 13, 2004)
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"Senate to Close Intelligence Session" (Saturday February 14, 2004
http://www.washingtonpost.com/wp-dyn/articles/A40853-2004Feb13.html
P.S.
Quack.
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"U.S. tallied up assets well before war" (July 19, 2003)
http://www.chron.com/cs/CDA/ssistory.mpl/business/2001799
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Quack.
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"Justice Scalia defends hunting trip with Cheney" (2/11/2004 11:18 AM)
WASHINGTON (AP) — Supreme Court Justice Antonin Scalia strongly indicated he will ignore calls to recuse himself from a court case involving his friend and hunting partner, Vice President Dick Cheney.
Scalia told a gathering at Amherst College on Tuesday night there was nothing improper about his accompanying Cheney to Louisiana last month to hunt ducks. The trip came three weeks after the Supreme Court agreed to hear the Bush administration's appeal in a case involving private meetings of Cheney's energy task force.
"It did not involve a lawsuit against Dick Cheney as a private individual," Scalia said in response to a question from the audience of about 600 people. "This was a government issue. It's acceptable practice to socialize with executive branch officials when there are not personal claims against them. That's all I'm going to say for now. Quack, quack."
Cheney wants to keep private the details of closed-door White House strategy sessions that produced the administration's energy policy...
http://www.usatoday.com/news/washington/2004-02-11-scalia-cheney_x.htm
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Quack.
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"Bush Will Meet With 9/11 Panel" (February 14, 2004)
http://www.latimes.com/news/nationworld/nation/la-na-bush14feb14,1,3730122.story?coll=la-home-nation
Outsourcing and job losses have nothing to do with Bush. It is the economic era we live in that's to blame. For years the US and Europe were more prosperous than other nations, because they made products other nations could not make. Either because of the advanced technology or because of the closed markets in the West, which took away export prospects and profitability for other nations. It took a long time, but the Korean engineers can now build a technologically advanced ship as well as American engineers. With the difference in wages, this means a whole industry moves out of the country. How do you stop outsourcing? By stopping other nations from gaining advanced technology? This is impossible. By protecting our market, so foreign companies can not hope to export and regain their investments and therefore will not invest in certain industries? This is impossible. If we do not go with the time and buy the best you can get, other countries like China might get an advantage over us. Foreigners are not stupid. American power is sustained by staying on top. If you discard advancement, we will wake up one morning and find "communist Russians being the first to put a man in space", or an equivalent of that. The only thing you could do to stop outsourcing is to pay American workers less money. But how low can you go? A chinese worker gets a dollar an hour. Economist know that a country like China could manufacture all goods all the 6 billion people on Earth need. With their low wages. This might happen. What should American, European and other workers do? Nothing. Kapitalism is by it's nature, the best economic system, but also a suicidal system. Kapitalism dictates that all manufacturing jobs go to China. Other countries better start a 1 child a family population reduction policy, because not too long from now there will be a lot of unneeded workers everywhere. It's either population reduction or poverty on a massive African scale. And poverty in the US will lead to a Weimar like Republic and we know what follows after that. An American Third Reich.
Posted by: Ricky Vandal on February 14, 2004 04:55 AMR Anand-- to put your comments in economic terms,
the net moves the world closer to the economist
perfectly competitive world.
The problem is that noone would really like to live in a world of perfect competition because
in that world there are no "profits".
Many of my capitalist friends believe the net
destroys profits.
"...And poverty in the US will lead to a Weimar like Republic and we know what follows after that. An American Third Reich...."
Very prudent observation. The people who introduced the New Deal were also prudent observers.
-------------------
R. Anand:
A few years ago, Bruce Sterling the well known SF author wrote: "What if it turned out that the Net was just plain too much for business to handle? That it was downright toxic to free enterprise?"
Those two questions are different questions. The net could indeed be too much to handle for some of the businesses, while it would bring about further opportunites for others.
As to the free enterprise: Remember that free enterprise is an institution while the net is technology. What impact a technology has on an institution depends on how you regulate the use of that technology. So far, I believe the net has only had positive impact on free enterprise.
Spencer:
Again, good observation. What is then "profit"? I think the science of economics does need to be re-invented. Here is an initial attempt:
1- Profits always disappear any way - eventually, in a given market.
2- The net perhaps increases the speed at which profits dissappear in a market.
3- Questions: In what kind of markets? How fast? What happens when that speeds reaches infinity. Zero profits right off the bat? And then no entrepreneurship? But what about OSS? What is OSS? Could there be "a different definition of profit" in OSS? Is there entreprenurship in NGOs? Do "non-profits" offer "a different definition of profit"?
Once you re-define "profit", you re-define the science of economics, as well as the institution of entrepreneurship.
"Had he proposed real stimulative tax cuts--tax cuts for the working and middle classes who will spend rather than the upper class that saves--we would have a much stronger labor market now."
Even if the "upper class" saves most of their income, wouldn't that income be used to finance mortgages, etc. for others? Unless they are keeping the extra cash in a mattress, it will circulate and benefit those that are in the market for loanable funds.
Posted by: EcoDude on February 14, 2004 06:13 AM"...Even if the "upper class" saves most of their income, wouldn't that income be used to finance mortgages, etc. for others? Unless they are keeping the extra cash in a mattress, it will circulate and benefit those that are in the market for loanable funds...."
Why not channel all the income to just one person then? Pass a law and simply rule "... all income generated in this country goes to Bush clan..." and then they'll put it in the bank and it would circulate through the economy. Simple, no? Like they had in the Soviets, except that it wasn't a clan, it was the Communist Party.
When confused, take the limit as x approaches zero or infinity and see how it looks.
(Hurf! My adsl connection went bad agin!)
Posted by: Bulent on February 14, 2004 06:28 AMOffshoring is an excellent economic and political force. It raises American productivity and creates some useful economic insecurity among the part of the population that votes. The former increases the size of the pie; the latter is likely to have it shared more fairly.
Posted by: Gerard MacDonell on February 14, 2004 06:45 AM"I think the winning - and appropriate - political message is that free trade isn't a good thing unless it is matched with health care, education, and opportunity for Americans, but protectionism is a terrible thing because it will prevent health care, education, and opportunity for Americans."
Excellent.
Posted by: anne on February 14, 2004 06:52 AMThe Toronto Star took a poll the other day and reported that Bush would lose 86-14 against anybody if he ran to the Canadian electorate.
This is insane. Bush is just about the best thing that ever happened to Canada. We get the full Keynesian force of the dope's deficits without having to pay for it -- those of us who don't have American children that is.
The building boom in Toronto is something that has to be seen to be believed. It hasn't been like this since maybe 1955, back when the Golden Mile really was paved with gold. Incidentally this means we have almost zip crime, except for a few extra murders among the cokehead crowd, the boom in their business being an unfortunate concomitant of ready cash in the workers' pockets.
In normal times, according to a friend who heads the Chinese drug desk at 52 Division, the usual Toronto murder is over real estate, the real estate in question typically being located in New York. American crime lords apparently prefer to live in a city which has good schools and relatively safe streets. What fun it is, that cokehead Bush should be fueling that particular industry as a side-effect...
his draws attention to an important economic law: full employment lessens violent crime overall, i.e. against non-criminals. (Francis A.J. Ianni, please report in.) There is strong social pressure among kids who work to make the dummy who wants a can of Colt 45 put in a shift at the warehouse to pay for it -- if the day labor at the warehouse is available.
Posted by: David Lloyd-Jones on February 14, 2004 07:12 AM"blue-collar workers bore the brunt of America’s economic cycles"
Why is it so hard for economists to admit that distribution of income is a political question and not an economic one?
Posted by: John on February 14, 2004 08:18 AM"blue-collar workers bore the brunt of America’s economic cycles"
Why is it so hard for economists to admit that distribution of income is a political question and not an economic one?
Posted by: John on February 14, 2004 08:18 AM"Why not channel all the income to just one person then? Pass a law and simply rule "... all income generated in this country goes to Bush clan..." and then they'll put it in the bank and it would circulate through the economy. Simple, no? Like they had in the Soviets, except that it wasn't a clan, it was the Communist Party."
If transferring income to the "upper class" does no good then where is the argument for transferring income to anyone? Let's pass a law to transfer all income to the poorest person in the United States and see if the money would not circulate throughout the economy.
Posted by: EcoDude on February 14, 2004 09:26 AMI said:
"When confused, take the limit as x approaches zero or infinity and see how it looks."
Limit of transferring more income to upper class is to transfer all income to the richest clan, not the poorest. But it really doesn't matter toomuch: Once you transfer all income to the poorest person, then that person becomes the richest person. Trouble with that is, come next year, you will have to determine the poorest person again. Etc....
P.P.S.
IF (that's a BIG "if") economics is a "science" at all, it IS the science of 'income transfers'...
--------------------------------
"Main Causes of the Great Depression" (May 13, 1996)
http://www.gusmorino.com/pag3/greatdepression/
--------------------------------
"Tour of the US Income Distribution: 'The L-Curve'" (undated)
--------------------------------
"The Walmart Effect: Part I 'An Empire Built on Bargains Remakes the Working World'" (November 23, 2003)
http://www.latimes.com/business/la-fi-walmart23nov23a,1,7637894.story
Posted by: Mike on February 14, 2004 10:49 AMI wish people wouldn't say things like:
it does little good to argue that offshoring is not to be feared — that it is simply the way the world works.
This is just as true if "death" is substituted for "offshoring." Nonetheless...
Posted by: Jonathan Goldberg on February 14, 2004 11:09 AM"it does little good to argue...that it is simply the way the world works."
Oh, I don't know about that, Jonathan.
That sort of argumentation does SOME good, for SOME people, SOME of the time...
Posted by: Mike on February 14, 2004 11:30 AMRoach: “Well-educated, high-paid, middle-aged white-collar workers are losing their jobs for the first time ever. “
Where was Roach in 1969-1971? Cuts in defense spending by the Nixon administration led to massive layoffs in the aerospace industry. This rippled through the economy causing unemployment in the technical industry. There were few jobs available for engineers and scientists anywhere in the economy. Of course at the same time we still heard the drumbeat of: shortage, shortage, shortage from the likes of the NAS and other pro employer organizations. Academia of course did nothing to tell their students that their job prospects were bleak. Circa 1970 our universities produced about 900 PhDs in theoretical high-energy physics with opportunities for about a dozen. It took a very long time for opportunities to improve, and they never went back to the good old days are least for physics. Just a few years ago one of my friends managed to convince a colleague not to go back to school and get a PhD in physics. The guy listened to reason and didn’t. Instead he started a tech business, and today he employs 30 people. Of course the current situation is much worse than 1970. Now we hear that it’s just free trade, that’s the way the world is. And those hordes of H1b immigrants brought in to replace Americans-- don’t complain you xenophobe racist, that’s just the way the world is. The way of the world is also big trouble when you put large numbers of people out of work. Big trouble is coming, and Roach knows that.
"...Big trouble is coming, and Roach knows that."
"Big trouble" doesn't necessarily HAVE to "come", A.
Unfortunately though, I think you're giving Roach far more credit for insight and/or foresight than he deserves....
Posted by: Mike on February 14, 2004 11:45 AM"Why don't economists..." That's usually a sign that I'm about to read something that's either strange, or a perfect description of what economists actually do. Here we go:
"Economists know that a country like China could manufacture all goods all the 6 billion people on Earth need." But people want much more than we need. We can all subsist on a whole lot less than we actually consume, but usually people want more no matter what. Instead of a house, maybe a nice house with central heating. Instead of food, maybe those really nice hothouse tomatoes. What makes you think that as the Chinese get richer they won't consume more too? Or are they masochists?
Spencer says that economists can't stand the thought of perfect competition. That's news to me (as an economist in a mildly liberal place) since if you ask maybe 90% of my colleagues, they'd describe it as the ideal mechanism for markets. What textbook written in the past fifty years hasn't said this?
Bulent writes, "Once you re-define "profit", you re-define the science of economics." Redefine it to what? Last time I checked, the definition of profit as total revenues minus total costs worked pretty nicely. Total costs include opportunity costs, of course.
A small point for Bulent about 20 posts above (oh, how quickly things get stuck back in the queue when you go on a bike ride in the snow). College-educated people in the US strongly lean Republican. Those with PhDs, however, generally lean Democrat, as do those with only high school educations. I really have no idea what to make of this but it's a cool factoid.
Posted by: Chris on February 14, 2004 02:38 PMNow to some interesting stuff from Zizka waaaaay up there in the queue. "I don't get it. 8% change seems like quite a bit. Lumping the high-skill immigrant workers in with the unskilled and then averaging obscures what I'm talking about. And at the bottom level, immigrants will bring down others' wages to their level, which is my point, so "don't earn that much less" isn't an argument."
Maybe 26% of the US native labor force has a college degree and 74% doesn't. Maybe 20% of the immigrant labor force has one and 80% doesn't. So in all, about 25.2% of the labor force would have college degree, with immigration at 14%. Say we cut immigration down to 6% but kept the distribution of immigrants the same. Then 25.6% of the population would have a college degree.
Either way we're not looking at that big of an effect. There's no way that labor demand is that inelastic where a few tenths of a percentage points' change in the labor force composition would matter that much. The size of the effect is likely to be smaller than the error in our calculations.
Finally, blaming Bush for people's wages or employment histories is pretty unfair. Nothing he does really sets my wages; they're set by a market clearing process. And it annoys me when people say, "Rich people won't spend their money but poor people will." For one thing, there's an adding-up constraint being violated in this explanation. Total income has to go somewhere, either to consumption, or to investment, or to the current account. Of course that increase in personal income from tax cuts is offset by a rise in future taxes, but the fact that supply-siders make this mistake doesn't excuse the other one.
Posted by: Chris on February 14, 2004 02:50 PMI still don't get it. I was specifically talking about the effects of immigration and outsourcing on members of the labor force who don't have college degrees -- i.e., on what is traditionally called "labor". I was not talking about the proportion of the labor force with college degrees, or the average condition of workers all lumped together.
I was not talking about your own persoanl wages, either. I was talking about the wages of labor generally (traditionally defined). I understand that Republicans would have a benign and fatalistic attitude toward the problems of labor. I just can't understand why Democrats do.
Posted by: zizka / John Emerson on February 14, 2004 04:11 PMWaffle, from way up there:
What you're talking about is sometimes called the Product Cycle - production being passed down to less capital-intensive, cheaper-labor countries after the developed world has wrung the rents out a new product and standardized the production process. And some (me, but probably actual economists too) think that the recent and rapid technological diffusion across the world has increased the speed at which production can be standardized and shipped abroad. If true, you're probably right.
But if it happens on a huge scale, US wages just adjust downward, and the dollar adjusts downward until our economy converges with some of our competitors. But, on the plus side, cheap-ass goods as far as the eye can see.
Less sarcastically, I actually think it is progress (I must, as an aspiring economist). The problem is the enormous and rapid dislocations that might occur - they're coming fast, and the scale of a human's life is staying the same, so it could be that humans for a generation are shafted. I think it will be interesting to watch, but then I don't have a mortgage.
Posted by: andrew on February 14, 2004 04:33 PMAndrew: Yes US wages will adjust downward, but we will have thrown away a great deal of valuable human capital. For example, it takes ten years of study and post doc work to become a research biologist. If we contract research biology work to India (or bring Indian H1bs here) because it’s cheaper, and consequently put a lot of American research biologists out of work, then we have wasted the cost of their training. A sunk cost borne by the individual and society at large. I don’t think the economists are accounting for this in their free-trade models. Who would spend ten years of his life to train for a profession that offers little hope of a career? Answer-- very few. So we will be out of the research biology business at some point in the future. But there’s a fair chance this will not happen because the educated middle class in America won’t stand for it. Revolutions are made by middle class types, not the lumpenproletariat. We could eventually end up with someone like Buchanan or Kucinich running the government. Sometimes politics looks like a Klein bottle.
Posted by: A. Zarkov on February 14, 2004 06:31 PMI know it is a bit late to reply to Chris, but he and I were talking about different things when he said:********************
I'm afraid that Liberal is right (and I'm certainly not liberal). Labor is supplied pretty inelastically; that is, labor supply doesn't change much with respect to wages. Labor demand does. So income and payroll taxes are mostly paid by workers regardless of who actually signs the check. Think of sales tax; whether or not it's added onto the final price or already included, you and the store are paying it anyway. Tax incidence is one of those things that just mystifies noneconomists because it isn't immediately obvious.
**************************
and I had said:
If most economists think that employers would pay an extra 7.5% to wage earners if they did not have to pay it in payroll taxes, whatever them economists are smoking must be more fun than magic mushrooms. It is a cost to be sure, another one that they avoid by outcountry outsourcing.
**************************
Anyone want to bet that if the employer's part of the payroll tax were zeroed out that employee pay would increase by anywhere near the same amount? An interesting indicator (and here I only rely on recollection) is that when the reach of payroll taxes were expanded to cover additional employees in the 1950s, the employees pay was not reduced to cover the employers part of the payment. The same could be said about what happened after the introduction of Medicare.
A. Zarkov,
Thanks for the reminder of the thrilling days of yesteryear when I worked at the Trojan Rubber Works (TRW). Reading then in the LAT of 8000 people applying for work as gas meter readers. I think there were 200 ot less jobs being offered. TRW went from 16,000 to 8,000 employees during my time there. I started the week after the first moon landing.
Ah!, reading the LAT want ads and finding exactly zip jobs that looked like I had a chance of being offered an interview let alone being offered a job. Of meeting vacuum cleaner salesmen who just a few mounths previously been engineers at one of the aircraft companies.
I was one of the lucky ones who got out of LA and into a new job before losing the house and going to live with the wife's parents. Thank god for the backup of the wife's parents and the better economy of Northern California.
I think we are in for a long hard struggle to climb out of the hole we have dug.
Thanks for all the great comments on the Prof's blog.
I've got to argue with an earlier comment: "labor supply doesn't change much with respect to wages. Labor demand does."
I have run a business and made a payroll week after week, and I know a bit about this, too. You employ the number of people you need to employ to meet demand, PERIOD.
Also, any business that would lay someone off because wages (or taxes) went up is a business that is employing too many people. Any business that wouldn't hire as necesary to meet demand is also not running their business well.
Chris:
Concerning re-definiton of profits, I mean considerations like this:
Profit is also entrepreneur's reward. Yet, there is enterepreneurship in "non-profit" outfits as well. So what is "the profit" in non-profit initiatives? What is the profit in OSS initatives?
And remember what Greenspan is reported to have said recently (aaproximately): ...much of what we have been assuming to be human nature in matters of economy turns out to be a matter of culture...
This means, I think, it is possible to create an economy /culture/ civilization fueld by a different definition of profit and it could prove to be superior (including military superiority) to the current American system of for-profit entrepreneurship, with profit defined as what the entrepreneur gets to keep in material terms.
Concerning folks voting Republican, you say:
" College-educated people in the US strongly lean Republican. Those with PhDs, however, generally lean Democrat, as do those with only high school educations. I really have no idea what to make of this but it's a cool factoid..."
Maybe it means Republicans ought to support universal coverage under higher education? (Joking)
Dogbert: Circa 1974 I was looking for a place to rent, and I stopped off at Mason McDuffie Realty on Telegraph Avenue in Berkeley. I picked out someone at random to get help and it turned out the guy had been a theoretical physicist at the Lawrence Radiation Lab (now called Lawrence Livermore National Laboratory). The wave of layoffs had hit LRL, and he got the axe. In desperation he took a job selling residential property, and he never worked in physics again. That was then. Here’s a modern version of that story. A new checker appeared at the supermarket where I regularly shop. It seems he used to be a network engineer, and he too will most likely never work at that again. The sad thing is he thinks it’s just a cyclical downturn, and he expects to return to his old line of work. He doesn’t realize that once you’re “out of field” for a year, most IT employers regard you as obsolete, and you become unemployable, even if you’re willing to work for a low wage. In “free trade” theory these people are supposed to “job shift” into some higher level of employment after suitable retraining (at a university of course). But I would like to hear from DeLong and Roach what they are supposed to shift into, and the why the Indians can’t do that too, and cheaper. Moreover Roach doesn’t seem to understand the details of the IT business either when he says:
“The IT-enabled global labor arbitrage provides high-wage companies in the developed world with a new and very powerful means to execute that option. That means is offshoring.
According to professor Matloff at UC Davis, “offshoring” IT gives only modest cost reduction, because you really need face-to-face contact on a regular basis. The way to reduce costs is to use immigrant labor, and that’s exactly what they do.
A. Zarkov:
Fact of the matter is, I think, that software engineers in a way correspond to what auto workers used to be. Narrow skill and well paid while on demand, unemployable otherwise.
In Turkey, there are "vocational lycees" where they teach you over a period of three years how to operate machine tools, and little else. This, I consider as bad as crime.
In US setting, I consider it equal crime to teach someone over a period of four years how to code software, and little else.
I say it again; at least two years of Harvard style arts and science education must be mandatory for every young American. America can afford it and it is vital that America heads in those directions, for a number of reasons I elaborated on in this blog before.
An occupation does not last a life time any longer. And one needs a broad based education to be able to learn multiple occupations.
The physicist you mention managed to learn real estate business, I'm not surprised -- arts and science ed.
I am not very optimistic about the learning abilities of the network engineer you mention (unless he was physicist-turned-software engineer).
Posted by: Bulent on February 15, 2004 12:33 AMIt seems to me, that now we - in the rich part of the world - are paying the price of keeping the rest of the world poor, i.e. on low wages, so now they can compete, not on superior skills but on low costs. Tough luck for us.
Posted by: John Ståhle on February 15, 2004 02:41 AMLots of interesting comments. Does anybody sleep around here?
Zizka writes: "I don’t think the economists are accounting for [loss of specific human capital and the pain it causes] in their free-trade models." Gary Becker (a pretty conservative guy) and lots of labor economists would disagree with you. So would Brad, for that matter, or myself; even though we're not labor economists, we constantly point out that dislocation hurts. But would you put a stop to technological change in the real world, where it's hard to identify and compensate the losers, because some people lose? And how is trade different from other kinds of technological change? Just because foreigners are involved doesn't change the basic idea.
Regarding how wages are determined, the equilibrium process that governs your or my wage should govern a steelworker's or automaker's wage also. Skilled labor and semi-skilled labor are still labor. That is, if firms maximize profits at all, wages should roughly be the marginal return on hours worked, which goes up as skills go up. So the greater the skill, the greater the wage. For some reason that we don't entirely understand, the return on education has gotten much, much bigger in the US than before.
Eli states, "An interesting indicator (and here I only rely on recollection) is that when the reach of payroll taxes were expanded to cover additional employees in the 1950s, the employees pay was not reduced to cover the employers part of the payment." If you have references to any data or research to this effect it would be really interesting. It might shed some light on why labor markets seem to adjust strangely to shocks.
Dave Johnson: You're telling me that if market wages were doubled, or if the price of your product fell by half, you and other businesses would hire exactly the same number of people? That means that you don't care about profit, however defined. Something's missing from the story. Which leads me into replying to Bulent, point by point, in the next post....
Posted by: Chris on February 15, 2004 11:32 AMBulent: If by “software engineer” you mean “programmer,” then your comparison with automobile workers is somewhat apt. However the term is a misnomer because the work of the modern “software engineer” does not involve using mathematics, physics and so. In the early days of the IT industry, the mainframe manufacturers also developed the system software. They used actual hardware engineers (people with engineering degrees) to develop the software they sold with their machines, and after a while they started to call them “software engineers.” The other (archaic) term used for the software engineer is “system analyst.” Programmers, especially those who do little more than write code, often don’t even have a college degree, it’s a vocational activity akin to the skilled factory worker. Yes it’s these people who have been the primary victims of non-immigrant visa worker in the past, but I’m more worried about the future where the trends are more ominous for the future of America.
Some highly specialized knowledge work requires many years of focused training; a good example is the radiologist. It requires about 12 years of study and training to become a board certified radiologist in the US. To get there you need four years undergraduate work, another four for medical school, a year of internship, and then about three years as a resident. The direct costs should be nearly $1 million. Adding the opportunity costs of not working for at least 8 years, perhaps another $2 million (includes the return from investing the money you don’t make) and you get over $3 million in sunk costs to produce a radiologist. That means a radiologist must produce a cash flow of $250,000 per year just to get an 8% return on his career investment. Lets say our radiologist would have earned $50,000 per year without any higher education, so that means his earning should be at least $300,000 per year. Add in 50% institutional overhead and assume he can read and write up about 20 images per day. That means the direct labor costs for a radiologist should be at least $100 per image. Today it’s possible to transmit the image to India to be read by an Indian radiologist. More than possible, it’s actually done at some hospitals. True they have to be certified and licensed at that hospital, but they can still come in less than $100 per image. Should we allow the Indians replace American radiologists to save let’s say $50 per image? And just throw away that $3 million investment? If we do this and have most of our radiology done in India then one day we will be dependent on them, and then they can then dictate the price of a vital service.
...and Bulent writes...
"Profit is also entrepreneur's reward." Exactly. We know that. But foregone profit is also the cost of not doing something else, and that needs to be considered. Bill Gates could have started Microsoft or become a lawyer, but not both.
"Yet, there is enterepreneurship in 'non-profit' outfits as well. So what is 'the profit' in non-profit initiatives?" Satisfaction, helping people, social approval, all nice stuff. Again, people have to value these things because they come at a cost. So why not treat them as profits in a general sense?
"What is the profit in OSS initatives?" I assume that you're referring to open source software, and not the operational support services that make dealing with the phone company such a treat. Based on the open-source programmers that I have met, I would venture a far from complete guess:
-Fun. Lots of people program computers as a hobby, drink too much coffee, and like to wear t-shirts with penguins on them. Lots of college students come to mind here; they seem to have lots of time on their hands. This is not a criticism; in fact lots of the good products of the university system come from this sort of situation.
-Politics. This overlaps with fun a great deal.
-Money. The funny thing about open-source software is that the code is free but it's hard to install and configure. I'm fairly computer literate but I tried installing Linux once and completely destroyed my machine. Your average businessman isn't going to spend all day recompiling kernels; he'll (shudder) outsource that job to some kid instead. The money's to be made in the implementation, not the production.
Whether or not OSS is actually important remains to be seen. Running a whole economy on these principles sounds like a particularly bad idea, since people have wildly heterogeneous tastes and endowments. A functioning price system is necessary (but maybe not sufficient) to bring these things into line.
For instance, I like cheap red wine, bicycles, and good peanut butter; and I dislike vodka, motorcycles, and Skippy. Without prices and profits to signal to producers that they should produce more of the former and fewer of the latter, there's no way to coordinate production to what people actually want. There's no way that some winegrower in Brad's backyard or a bike-part-maker in Italy would know or care about my preferences apart from through prices. Open-source winegrowing sounds like a bad idea.
I picked kind of a silly example to make a point. But substitute things like medical care, housing, and food, and we're talking about life and death issues. People think that economists like Adam Smith's metaphor of an invisible hand because we're a bunch of greedy fools. The truth is, as people we may as well take advantage of greed since that's really the only possible way to improve people's lives. There just aren't any other feasible ways. Like democracy, competitive capitalism is the worst system apart from all others.
Posted by: Chris on February 15, 2004 12:11 PMA. Zarkov: That $3 million is gone whether or not your radiologist still practices radiology. So that decision should be based purely on marginal considerations. As the saying goes, if you're in a hole, stop digging, unless you're about to hit oil.
And in the last line of your post, you're confusing countries and firms. A country is not a firm; it can't dictate a price the way that a monopoly can. If the good is supplied by many suppliers from India (say, textiles), they still compete against each other and give you competitive prices that way. This explains also why countries don't compete against each other. Businesses do, and people get these things confused all the time.
Everyone repeat after me. Countries are not businesses. Trade is not a zero sum game the way that business sometimes is. GM's loss is Toyota's gain. America's loss is not Japan's gain. This is why businessmen like George Soros or Lee Iacocca (sp?) often say the dumbest things about economics.
Posted by: Chris on February 15, 2004 12:25 PMWhat I've been saying here, in particular, is that free trade has hurt a significant part of the Democrats' constituency and that it was a big mistake for (presidential) Democrats to give such unreserved support ro free trade, especially since the various proposals to soften the blow were not really put into effect. The party has been weakened, and people who now want the Democrats to oppose the Republicans on other issues find that they are in a weaker position. The Democrats failed to represent a significant share of their constituency (i.e., the ones you can't "pander " to -- old-style labor). I understand why republicans are gung ho about free trade. I just can't understand why Democrats are.
You know, Chris, even the dumbest of us here know something about economics.
For economists, nations really shouldn't exist, and political leaders shouldn't represent their constituents, and the laws of economics will make everything wonderful. If economics is a perfect description of reality, then Chris is right. I think that it's perfectly OK for government to interfere in the economy for the sake of softening the negative impact of progress, even if that slows progress a bit. And it's right for governments to represent their own people, rather than the average long-run global citizen. That's what governments are for.
Posted by: zizka / John Emerson on February 15, 2004 01:05 PMChris: Yes the $3 million is gone, and future students know that so they will not study radiology, and I think that’s the problem. Sure countries are not firms in the ideal world of economists, but reality can be different. Suppose we want to support Pakistan against India in some future war between the two. We might need to do that because of an alliance between Pakistan and China and we don’t want to alienate China. The Indian government could have a future weapon to wield against the US as it can threaten to embargo vital services to the US that we can’t replace. In the real world firms aren’t free to do as they please. For example US firms can’t sell to Cuba, nor can they sell certain cryptographic software to anyone in a foreign country because it’s classified as “munition.” You might not remember the days when relations between India and the US were quite frosty. The Indian foreign minister V.K. Krishna Menon would regularly and harshly denounce the US. Yes, India was officially neutral in the cold war, but it really sided with the Soviet Union as late as the 1970s when the US generally supported Pakistan. India, China and Pakistan are all nuclear powers, and there is no telling how this volatile triangle will behave in the future.
Posted by: A. Zarkov on February 15, 2004 01:38 PMI excerpted this Roach article in an earlier thread and chose a different excerpt. My excerpt had the effect of prioritizing a different set of problems. I would suggest anyone read the whole thing:
http://www.morganstanley.com/GEFdata/digests/20040213-fri.html
Brad's excerpt focused on the political problem of stemming the protectionist tide. My excerpt focused on the true extent of devastation in the job market, which I think the free-traders are not taking a good hard look at. From Roach:
One of the pillars of trade theory is that wealthy industrial economies like America’s can be broken down into two basic segments of activity — tradables and nontradables. International competition has long been confined to the tradable goods, or manufacturing sector. By contrast, the nontradables sector was largely shielded from tough competitive pressures, thereby providing shelter to the 80% of America’s private sector workforce that toil in services. "
So, the difference this time is in how trully huge and vital and irreplaceable is the sector of the work force which is now subject to "competitive pressures". The size is simply unprecedented. The parallels to past breakdown due to this variable, which is tending to the limit in this situation.
Again, from Roach:
Offshoring is seen as but a bump in the road for theorists like Mankiw. The presumption in this case is that an innovation-led, flexible US economy is able to uncover new sources of job creation that can fill the void left by this cross-border labor arbitrage. Yet that may be a heroic assumption for the foreseeable future.
"A heroic assumption for the foreseeable future."
That is NOT going to fly, folks. If that's true, NOTHING can stem the protectionist tide.
That means some serious policy wonks must do some serious policy work. Status quo won't cut it. The question remains, WHAT IS TO BE DONE??
Of course, if the job situation resolves itself in six months, this issue will become moot. I doubt that will happen.
Posted by: camille roy on February 15, 2004 01:47 PM"Dave Johnson: You're telling me that if market wages were doubled, or if the price of your product fell by half, you and other businesses would hire exactly the same number of people? That means that you don't care about profit, however defined."
Exactly. You hire the number of employees you need to meet demand. Now I assume that you run your business sensibly, and don't pay more than it costs to sell your product. I'm talking normal day-to-day operations, not dramatic swings in the overall picture. If the market forces prices to drop THAT much, you might be in the wrong business. And if labor costs more than you're selling your product for, you're also in the wrong business. But if you have people who want what you sell, you are going to hire the people to get what you sell to those people. I mean, duh! And, of course, you aren't going to hire extra people just to have them around. Duh!
When the price of programmers went WAY up in the late 90's, tech companies paid it, because they needed the programmers. They didn't hire extra programmers (except Microsoft; they were trying to dry up the labor pool for their competitors...) and they didn't not hire programmers they needed. BECAUSE THEY NEEDED THEM.
And when demand for tech fell through the floor, programmers were laid off in large numbers.
It's about demand and meeting demand.
Posted by: Dave Johnson on February 15, 2004 01:49 PMChris' notes:
Hey, I like cheap wine too! Haven't got helluva choice any way!:-)
=====================
"Satisfaction, helping people, social approval, all nice stuff. Again, people have to value these things because they come at a cost. So why not treat them as profits in a general sense?"
Exactly! Psychic utility?
===============
"A functioning price system is necessary (but maybe not sufficient) to bring these things into line."
Absolutely. I'm not challenging markets' allocative function.
=================
OSS: Fun. Politics. Money.
Juicy,no?
===================
Food: Only about one percent of US population can produce more than all the foodstuff the nation needs. This means if one works in farm sector for one year, he or she produces all the foodstuff she or he would need for a hundred years. How could food be a matter of life and death in America? How could there be hunger in America? The only answer is, "greed" (whatever that means) has been allowed to go beyond the point of serving the society. It needs to be checked a little, e.g., making it a rule that no one ever goes hungry in America, for any reason.
================
I now pose a question:
What is income? Why does one need income?
================
And I repeat some of the remarks I have made:
"And remember what Greenspan is reported to have said recently (aaproximately): ...much of what we have been assuming to be human nature in matters of economy turns out to be a matter of culture...
This means, I think, it is possible to create an economy /culture/ civilization fueld by a different definition of profit and it could prove to be superior (including military superiority) to the current American system of for-profit entrepreneurship, with profit defined as what the entrepreneur gets to keep in material terms."
Anyone who has to meet a payroll like Dave Johnson knows that the federal and state governments mandate all sorts of things that raise labor costs in the US such as workman’s compensation, social security taxes, various payroll taxes and let’s not forget handicap access, and ergonomics. Even building codes increase our labor costs. The attitude of the government is “you must pay to play.” We don’t care if your foreign competitors don’t have these extra costs, you must pay for all these things we want you to do. My question to the unfettered free trade advocates is: “Should we waive all these requirements for US firms that face foreign competition? Or do you expect US firms to somehow, magically, compete with firms in countries nk have few (if any) of these cost-increasing laws?
Posted by: A. Zarkov on February 15, 2004 02:32 PMA. Zarkov:
"...then they can then dictate the price of a vital service."
They cannot dictate much more effectively than they can dictate now.
Would you rather pay $50 to get an x ray or $100? And suppose you need 10 of them? (I certainly hope you never need them, of course).
Chris already referred to "sunk cost" so I don't need to get into that.
Who knows? Maybe only two years of undergrad and two years of internship is enough for radiologists? And maybe that would have never be understood if it weren't for Indian radiologists?
I'd say use Indian radiologists for $50 x rays and use the savings to expand higher ed coverage. That, combined with a bit accelerated education for radiologist might cut in half the investment requirements to become radiologist -- and other medical specialists as well. And so Medicare costs could go down.
Posted by: Bulent on February 15, 2004 02:50 PM
A. Zarkov makes a very good point. Economists can talk until they're blue in the face about how free trade and offshoring is supposed to benefit us all, but if the middle class sees their standards of living go down for long enough, they're not going to put up with it, and protectionists will be elected to stop it. As I stated before - free trade is only viable over the long term if most of the American people are reasonably happy with their job situation and prospects. Economic rationalizations saying how things *should* work out only go so far, when they are clearly *not* working out right now, and there is no sign that they will any time in the near future. If you want to fight protectionism and the anti-offshoring movement, you'd better get cracking on the creation of good jobs.
Still waiting for an answer to my three questions:
(1) It has been admitted that even if the country as a whole may be better off with job exporting (which is debatable, but let's pass that over for now), some groups will, if not compensated, be net losers in this game. What programs, if any, would you propose to ease the pain of offshoring and free trade on specific groups of Americans who are negatively affected by it? Please be specific.
(2) What do you think the political feasibility is of the programs (if any) that you would recommend?
(3) How would you respond to a point made in one of these threads by another poster that there is no realistic possibility that the losers of offshoring will be compensated in any way, and that therefore it is rational for the individuals in these groups to oppose it even if it results in a theoretical benefit to the country as a whole? Is it your assertion that they should sacrifice the well-being of themselves and their families for the enrichment of others?
Posted by: Firebug on February 15, 2004 03:32 PMBulent:
They can dictate the price if there’s no domestic competition.
I would rather pay $100 for an American radiologist than $50 for to get it read in a foreign country. Here’s why. First I can sue the American radiologist for malpractice, he knows that, so he should be more careful than the foreigner. Then I can complain to the American Board of Radiologists much more easily than I can complain to the Indian Board of Radiologists (if there is one). The American likely has assets to protect while the foreigner might not. With my medical information out of the country I lose control over it. Will the foreign country protect my privacy? How do I enforce that in a foreign jurisdiction?
“Who knows? Maybe only two years of undergrad and two years of internship is enough for radiologists? And maybe that would have never be understood if it weren't for Indian radiologists?”
Exactly-- who knows? Have you ever tried to read a film? It’s not easy, and you need medical experience to make an interpretation. Perhaps one day it will be reduced to a computer algorithm and radiologists will be largely obsolete, but for a long time we will be dependent on human judgment. Do you really want a vital medical decision made by a low-bid foreigner whose training you’re not sure about, and who is located at a distant site? Do you want to run the risk he might miss a developing aneurysm? All to save $50!
A. Zarkov: Some highly specialized knowledge work requires many years of focused training; a good example is the radiologist. [...] That means the direct labor costs for a radiologist should be at least $100 per image. Today it’s possible to transmit the image to India to be read by an Indian radiologist. [...] Should we allow the Indians replace American radiologists to save let’s say $50 per image? And just throw away that $3 million investment?
The story made me think of one of my former bosses who was trained as an accountant. He always liked to remind us that sunk costs should play no role in any decision on how to spend money: you can't get the old money back anyway, so you should not let it affect what you do with what you have now.
Under that rule the answer is yes, you should ignore the three million dollar investment (sunk cost) and get the images read for $50 a pop.
That doesn't say anything about what should be done for people who lose their jobs because of trade. I think the U.S.system is a bit miserly and can be improved.
Posted by: Christian Murphy on February 15, 2004 06:30 PMBulent states, "[Alan Greenspan's comments], I think, it is possible to create an economy /culture/ civilization fueld by a different definition of profit...." How would you create this culture and what would it look like? Culture is a pretty spontaneous thing that is the result of lots of people's actions, but nobody's intention. The last time people tried creating a culture based on a different definition of profit, tens of millions of people died; something as simple to produce as food wasn't even available in a lot of places. That's what I mean by life and death. It's easy to destroy culture but pretty hard to create it.
A. Zarkov states, "Should we waive all these [costly] requirements for US firms that face foreign competition? Or do you expect US firms to somehow, magically, compete with firms in countries nk have few (if any) of these cost-increasing laws?" We're talking about something that reduces productivity whether or not we have free trade. Foreign competition has nothing to do with this--we're talking simply about less production per hour of work. Whether or not this is worth the costs depends on the actual regulation and has nothing to do with whether or not the Chinese or Brazilians have the same rules. Again, countries don't compete, but firms do. New firms are born and old firms die or rearrange, so what happens to one firm might not happen to a country as a whole. GM and the US are not the same thing.
Sorry for jumping around, but not to pick on Bulent, he asks, "What is income? Why do we need it?" Well, income is all production of all goods at a point in time. Usually we're talking about GDP, where these things are weighted by price; there's a good economic reason for doing this that's just a little bit technical, but the basic idea is that households prefer more resources to spend. But you can talk about income in lots of dimensions--pepperoni pizzas, bottles of delicious red wine, bike derailleurs, environmental protection, whatever, and it all works the same. It's the simple concept that more goods are good.
I'll have to leave Firebug's comments to someone else since I have to go now. But, don't think of jobs being exported since a job isn't a good and we can't think of jobs being created, consumed, or moved around the way that we can think of pizzas. There's no such thing as an accounting identity for jobs like there is for income (Y=C+G+I+CA). Think of labor being allocated between different tasks and there maybe being costs to moving around. Trade moves people between different industries, but so does any technological change. Why should we single out trade as being particularly disruptive when I can think of much more disruptive things like computers or stochastic fiscal policy? Does this mean that we should ban computerization since secretaries lose from this invention?
Posted by: Chris on February 15, 2004 08:28 PMThe choice shouldn't be between protectionism and what passes for "free trade". How about arguing for multilateral treaties protecting intellectual property rights? What about pushing countries to reform and make more transparent their financial systems? How about coming down hard on China and Japan for intervening against currency floats? What about India liberalizing its foreign investment/capital mobility laws? What about someone taking the IMF by the ear and telling it that fiscal austerity and servicing bad debt are making basket case countries that can't develop and therefore equilibriate? If free trade proponents want to make their position politically viable, then they better stop quoting inapplicable models like simplistic comparative advantage (that doesn't apply if capital mobility allows producers to pursue absolute advantage) and obscure benefit tests like Hicks-Kaldor (even Kaldor didn't think long term growth was compatible with a systematic trade deficit), or anti-competitive behavior like dumping, etc. ... and start coming up with some real world solutions and defenses!!!
If a country benefits from "free trade" models that don't take into account subsidies, intellectual property rights, population size differences, currency intervention, capital mobility barriers, and inequitible market liberalization then I would argue that "free trade" is another word for "stupid trade". There is a serious economic problem involved here structurally and in the trade systems. Spare me pie in the sky answers or answers that almost moronically confuse automation job eliminations with offshoring because they don't understand the concept of capital flight and absolute versus comparative advantage.
Posted by: Oldman on February 16, 2004 12:43 AMFrom: "Why Oh Why Can't We Have a Better Press Corps? (Special Free Trade Edition)* February 11, 2004
http://www.j-bradford-delong.net/movable_type/2004_archives/000270.html
[---------]
"Average" Americans have stood stoically by for DECADES watching the trade deficit explode while their jobs, industries AND communities literally wither and die, waiting for all the good things "economists believe" to flow from "free" trade to trickle down to them.
Well, it hasn't happened.
There's lots of reasons. To start with, trade doesn't mean barter. The "medium of exchange" is a BIG part of this "message"...
[---------]
....THEN, there's "the Walmart Effect"...
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November 23, 2003
First of Three Parts
An Empire Built on Bargains Remakes the Working World
Wal-Mart is so powerful that it moves the economies of entire countries, bringing profit and pain. The prices can’t be beat, but the wages can.
By Abigail Goldman and Nancy Cleeland, Times Staff Writers
LAS VEGAS — Chastity Ferguson kept watch over four sleepy children late one Friday as she flipped a pack of corn dogs into a cart at her new favorite grocery store: Wal-Mart...
http://www.latimes.com/business/la-fi-walmart23nov23a,1,7637894.story
Posted by: Mike on February 11, 2004 10:31 AM
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Ponzi scheme just about sums it up for me.
Ever since, as Cheney reportedly said to Paul O'Neill, "Reagan proved deficits don't matter", the good ol boys on Wall Street AND inside the Beltway have (with the tacit support "academics" across the land) been pawning every(American)thing that IS (equities, now real estate) AND isn't (jobs, public debt) "nailed down" to the rest of the world--to inflate their golden parachutes, their egoes, and their [asset] "bubbles"--and, by the way, to finance their delusions of imperial grandeur...
It all seemed to work well enough too--as long as it was only working class d***s and hicks out in the sticks who were doing the suffering for their economic sins. NOW though, even "educated" middle-class pr***s are "smelling the rats".
I heard Kerry got a big "Amen" from the crowd last night when he called THIS slip of the "inside" political lip...
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W.House Backs Adviser After Uproar Over Jobs
By Adam Entous
WASHINGTON (Reuters) - The White House on Wednesday stood by a top economic adviser who critics accused of encouraging companies to export jobs overseas, a factor in job losses during George W. Bush's presidency.
With political concern about unemployment heating up ahead of the November presidential election, White House spokesman Scott McClellan said "any job loss is regrettable."
He brushed aside suggestions that Gregory Mankiw, who chairs the White House Council of Economic Advisers, be fired for pointing out the potential economic merits of "outsourcing" jobs overseas.
"We certainly don't want to do anything that would undermine free trade," McClellan said....
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20040211/pl_nm/bush_jobs_dc_4
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...a "rare" moment of candor.....
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Kerry's Agility
"...He [Kerry] could take a big chunk of the vets' vote: a traditionally Republican constituency.
He also might make inroads with fiscally conservative Republicans, who gasp at seeing a $521 billion budget deficit. Kerry appealed to this group when he said he has heard the voices of "parents who want to hand on to their children a better future, not the heavy burden of federal deficits and national debt...."
...Kerry played up what he called "the wreckage of the Bush economy," and he seized on a Bush Administration official's comment that outsourcing is good for the American economy. Kerry said, "In a rare moment, they actually admitted what they are doing...."
http://www.progressive.org/webex04/wx021104.html
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All I can say is: It's about frigging time.
Posted by: Mike on February 11, 2004 11:58 AM
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The thing Brad AND his ideological kinsmen "neglect" (conveniently and incessantly) to address in their tiresome sermons on "free" trade is this simple fact:
There can be no "free" trade when the medium of exchange is POLITICALLY "fixed"....
Posted by: Mike on February 11, 2004 12:43 PM
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"Job shifting" involves a *lot* of people losing their jobs and suffering as a result.
Posted by: Brad DeLong on February 11, 2004 01:42 PM
[---------]
Translation: When "we" can't afford luxuries and fancy institutions like Berkley anymore, I'll get a job at Citibank (or Beijing pyrotechnic).
Until then, the trade deficit, down-sizing", "out-sourcing" and "job shifting" is YOUR problem. Sucker.
Posted by: Mike on February 11, 2004 02:37 PM
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You want a "rational response" to OUR trade problem? Here['s] one:
"...The starting point is for the major exporting nations each to unilaterally require that all its exports be payable only in its currency, so that the global finance architecture will turn into a multi-currency regime overnight. There would be no need for reserve currencies and exchange rates would reflect market fundamentals of world trade..."
"US dollar hegemony has got to go"
By Henry C K Liu
http://www.atimes.com/global-econ/DD11Dj01.html
Posted by: Mike on February 11, 2004 08:41 PM
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...The numbers have been bad--and getting worse--for almost a quarter centrury now, you know. Don't take my word for it though. Read 'em yourself. And weep....
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"U.S. International Transactions Accounts Data"
http://www.bea.gov/bea/international/bp_web/simple.cfm?anon=118&table_id=1&area_id=3
Posted by: Mike on February 11, 2004 09:12 PM
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...And people around here complain when I repeat myself. Let me make this perfectly clear.
I do it because people...have VERY short attention spans...
[---------]
...(Why don't they complain about that ;?)
Posted by: Mike on February 12, 2004 05:42 AM
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From: "The IMF Wishes the Bush Administration Had a Very Different Fiscal Policy"; January 08, 2004
http://www.j-bradford-delong.net/movable_type/2003_archives/003011.html
[---------]
Speaking of "stupid":
Can anyone here tell me why "free" trade true-believers (like Brad DeLong) aren't "leading the (political) charge" to wean us AND the world off the so-called "strong (or "petro") dollar"? I mean, how is pretending to believe in THAT political-economic fiction in OUR national interest?
That is to say, what REAL economic benefit accrues to "average" Americans (or, for that matter, average earthlings) when demand for US private equity and PUBLIC debt is artificially stimulated (by obliging other countries to park their foreign exchange reserves in US securities) while highly placed "transnationally corporate" resident aliens on Wall Street AND in Washington (like Greenspan and Rubin etc. etc.) vainly engage in flights of sophistic fancy attempting to explain away the persistent, pernicious (and growing) US trade (and budget) deficits (not to mention "consumer" debt) as thousands AND millions of "Made in the USA" jobs (as well as entire industries) together with our moral, ethical, socio-economic and environmental standards--not to mention our standard of living move "off-shore" to low wage, cheap currency, labor camps posing as countries in other parts of the world?
It's painfully obvious by now even to the casual observer, that NOBODY--other than a TINY handful of obscenely rich people (and/or their institutional "agents")--benefit, even in the short term, from this "arrangement". So why don't central bankers, political leaders and economists EVERYWHERE, across the ideological board, inside the various system(s) and out, scream "bloody murder" about the situation?
Well, I think the reason is: They're stupid.
Either that or they're "compromised"--bought and paid for--in a word: corrupt.
Or they're scared. Spineless. Gutless. Worthless. Useless.
Of course, I don't claim to be omniscient. I'm willing to admit I COULD be wrong. If anyone around here thinks he or she has a better "theory", I'm "all eyes".....
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>Strategic Analysis 2000 , January 01, 2000
>Interim Report: Notes on the U.S. Trade and Balance of Payments Deficits
>Wynne Godley
>"If the United States's balance of trade does not improve, the country could eventually find itself in a 'debt trap'..."
> http://www.levy.org/2/index.asp?interface=standard&screen=publications_preview&datasrc=f73a207294
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>April 11, 2002
>US dollar hegemony has got to go
>By Henry C K Liu
>"There is an economics-textbook myth that foreign-exchange rates are determined by supply and demand based on market fundamentals. Economics tends to dismiss socio-political factors that shape market fundamentals that affect supply and demand.
The current international finance architecture is based on the US dollar as the dominant reserve currency, which now accounts for 68 percent of global currency reserves, up from 51 percent a decade ago. Yet in 2000, the US share of global exports (US$781.1 billon out of a world total of $6.2 trillion) was only 12.3 percent and its share of global imports ($1.257 trillion out of a world total of $6.65 trillion) was 18.9 percent. World merchandise exports per capita amounted to $1,094 in 2000, while 30 percent of the world's population lived on less than $1 a day, about one-third of per capita export value.
Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was $6.021 trillion against a gross domestic product (GDP) of $9 trillion..."
> http://www.atimes.com/global-econ/DD11Dj01.html
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>IMF says U.S. debt a threat to world
>By Elizabeth Becker and Edmund L. Andrews
NEW YORK TIMES NEWS SERVICE
>January 8, 2004
>"WASHINGTON – With its rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of such record-breaking proportions that it threatens the financial stability of the global economy, according to report released yesterday by the International Monetary Fund.
>Prepared by a team of IMF economists, the report sounded a loud alarm about the shaky fiscal foundation of the United States, questioning the wisdom of the Bush administration's tax cuts and warning that large budget deficits pose "significant risks" for the United States and the rest of the world..."
> http://www.signonsandiego.com/news/business/20040108-9999_1b8imf.html
Posted by: Mike on January 9, 2004 12:51 AM
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Addendum:
U.S. Trade Deficit Hits Record in 2003 (February 13, 2004)
By JEANNINE AVERSA, Associated Press Writer
WASHINGTON - America's trade deficit ballooned to an all-time high in 2003...
Posted by: Mike on February 16, 2004 01:13 AMMike thanks for your post(s). Is there any chance that you could diminish your encyclopedic volume?
Just a thought.
Donald Luskin has a good refutation of Roach's other recent labor column here-- http://www.poorandstupid.com/2004_02_15_chronArchive.asp#10769078619200582
Posted by: Dilbert on Febru