February 27, 2004

Complementarity: Free Trade, Full Employment, and the Social Safety Net

Paul Krugman writes that if there are "effective job creation measures and a strong domestic social safety net" then even a union-funded Democrat can be for free trade. Conversely, an administration that focuses on tax cuts for the rich and thinks that the poor are poor for a reason will find itself under heavy pressure to impose voluntary export restraints on other countries and hike tariffs: "there's a reason why the two U.S. presidents who did the most to promote growth in world trade were Franklin Roosevelt and Harry Truman, while the two most protectionist presidents of the last 70 years have been Ronald Reagan and, yes, George W. Bush."

But I can and do blame Democratic politicians for not resisting temptation: every day that Americans are told that trade destroys jobs--rather than that it shifts jobs from one industry to another, hopefully from lower-paying to higher-paying--is a day that makes it harder to pursue good policies to enrich America. Blame Bush for failing to take out the obvious insurance against a slack job market--for pursuing tax cuts for the upper class rather than fiscal policies that would provide an effective stimulus to demand and employment. But don't you dare imply or state that the U.S. would be a richer, more productive, and faster-growing economy if we turned our back on the world market.

Op-Ed Columnist: The Trade Tightrope By PAUL KRUGMAN: You can't blame the Democrats for making the most of the Bush administration's message malfunction on trade and jobs. When the president's top economist suggests, even hypothetically, considering hamburger-flipping a form of manufacturing,* it's a golden opportunity to accuse the White House of being out of touch with the concerns of working Americans. ("Will special sauce now be counted as a durable good?" Representative John Dingell asks.) And the accusation sticks, because it's true. But the Democratic presidential candidates have to walk a tightrope. To exploit the administration's vulnerability, they must offer relief to threatened workers. But they also have to avoid falling into destructive protectionism.

Let me spare you the usual economist's sermon on the virtues of free trade, except to say this: although old fallacies about international trade have been making a comeback lately (yes, Senator Charles Schumer, that means you), it is as true as ever that the U.S. economy would be poorer and less productive if we turned our back on world markets. Furthermore, if the United States were to turn protectionist, other countries would follow. The result would be a less hopeful, more dangerous world.

Yet it's bad economics to pretend that free trade is good for everyone, all the time. "Trade often produces losers as well as winners," declares the best-selling textbook in international economics (by Maurice Obstfeld and yours truly). The accelerated pace of globalization means more losers as well as more winners; workers' fears that they will lose their jobs to Chinese factories and Indian call centers aren't irrational. Addressing those fears isn't protectionist. On the contrary, it's an essential part of any realistic political strategy in support of world trade. That's why the Nelson Report, a strongly free-trade newsletter on international affairs, recently had kind words for John Kerry. It suggested that he is basically a free trader who understands that "without some kind of political safety valve, Congress may yet be stampeded into protectionism, which benefits no one."

Mr. Kerry's Wednesday speech on trade seemed consistent with that interpretation. He decried the loss of jobs to imports, but was careful not to promise too much. You might say that he proposed speed bumps, rather than outright barriers to outsourcing: rules requiring notice to employees and government agencies before jobs are shifted overseas, steps to close tax loopholes that encourage offshore operations, more aggressive enforcement of existing trade agreements, and a review of those agreements with an eye toward seeking tougher labor and environmental standards. I don't see anything there that threatens to unravel the world trading system. If anything, the question is whether it provides enough of a "political safety valve." The answer, I think, is yes -- but only if those modest measures on the trade front are combined with much bigger changes in domestic policy.

First and foremost, we need more jobs. U.S. employment is at least four million short of where it should be. Imports and outsourcing didn't cause that shortfall, but if the job gap doesn't start closing soon, protectionist pressures will become irresistible. Beyond that, we need to do much more to help workers who lose their jobs. It didn't help the cause of free trade when Republican leaders in Congress recently allowed extended unemployment benefits to expire, even though employment is lower and long-term unemployment higher than when those benefits were introduced.

And in the longer run, we need universal health insurance. Social justice aside, it would be a lot easier to make the case for free trade and free markets in general if, like every other major advanced country, we had a system in which workers kept their health coverage even when they happened to lose their jobs. The point is that free trade is politically viable only if it's backed by effective job creation measures and a strong domestic social safety net. And that suggests that free traders should be more worried by the prospect that the policies of the current administration will continue than by the possibility of a Democratic replacement.

Put it this way: there's a reason why the two U.S. presidents who did the most to promote growth in world trade were Franklin Roosevelt and Harry Truman, while the two most protectionist presidents of the last 70 years have been Ronald Reagan and, yes, George W. Bush.  


*In context, Greg Mankiw** and his senior staff economist for macroeconomics (who I think actually wrote the box in the 2004 Economic Report of the President) were making two related points. (1) If we do adopt policies that specifically subsidize manufacturing, expect to see McDonalds heavily lobby Congress to direct the Census Bureau to enlarge manufacturing to include activities that involve the chemical transformation of food stuffs by application of heat (i.e., cooking). (2) The place where the line between manufacturing and non-manufacturing was drawn in the U.S. statistical system set up in the first half of this century is somewhat arbitrary. To put it bluntly, if women did it in 1900, it probably isn't manufacturing. Slaughtering cows and carving them up is food processing--part of manufacturing. Cooking Beef Wellington is not.

**But I have been told that there are people in the White House talking on background about how the loss of social capital from the steep trade-deficit and slack-demand driven fall in manufacturing employment is not a problem because the 2004 Economic Report of the President shows that there are many more manufacturing workers than we had thought.

Posted by DeLong at February 27, 2004 09:40 AM | TrackBack

Comments


We are in the process of going through a major shift of all economic data from the old industrial classification system to a new one.

For example, computers are now in electronics rather than in mechanical equipment because in the 1950s computers were a mechanical punch card systems.

so you need to revise your comments about a century old system.

If you include fast food in manufacturing it will also play havoc with manufacturing average hourly earnings and manufacturing productivity.

someone needs to tell the white House to be careful what you wish for, you just might get it.

Posted by: spencer on February 27, 2004 09:52 AM

____

Professor DeLong:

Which Democrats are doing what you claim in the second paragraph?

Posted by: Brian on February 27, 2004 09:55 AM

____

Job Shift...hopefully, from lower-paying
to higher-paying...

According to economic research, how many election cycles does this job shift
usually take ?

Posted by: bhaim on February 27, 2004 10:11 AM

____

I don't know what you think you gain by misrepresenting the positions of people opposed to the current trade situation!

You wrote "...Americans are told that trade destroys jobs...". Who is telling Americans that? NO ONE IS.

I hear people saying that trade with countries that do not honor their agreements, and/or countries that do not permit labor to organize or that do not allow their citizens to vote on their counttry's policies or do not have environmental regulations, etc. is inherently stacked against US interests AS WELL AS the interests of the people in the countries we trade with. And it is not JUST the interests of Americans who lose their jobs but also the interests of the country as a whole. How do we benefit by trading away our jobs, assets, manufacturing base, technological expertise and revenue base, to trade partners who are not purchasing enough from us, not paying their citizens well, not protecting the environment, not letting workers organize, not letting their citizens vote, not floating their currency, etc.?

Ultimately this is about more than trade, it is about who gets what share of the pie. Of course corporations will always try to lower costs. They should. But this can mean trying to repeal the minimum wage, or use child labor, or bribing inspectors. It's up to us, the people, to try to put in place controls that protect the puplic interest. It it "protectionist" to support a higher minimum wage, or national health insurance or worker safety regulations, or the right to unionize? YOU BET IT IS! Here AND with our trading partners.

Without worker protections in place in countries like China, and without agreements in place that mean that India and China REALLY DO balance out our job losses by purchasing US goods, and by allowing their currencies to follow the market, it is NOT A LEVEL PLAYING FIELD. It is NOT "FREE" TRADE AT ALL! ALl we are doing is trading away American living standards, ijncreasing our debt, to enrich corporate executives and corrupt Chinese officials!

"Protectionism" means PROTECTING AMERICANS. A $500 billion trade deficit indicates a problem with our idea of "free trade," doesn't it? Stagnant income growth for the middle class since the 70's indicates a problem, doesn't it? With the trade portion of the struggle between moneyed interests and the public, we are trading away jobs and assets in return for loans. The public takes on the trade debt load and the executives walk away with the cash. With other forms of this struggle, like the minimum wage and the right to organize, we are experiencing the corruption of our own political system, trading away our retirement income for tax cuts to the rich, and other signs that the public's position in this ongoing battle is weakening...

The trade situation is just another part of that battle - it's the scene in 'Grapes of Wrath' where they're bussing in the strikebreakers so they can keep wages low. It's just that they're bussing them over the border now.

Posted by: Dave Johnson on February 27, 2004 10:26 AM

____

Let me add to that. Show me where the trade arguments are different from the minimum wage arguments? They argue that raising (or even having) a minimum wage keeps the poor from getting jobs. And they argue that asking trade partners to protect workers rights and safety and pay higher wages keeps THEIR poor from getting jobs.

But, in fact, history shows that increasing the minimum wage and other income redistribution policies precedes higher growth, not lower growth. And periods of wealth concentration coincide with periods of lower growth. This is a consumer economy and customers with money to spend grows the economy. Clinton's tax HIKES and minimum wage HIKES and EITC HIKES brought about a boom.

So policies that promote higher wages and income redistribution benefit everyone, and policies that reduce wages and concentrate wealth promote that "race to the bottom." Policies for labor OUTSIDE the country have the same effect as those for labor IN the country. Promoting workers rights increases growth, and benefits all of us.

Posted by: Dave Johnson on February 27, 2004 10:39 AM

____

"And in the longer run, we need universal health insurance. Social justice aside, it would be a lot easier to make the case for free trade and free markets in general if, like every other major advanced country, we had a system in which workers kept their health coverage even when they happened to lose their jobs."

If we had a sane system in which people purchased health insurance from insurance companies in the same way as they buy car insurance, fire insurance, homeowner's liability insurance, boat insurance, and almost every other damn kind of insurance, this wouldn't be an issue.

The expectation that when one gets a job that one should have the employer buy you a health insurance policy is over fifty years old, the result of an unfortunate government interference with the private sector, but that doesn't mean it makes sense, or that we can't start trying to move away from it. Insurance companies could help by reducing the penalty between group and individual policies.

Again, the thesis from Krugman seems to be that if we just ran things like Europe does, our economy could be the roaring powerhouse that Europe's is.

This new pro-free-trade thing from some pundits is interesting. Is it that Kerry has shifted and a lot of liberals now find themselves on the wrong side of the ever-moving Kerry policy line? Some of this is like watching a dog try to catch a Frisbee on a linoleum floor.

Posted by: tbrosz on February 27, 2004 12:13 PM

____

"But don't you dare imply or state that the U.S. would be a richer, more productive, and faster-growing economy if we turned our back on the world market."

I'll bite. The Efficient Markets theorem tells us that, given equivalent expertise levels (and no one is arguing that Indian or Chinese workers are less educated than Americans), all jobs that can migrate to lower wage countries will migrate there. Because the labor pool abroad is larger than here, inflationary pressures on wages abroad will likely be less severe than deflationary pressures on wages at home. Should these deflationary pressures continue to grow (and they have been -- check the CPI), it's quite possible that we will be a poorer, slower-growing economy.

Stephen Roach of Morgan Stanley has been arguing along these lines for some time now. Structural damage to the economy may need to be offset by structural (e.g. legislative or "protectionist") responses.

Posted by: Alan Young on February 27, 2004 01:01 PM

____

Dave Johnson -

Thank you. Your post was absolutely spot on.
You and Zizka make quite the duo over there.

Posted by: Tecla on February 27, 2004 01:03 PM

____

"Show me where the trade arguments are different from the minimum wage arguments? They argue that raising (or even having) a minimum wage keeps the poor from getting jobs. And they argue that asking trade partners to protect workers rights and safety and pay higher wages keeps THEIR poor from getting jobs."

Powerful comment.

Posted by: anne on February 27, 2004 01:09 PM

____

tbrosz- a lot of liberals and the left are against free trade. They criticized Clinton for NAFTA and other Dems who support free trade. OTOH, GW Bush proclaimed himself to be a free trader, but turns out to be a protectionist with ill conceived and illegal steeel tariffs, etc. At this point Kerry has a better record in support of free trade than does Mr Bush. So if free trade is your number one issue, then support Kerry. If you desire protectionism, then Edwards or Mr Bush is your guy.

Posted by: bakho on February 27, 2004 01:09 PM

____

I'll admit right away that economic was never my strong point. You and Krugman are practically the only economists I read. But Krugman's column bothered me, and you comment on it bothered me even more.

Maybe that's because I look at this from a historian's perspective, not an economist's. So it seems to me that offshoring is only partly about free trade vs. protectionism. When U.S. companies fire U.S. workers to ship their jobs overseas, they're not engaging in free trade. They're getting around what we used to think was a permanent solution to the problems of industrial capitalism that appeared in the late 19th century.

After decades of labor struggles and reform legislation, Americans in 1950 could think they were well on the way to civilizing capitalism. Unions brought good wages and job protection even to those who weren't members, there was an 8-hour day, unemployment insurance, and social security. The rapacious Gilded Age robber barons had gradually evolved into a stable corporate aristocracy, and inequalities of wealth and even opportunity were smaller than ever.

Then came globalization. Now U.S. companies don't have to hire U.S. citizens, or obey U.S. laws. It's still the 19th century in most of the rest of the world, and now those companies can return to the good old days when capital could do anything it damn pleased.

Posted by: Bob Mutch on February 27, 2004 01:11 PM

____

When politicians get around to protecting American "jobs" they almost never do it by protecting workers. Protectionism almost always utilizes tariffs and subsidies. Tariffs and subsidies do nothing to protect workers or their wages; they simply subsidize uneconomic domestic activity. The workers hired by uneconomic employers get treated just as badly or as well as otherwise. This is almost opposite to the minimum wage, which stop those classes of economic domestic activity that involve paying the desperate pennies.

I wouldn't call any analogy that bad "powerful".

In re efficient markets, didn't everyone see the study on US Senator's portfolios from 1993-1998? Collecting over 6000 financial disclosure forms, the study found Senators absolutely crush the market -- by 12% a year, if memory serves. Anyone arguing from the EMH for any reason needs heavily to caveat their argument these days.
cf http://www.cba.gsu.edu/news/04/senators.html

Posted by: wcw on February 27, 2004 01:26 PM

____

"I'll bite. The Efficient Markets theorem tells us that, given equivalent expertise levels (and no one is arguing that Indian or Chinese workers are less educated than Americans), all jobs that can migrate to lower wage countries will migrate there."

Efficient market theory also tells us there is no need for employment because all tasks can be contracted for on a labor spot market.

Posted by: ogmb on February 27, 2004 01:31 PM

____

tbroz- Health insurance does not work the same as car insurance. Driving a car requires a license and is a privilege and not a right. Most states mandate that those driving cars purchase insurance. The insurance not only covers the driver but also the passengers. However, most car insurance has limits that fall far short of the costs of the most expensive cases.

In your analogy with car insurance, do you believe that the government should require everyone to purchase health insurance? If so what about children, the unemployed and others who cannot pay? Who pays? Car insurance has high premiums for high-risk drivers. Does your health h insurance also have high premiums for high-risk people? What if they cannot afford the premium? Insurance companies know that young people have fewer medical problems than the elderly. What is to keep the insurance companies from gouging the elderly? Car insurance companies make money by charging more for insurance (on average) than the aggregate cost of paying for accident related damage. Thus having private insurance companies adds an additional layer of bureaucracy that demands a slice of every health care dollar.

Not having medical insurance means that people let their medical problems fester. What start as small problems inexpensively corrected can turn into enormous costly medical problems. Private insurance does not address this challenge.

In livestock production, the producers evaluate the herd routinely and identify those animals that are in need of medical attention. Medical problems are treated early before they become more expensive problems. Extra attention is given to pregnant livestock to insure that the birthing goes smoothly and the offspring are robust. Herds are routinely vaccinated and treated for parasites that can transmit diseases. In short, the health care needs of our livestock is managed in such a way as to prevent disease, provide optimal nutrition, provide for the offspring and treat problems early before they fester. These herd health practices are the most cost effective means of treating livestock. In many ways, American livestock has better health care and health care access than the poorest Americans.

Posted by: bakho on February 27, 2004 01:35 PM

____

Bob -

That isn't exactly right, because the US has to export something in exchange for the foreign labor that they're replacing US labor with (well, in theory. The reserve nature of the US dollar makes the rules a little different for us, so we mostly export debt). So DeLong is right when he says that trade doesn't result in fewer jobs, it results in different jobs (the unemployment period when displaced workers try to find their new industry is something you're supposed to ignore - neo-classical types find it inconvenient).

The job-shift is where DeLong stops his analysis, with a "hopefully from lower-paying to higher-paying". "Median wage stagnation - never heard of it. *covers ears* La la la la la. Let 'em eat tenure."

The problem isn't that it's always the 19th century somewhere in the world, it's that it's possible to be the 19th century back home. And what trade does is shift from 20th century American jobs (unionized, overtime paying, pension providing, high paying) with 19/21st century jobs American (non-unionized, low-paying, no security, no health care).

Posted by: msw on February 27, 2004 01:41 PM

____

" You can't blame the Democrats for making the most of the Bush administration's message malfunction on trade and jobs."

You can if you're a professional economist and that is your job. But I guess this means Krugman can't blame Bush for the steel tariffs since he was doing it to woo the electoral votes in Ohio and W. Virginia.

Posted by: Patrick R. Sullivan on February 27, 2004 01:55 PM

____

bakho, states don't require people to buy auto insurance on their own cars (the banks that finance them do that, as they do for houses they lend money to buy also). States require LIABILITY insurance, so that if you damage SOMEONE ELSE'S car, you can make restitution.

Interesting that he thinks of people as just so much livestock.

Posted by: Patrick R. Sullivan on February 27, 2004 02:00 PM

____

wcw, thanks for the link -- that study (Senators' portfolios) looks like a very interesting piece of work.

My basic argument works just as well if you prefer to start from the principle of comparative advantage (rather than the EMH).

If the bulk of jobs created as a result of savings from moving other jobs overseas are in areas that themselves can be moved overseas, the situation is inherently deflationary. Protectionist measures, being by nature inflationary (whether in the form of tariffs, subsidies, or more subtle measures) are a thus a rational economic response to avoid getting trapped in a structural deflationary trap. Whether protectionist are the optimal response is not for me to say, but Brad's contention that discussing them is completely out of bounds simply doesn't consider the whole picture.

Modern Japan is an important model for understanding the current US economic situation. Despite very high education levels (arguably higher than in the US), there simply isn't enough service/knowledge job growth to offset job losses in other fields, resulting in a devastating deflationary trap. It's difficult to see how we're headed in any different a direction, unless structural remedies are undertaken soon.

Posted by: Alan Young on February 27, 2004 02:01 PM

____

PR Sullivan, it is not that bakho think of people as livestock, it is that you yourself care less about people than about livestock.

It looks like Bush partisans have not evolved from prehistoric hunter-gatherer stage.

DSW

Posted by: Antoni Jaume on February 27, 2004 02:31 PM

____

Alan, what could this mean?: "No one is arguing that Indian or Chinese workers are less educated than Americans." Are you kidding? The literacy rate in China is 85% -- and considering that number comes from the govt it's likely that it's considerably lower. In India it's 58%. Productivity rates in these countries are dramatically lower than in the U.S. (that's why pepole are paid so little).

It is true that in certain select industries -- some parts of IT, call centers, etc. -- Indian workers are the equal of American workers. But in those industries the pool of available Indian workers is relatively small. And as investment in those industries has risen, so too have wages for Indians and costs for capital. The idea that foreign trade is a deflationary race to the bottom is wrong as a matter of theory. But it's also wrong as a matter of fact, given the rise in prices that Indian firms are charging American companies for outsourced work.

Posted by: Steve Carr on February 27, 2004 02:34 PM

____

tbrosz wrote, "Again, the thesis from Krugman seems to be that if we just ran things like Europe does, our economy could be the roaring powerhouse that Europe's is."

On the issue of *health care*, most European countries are far more efficient than we are. We spend a far higher fraction of GDP on health care, for no higher average life expectancy than other industrialized Western nations.

"This new pro-free-trade thing from some pundits is interesting."

Krugman? New pro-free-trade? Krugman's always been pro-free-trade.

Posted by: liberal on February 27, 2004 03:18 PM

____

Literacy rates for the entire populations of China and India are largely irrelevant. What's critical is the size (on an absolute level -- number of workers) of the segment of workers in those countries who are capable of performing jobs heretofore performed by middle-class American workers. India alone graduates more Master's and Ph.D. level students than the United States. But don't take my word for it; lately Greenspan has been pushing this point, e.g.:
http://www.federalreserve.gov/BoardDocs/Testimony/2000/20000921.htm
Greenspan specifically warns about both the education levels of American eighth and twelfth graders relative to the rest of the world (which I consider largely irrelevant) and the relative education levels of college-educated workers.

Productivity differences have virtually nothing to do with why Indian and Chinese workers are paid so little.

"The idea that foreign trade is a deflationary race to the bottom is wrong as a matter of theory. But it's also wrong as a matter of fact, given the rise in prices that Indian firms are charging American companies for outsourced work."

I don't buy either of those statements. While I don't subscribe to the "race to the bottom" theory, there is plenty of evidence that foreign trade is increasingly deflationary, as barriers, both legislative and practical (e.g. relative education between countries, communication roadblocks) come down. It's not surprising that Indian firms are following a rational pricing model, raising prices to the point that the market will bear, but this doesn't negate their sustainable comparative advantages vis-a-vis American workers (cost of living, low regulation, high education, etc.). The "slack" in pricing is on their side, and will remain so. Neither the "race to the bottom for America" hypothesis nor the "rising tide lifts all boats for the world" hypothesis is likely to be entirely true. Prices will rise in developing countries, and they will fall in America. Economists who argue only half the story -- that somehow inflationary forces will raise prices elsewhere, but that we'll magically escape deflationary forces here are deluding themselves.

Posted by: Alan Young on February 27, 2004 03:22 PM

____

Nice ripose A. Juame. For Steve Carr, let's assume the average literacy of India and China is 65%. That's 65% of roughly 2.5 billion people, or a little over 1.6 billion literate people. Given societies that begin to careen into the 21st century, the marginal growth in talented, motivated people starting from very low living standards seems inescapable.

Krugman began in his column today to shake the chains of his Anglo-American economic heritage and deal with "exogenous variables" and even consider solutions that involved something other than the myths of free market economics that are necessary for his equations to work.

His growth should be applauded. Perhaps Brad can join him. Easy steps for little feet.

Sam

Posted by: Sam Taylor on February 27, 2004 04:28 PM

____

Brad -

I thought you posted to me personally the other day (on this site), that economists knew free trade with poor countries like China and India would cause real wages in this country to fall, "only they didn't like to talk about it (much)"

Now you're saying you hope that Americans who loose their jobs on account of outsourcing, etc., will find new jobs at higher pay.

So fess up. Which is it? You can't have it both ways.

Posted by: Luke Lea on February 27, 2004 05:35 PM

____

Economics, as usual hits the wall. Just looking at it through numbers is not enough.
Actually, it might be enough, but you're looking at the problem with not enough depth.

Theoretically, the idea of rising wages with new jobs makes some sense. On a numbers basis, wage growth should match inflation to some degree.

It doesn't. It never will. At least not again. Why would an employer not pay the least amount it can get away with doing? And all you get is a situation where the lowest wage payers maintain a low wage, and everything else increases by small incrementals from that point. Until there is a labour shortage of some degree, (there is in specific industries...but not enough to cause widespread change) don't expect the average wage to increase.

Eventually however the whole system will crash. Not just the US, but the whole global economy. The 1st world will have further to fall than the 3rd, of course...

A consumer economy requires consumers. And I think there's too much ego in the business community to change their habits in time to fix it...

Posted by: Karmakin on February 27, 2004 06:07 PM

____

Alan, productivity differences have an enormous amount to do with why Indian and Chinese workers are paid so little. If they don't, then why hasn't American capital migrated there en masse? More important, how do you account for the fact that in essentially every country that has enjoyed sustained economic growth over time, wages have risen almost in lockstep with productivity. Certainly that's been the case in the United States, where labor's share of national income has remained remarkably steady, with minor oscillations, for nearly a century. You invoke the lower "cost of living" in India and China as if the lower cost of living there has nothing to do with how weak their economies have been, and how unproductive they are relative to the United States. (China has four times as many people as the U.S. and its economy is one-ninth our size.)

Posted by: Steve Carr on February 27, 2004 07:22 PM

____

One of the mistakes that the US makes with health care is that individuals are required to make decisions regarding their own health care in the absence of a good understanding of the underlying science. Many people do not get proper medical care simply because they don't know what care they need are cannot afford the primary screening where they could receive that education.

Preventative measures that are simple and inexpensive are often overlooked at treatment not sought until it is impossible to ignore the symptoms. So for instance, instead of low cost programs for prenatal care, educating the parents to be and providing proper nutrition, we treat pregnancy as if there are no health consequences, then pay exhorbitant sums to care for large numbers of premature and low birth weight babies that did not have to be. We expect mentally ill and disfunctional people to somehow be functional enough to recognize their problem and navigate the complicated process of seeking and receiving treatment.

We allow children to go unimmunized and pay higher aggregate medical costs to treat the diseased than we would to prevent the disease. We allocate few resources to community fitness, when obesity is responsible for many health problems. Funding fitness programs would be far cheaper than expensive by-pass operations, treating diabetes, obesity-linked breast cancer, etc. Providing dental checks and teeth cleaning and maintenance is far cheaper than oral surgeries, etc. Other countries have healthy populations for a lot less buck than the US. However, they do so by having community health programs that raise the health of everyone. The US culture requires everyone to be in charge of their own health decisions regardless of their level of knowledge. While we allow the government to address diseases like West Nile Virus that are spread by mosquitos, we are reluctant to engage in other community health programs that make as much or more economic sense.

Posted by: bakho on February 27, 2004 07:55 PM

____

Bob, I am a history reader as well, and I too see scary parallels to the 19th century going on here. As an average American, I see free trade on it's way out. You are losing the middle class on this--the people that vote. If politicans (and academics) don't do something to make free trade more advantageous to Americans, they will find themselves out on their butt. You may also find people marching on Washington like WWI veterans. Those who don't learn from the past, are doomed to repeat it applies in spades here.

Posted by: Hi on February 27, 2004 08:03 PM

____

what we have now, Larry, is predatory capitalism which makes of the American people a cash crop for the insurance companies and the pharmaceutical companies. -DENNIS KUCINICH

Posted by: bakho on February 27, 2004 08:14 PM

____

Unless tbrosz knows something I don't, his history of the health insurance market is simply wrong from a historical point of view.

My understanding is that there were private insurance companies offering hospital insurance, but never comprehensive health insurance policies. Modern health insurance was developed as a means to the viability of independent practioners during the depression, when patients could not pay. The original non-profit "Blues" (Cross and Shield) came about this way. Employee plans took off during WWII when this seemed to be the easiest and cheapest approach to ensuring the health of the war production workforce, and Kaiser Permanente comes from the employee plan designed by Henry Kaiser for his defense contracting firm.

There never was a private insurance industry for comprehensive health insurance. There may have been government "meddling" to keep this combined non-profit and employer-sponsored contraption going after WWII. But there was no government meddling to replace any private industry.

In fact, much of the history of health care reform in the US is an attempt to increase efficiency by creating a lean mean consumer-satisfying for-profit industry from the fat slap-happy non-profit mess that existed.

Unless tbrosz can provide some history I am not aware of, his criticism of Krugman on health insurance is kind of weak.

The fact there never was a for-profit health insurance inustry may be the reason that some conservative economists do not like the idea at all. So they want to force savings accounts as a replacement, except for catastrophic insurance.

Posted by: jml on February 27, 2004 08:16 PM

____

every day that Americans are told that trade destroys jobs--rather than that it shifts jobs from one industry to another, hopefully from lower-paying to higher-paying--is a day that makes it harder to pursue good policies to enrich America

Brad, you say a lot of things that make sense, but you don't destroy lives based on the "hope" that a wacky theory is correct. Roach is right; the assumption that there will jobs is a bad, very bad assumption

Posted by: John on February 27, 2004 08:47 PM

____

bakho: "In many ways, American livestock has better health care and health care access than the poorest Americans."

Little to argue about that one, in light of the preceding paragraph. Point well made. (Even if you were being facetious -- not sure here.)

Posted by: cm on February 28, 2004 01:03 AM

____

Patrick R. Sullivan: "States require LIABILITY insurance, so that if you damage SOMEONE ELSE'S car, you can make restitution."

I think that's what he meant, speaking somewhat sloppily.

"Interesting that he thinks of people as just so much livestock."

I'm not reading it that way. Looks like it's a fair comparison. ("Fair" in the sense of "not unreasonable".) What should stop you from comparing the "healthcare" that a cow and a human each receive? (Only that the cow is scheduled for slaughtering, while the human is allowed to die on his own.) Well, I don't want to ridicule it.

Posted by: cm on February 28, 2004 01:10 AM

____

Its really interesting that there are a couple of posters here who claim to be students of history. OK, if you don't like economics, what about looking at free trade in history?

Would you rather be insular, militaristic Sparta or the free-trading Athenian empire? Like the Brtish and Americans in later times, the Athenians enforced free trade by force of arms. The whole point of the pax Romana was to allow trade, Portufgal and Spain were great until their trade was destroyed, and the disruption of trade during and after WW1 destroyed Britain's prosperity. I won't even mention the role of the collapse in world trade in the rise of German and Japanese militarism in the 30s.

The point is, trade has always and everywhere been associated with learning, tolerance and with prosperity. Autarky, on the other hand, has always been associated with ignorance, militarism and economic stagnation. Economic (and social) theory can certainly suggest why this is so, but if you don't like theory just judge the alternatives by the historic results.

Posted by: derrida derider on February 28, 2004 01:33 AM

____

Steve Carr: "Alan, what could this mean?: "No one is arguing that Indian or Chinese workers are less educated than Americans." Are you kidding? The literacy rate in China is 85% -- ..."

This does not mean that a part of the remaining 15% of the population could not be highly qualified. You are talking about 150 or so million people. Let's say 5% of those are engineer material (complete with education and all). That would be 7.5 million, which is some number. Even if they are fewer, it will still be a significant number. How many engineers have you got in the US?

The mainland+Taiwan Chinese here in the US that I know may in some cases be culturally and pronounciation-wise (not grammar-wise!) handicapped, but they are technically very competent. Same for the people our business unit employs in China (this based on other people's judgement, as I don't work with them directly).

"Productivity rates in these countries are dramatically lower than in the U.S. (that's why pepole are paid so little)."

I disagree. While there is some relationship between productivity and pay, there are other important "non-economic" factors. For example, I used to work in East Germany as a software engineer, and for several years I was pulling less salary than my West-German coworkers of comparable job grade, _and_ I was supposed to work more weekly hours. I contend that I was no less productive than them. Even if some average productivity measure of an economy is lower, you cannot necessarily impute this on specific people or occupational groups. (I had to listen of numerous arguments along the lines of "your costs of living are lower" (marginally), "your productivity is lower" (bullshit), "we are paying your welfare" (as if I'm not subject to the same tax rates).)

"It is true that in certain select industries -- some parts of IT, call centers, etc. -- Indian workers are the equal of American workers. But in those industries the pool of available Indian workers is relatively small. ... [rising wages] ..."

This is confirmed by what I'm hearing from Indian coworkers, but is orthogonal to your other points.

Posted by: cm on February 28, 2004 01:36 AM

____

derrida: "The point is, trade has always and everywhere been associated with learning, tolerance and with prosperity. Autarky, on the other hand, has always been associated with ignorance, militarism and economic stagnation."

True point, and I agree, but "trade" implies it goes both ways. But it looks like trade between the US and Asia is heavily lopsided.

Posted by: cm on February 28, 2004 01:39 AM

____

derrida: "The point is, trade has always and everywhere been associated with learning, tolerance and with prosperity

What a wholly false proposition, disproved by the American experience. Free trade is mostly associated with slavery. One need do no more than compare the trading slave South with the protectionist free North, before the Civil War

Posted by: John on February 28, 2004 05:54 AM

____

Whenever I read a column discussing laissez-faire trading practices, the first sentence of the last paragraph begins with a sentence on the order of, "Of course, we should do more to relieve displaced workers, but..".

Guess what? The relief never comes. It is not intended to. You never read a column saying to the captains of industry or pro-management members of Congress, "Hey, guys? What happened to the help for these people? I went out on a limb for you, now it's your turn. Wha' happen'd?" It doesn't happen. Mr. Potter's "We need a thrifty working class" is the attitude these writers do not mention, but seem to harbor.

The squeeze on workers is intended. Not just on those whose jobs can be eliminated, but also on non-exportable jobs. Witness the supermarket workers in California this week - no, they didn't lose their jobs, but they are being put on a downward flight plan.

As to the "hopefully, to higher-paying jobs"...look at the list of fastest-growing jobs as compiled by the Commerce Department. Many are in the cashiers and clerks category, not exactly a step in the right direction.

Twenty years ago, the arguments of "don't worry, everyone will be better off, we're only losing bad jobs, ones that Americans don't want, people need to raise their skill level and things will be OK" were persuasive. No longer.

Posted by: Ed Tracey on February 28, 2004 06:09 AM

____

I donīt understand on what theories the claim that trade doesnīt destroy jobs. You certaily can get such effects in a fixed price model ala Dreze.

What are the trade models with endogenous unemployment I donīt know?

Posted by: Michael Greinecker on February 28, 2004 06:27 AM

____

Free trade doesn't work, a proved by the literature. The answer to key question is a false hope:

"Still, mainstream economists can't answer a key question that Roberts raises, which is how the U.S. economy can generate better employment opportunities to replace the white-collar jobs that are suddenly vanishing. In his article dissecting Roberts's argument, Boudreaux asserted that as long as the United States maintains policies that make it an attractive place to invest, the U.S. capital that gets shipped overseas "will in all likelihood be replaced by new and more productive capital." But there's no way to be more specific than that. "Some entrepreneur out there will figure out something; that's the best answer you can give," said Ruffin, the University of Houston economist.

Roberts recently got some support for his argument from a heavyweight academic economist, William J. Baumol of New York University. Though not a trade specialist, Baumol is a past president of the American Economic Association, and a book he published in 2000 with a leading mathematician, Ralph E. Gomory, pokes some holes in economic orthodoxy by showing that free trade will not necessarily provide mutual gains to countries. (Gomory is a member of The Washington Post Co. board.)"

http://www.ecommercetimes.com/perl/story/32988.html

Posted by: John on February 28, 2004 07:22 AM

____

the worm on free trade is starting to turn

Posted by: Hi on February 28, 2004 09:32 AM

____

The problem seems to be that many economists are poor scientists. When their theories are contradicted by observations, they simply ignore the observations or insist that the observations don't apply.

Boyle's law applies to gases, but if you compress a gas enough, it goes through a phase change and becomes a liquid or a solid, and Boyle's law no longer applies.

Brad, how many times have you said "theory says employment should increase, but it's not" and "I'm truly puzzled by these numbers"? The theory doesn't hold. There is a phase change going on. The empirically determined numerical relationships aren't working, throw them out.

Why don't we educate more American scientists and engineers? Because it is increasingly apparent that the return on investment for a science/engineering education is negligable for American workers. This is in and of itself a trap -- where are the new breakthroughs going to come from that make the economy prosper?

Posted by: cenobite on February 28, 2004 09:52 AM

____

CM, East German workers were massively less productive than West German workers. That's why unemployment in East Germany is so much higher today than in the rest of the country: capital is forced to pay the same wages for significantly less productive labor, and as a result capital has invested much less in East Germany than it otherwise would.

The point about rising wages in India is not orthogonal to the debate about free trade. Wages are rising as Indian workers become more productive (thanks in part to greater capital investment), demonstrating the link between wages and productivity and suggesting that the myth of trade as a race to the bottom is just that, a myth.

The strangest part about all this fearmongering about free trade is that the U.S. is, by far, the world's largest recipient of foreign investment. How, exactly, do you propose to fund the current savings deficit if we cut ourselves off from foreign investment?

Posted by: Steve Carr on February 28, 2004 01:10 PM

____

ROFLMAO!!

Ummm. Anyone talking about higher rates of American productivity should be very very careful about what they write. These productivity figures are not absolute numbers, they are relative numbers. In other words a company that formerly employed 1,000 workers to produce X number of widgets has a productivity of Y. If that company now fires 900 workers but produces the same number of widgets it's productivity will rise substantially.

I.E. Those productivity figures you're throwing around do NOT include, in any way, shape or form, outsourcing or offshoring in their calculations. All work done is assumed to be done in America and entirely by Americans.

Might be why the productivity figures are rising 9% a quarter.

U.S. Department of Labor
Bureau of Labor Statistics
(http://stats.bls.gov/opub/hom/homch10_e.htm)

Anybody see the words "outsourced" or "offshored" or anything that implies work conducted offshore?

ROFLMAO!!

You people are funny as hell!

Posted by: ed on February 28, 2004 04:45 PM

____

RE: The strangest part about all this fearmongering about free trade is that the U.S. is, by far, the world's largest recipient of foreign investment.

Prove it.

And provide the source of your data. My feeling is that something is missing from that data. Particularly does that source consider an investment by an existing division of a company to be foreign investment? I.E. if Boeing has a division already in place in China and that division invests $2 billion in new facilities, is that $2 billion counted as foreign investment in China?

Additionally I want to know how much of that investment into America is being simply rerouted out to other countries, but not counted as such? IN this case my feeling is that those "investment" dollars are largely stock purchases, which means nothing as far as the final destination point for capital.

Posted by: ed on February 28, 2004 04:52 PM

____

Oh and BTW, I've mentioned this on other websites but not here yet. In India Computer Science and Engineering schools are heavily subsidized. Students to these schools used to pay $10 per year tuition. But now, post-1991, they pay the princely sum of $1,700 USD for a four year degree. That's right. $440 USD per year for tuition.

ROFL!

Posted by: ed on February 28, 2004 04:57 PM

____

Ed, productivity statistics measure value-added. They do not assume that all work is done in America by American workers. Any products produced abroad are counted as being produced abroad. The company that fires 900 workers in order to ship the work that they did abroad will not be counted as being significantly more productive, because it will not be producing the same amount of output with its 100 workers. Give the economists at the BLS a little credit, will you. They're not so stupid as to overlook something as obvious as that. You'd be better served spending a little time familiarizing yourself with the terms of debate before shooting your mouth off.

The investment thing is simply mathematics. Exports - imports = savings - investment. That means that if the U.S. is running a trade deficit of $500 billion on the left-hand side of the equation (which it is) and it's not saving enough on its own to fund that deficit (which it isn't) then it must be getting an inflow of investment from abroad. And I don't know what it means to say that stock purchases (or investments in U.S. bonds) are irrelevant. They lower the cost of capital for American companies (lower bond rates keep interest rates low for American homeowners and small business owners), making it cheaper for them to invest, and they create a healthy secondary market that allows new enterprises to raise capital. Do you really think the U.S. economy would be as big as it is without a thriving equity market?

Posted by: Steve Carr on February 28, 2004 05:46 PM

____

"...if women did it in 1900, it probably isn't manufacturing.." I don't think this is the case. Women were heavily involved in the textile and apparel industries from the beginning (viz Lowell, MA), and I think these industries were certainly classified as manufacturing.

There *are* issues with what is and isn't classified as manuacturing, but this doesn't correspond to any actual dividing line.

Posted by: david foster on February 29, 2004 02:31 PM

____

re sexism and traditional definition of manufacturing:

I agree with david foster. Several of great and great-great aunts and my grandmother grew up in the SF Bay Area and worked as short order cooks way back when. They have interesting stories about their restaurant and way-station days before they went back to school to be come nurses and teachers and whatnot.

Their restaurant work sounded a lot like burger flipping today. So if they change the definition of manufactoring, I hope they go a long way to produce a consistent series.

Posted by: jml on February 29, 2004 11:40 PM

____

Bravo!

Posted by: Ian Maitland on February 29, 2004 11:43 PM

____

Post a comment
















__